With your family around you over the Christmas period, the tax bill paid and longer evenings, it can be a good time to chat about farm business plans. Land purchase is no longer a case of securing loan approval an hour before an auction, but about longer-term planning, says Dr Ailish Byrne, head of agriculture with Ulster Bank.
Dr Ailish Byrne Ulster Bank. \ Shane O'Neill, SON Photographic
“Don’t jump at buying a piece of land next door on a whim. When you have time, do some planning and you will avoid the pitfalls of impulse buying,” Byrne says, adding that farmers can often get caught up emotionally in land purchase without thinking it through fully.
As part of a business plan you need to look at different scenarios. What happens if you buy land or not? What happens if you lease land? How much is it going to cost per year? Only the interest on a loan can be offset against tax.
“For example if you were paying back the bank €20,000 per year, only €5,000 of that might be interest and the rest is capital repayments that can’t be offset against tax. So it’s important to be educated and informed about it.”
A feature of loan repayments is that the repayment stays more or less constant during the repayment period, but the capital and interest components change as the loan is gradually repaid.
She says that business plans must be realistic. If your average yield of barley is 3t/ac for example, it is not going to turn into 5t/ac just because you bought land. Ulster Bank will assess the plan based on future projections for the industry.
For example if in dairy, rather than looking at milk price now, Ulster Bank will put the price down at a consistent 28c/l + bonuses + VAT. On the tillage side, the bank will look at the futures market and in drystock it will assess historical and future price projections.
Hidden costs
While farmers are often familiar with the auction room setting, or how a private treaty sale is negotiated, it is easy to forget about the hidden costs of land purchase.
“If you are thinking about buying land, make sure you know about the legal implications, the accountancy implications and the hidden costs. You have stamp duty which has gone up in the last budget.
“If you need to borrow money you have two sets of solicitors fees to pay, your own and your bank.
“Also you will have to pay a professional valuation fee, even though you’ve bought the land and know how much you paid for it, the bank might say that the auction was driven by emotion rather than the actual value, so you might have to get a professional valuation done as well. So for example if you are buying land for €200,000, you will need 10% on top of that for other costs.”
Dr Byrne’s advice is to shop around. If you are thinking of purchasing land ask your accountant, solicitor and agricultural consultant for advice and also for costings of their fees.
It is also worth talking to someone else you know, who has bought land, about the process. If you have a young trained farmer that may be your successor, they need to be brought into the conversation, and can help reduce stamp duty costs.
“For a young trained farmer, stamp duty is 1% at the moment so you often see people bringing a son or daughter into the business to avail of the lower stamp duty rate. With young farmers [Ulster Bank] will look at their qualifications and experience; are they really interested in this or do their parents want them to do it? What are they going to do to change the farm or do they believe in the same principles as their parents? The big thing is to understand that when you’re buying land you are looking at a long-term commitment.”
Other costs to consider include reseeding, fencing and drainage of land purchased.
Security
If you are buying land and you have no other security to put into the deal, Ulster Bank will look for 30% contribution.
“So if you are looking to borrow €100,000, you should have €30,000 in cash yourself and on top of that you have to pay the additional charges like stamp duty etc. Typically what we will see is a dairy farmer farming 100ac on the home block and 20ac come up for sale next door.
“If the farmer is willing to provide part of the 100ac as security, has the cows and has been planning on buying land for a while, in that instance we will provide 90-100% of the money needed.
“The farmer is ready to rock, has the replacement heifers and won’t need a stocking loan or anything like that. He might reseed it himself or do some fencing out of cashflow.
“Typically you might get 50-70% loan to value depending on the risk profile of the operation. So for example to borrow €200,000, we might need security worth €400,000.”
The max loan Ulster Bank will do is for 20 years, with the option of paying interest only, for the first two years. Dr Byrne says bridging loans are no longer an option with Ulster Bank.
“Farmers are often hoping that land beside them will come up for sale and it doesn’t. Then they decide to buy say 30ac about a mile away, you’ve committed to that and may not be able to afford to buy the piece beside you when it does come to the market.”
Staying in contact
Dr Byrne says that signing up to any form of bank loan is a serious undertaking and needless to say, must be repaid, so don’t enter into it lightly.
“It’s extremely important that the farmer understands what she/he is signing up for and what potentially is at stake.
“The bank will stress test your application, but you’ll need to do this too. What if your circumstances change, mart prices decline over time, or unforeseen economic movements like Brexit occur – have you still got wriggle room?
“The vital thing is to keep lines of communication open with your bank. If the farmer thinks she/he is going to experience trouble, they should come to the bank and say ‘my herd went down with TB, I need to work out a plan with the bank because I can’t repay you over the next 12 months’.
“It’s when the farmer doesn’t talk to the bank that issues can arise. If it’s your farm and you’re just having an issue for 18 months, then that’s something we can work with.
“If the past performance is good and the farmer is keeping us up to date, we will put a solution in place to get the farmer out the other end.”
Confidence
People who have experience of borrowing and are good communicators are usually happy to come in and talk to their bank, says Dr Byrne.
“If people are going to borrow money for the first time maybe land purchase wouldn’t be the first thing to dip your toe in the water with. You might start off with a stocking loan or an overdraft.
“It’s very much up to you to educate yourself. Take all the advice in the world you want but it’s your name on the end of the solicitor’s letter, so you must be in control of your situation.
“It’s your land, in your name so you need to be happy with what you are signing, and if you don’t understand it ask for help.”
Checklist for your meeting
with bank
Three years of financial accounts.Bank statements for 12 months.Details of existing commitments including leases, loans, higher purchase, creditors and debtors.Five-year business plan.1 Get financial advice before buying land.
2 Shop around – look for best value in professional fees and interest rates in different banks.
3 Draw up a five year business plan that is realistic and looks at various scenarios (eg land purchase or lease).
4 Ask yourself how much is it going to cost per year and can you manage that level of debt.
5 Obtain loan approval before a land auction.
6 Take one morning each week to take a look at finances and don’t leave it to the evenings when your head is tired.
Read more
166 acres in the treaty county guided at €1.25m
Compact residential farm in Westmeath up for auction
131ac coastal estate for sale at Enniscrone
With your family around you over the Christmas period, the tax bill paid and longer evenings, it can be a good time to chat about farm business plans. Land purchase is no longer a case of securing loan approval an hour before an auction, but about longer-term planning, says Dr Ailish Byrne, head of agriculture with Ulster Bank.
Dr Ailish Byrne Ulster Bank. \ Shane O'Neill, SON Photographic
“Don’t jump at buying a piece of land next door on a whim. When you have time, do some planning and you will avoid the pitfalls of impulse buying,” Byrne says, adding that farmers can often get caught up emotionally in land purchase without thinking it through fully.
As part of a business plan you need to look at different scenarios. What happens if you buy land or not? What happens if you lease land? How much is it going to cost per year? Only the interest on a loan can be offset against tax.
“For example if you were paying back the bank €20,000 per year, only €5,000 of that might be interest and the rest is capital repayments that can’t be offset against tax. So it’s important to be educated and informed about it.”
A feature of loan repayments is that the repayment stays more or less constant during the repayment period, but the capital and interest components change as the loan is gradually repaid.
She says that business plans must be realistic. If your average yield of barley is 3t/ac for example, it is not going to turn into 5t/ac just because you bought land. Ulster Bank will assess the plan based on future projections for the industry.
For example if in dairy, rather than looking at milk price now, Ulster Bank will put the price down at a consistent 28c/l + bonuses + VAT. On the tillage side, the bank will look at the futures market and in drystock it will assess historical and future price projections.
Hidden costs
While farmers are often familiar with the auction room setting, or how a private treaty sale is negotiated, it is easy to forget about the hidden costs of land purchase.
“If you are thinking about buying land, make sure you know about the legal implications, the accountancy implications and the hidden costs. You have stamp duty which has gone up in the last budget.
“If you need to borrow money you have two sets of solicitors fees to pay, your own and your bank.
“Also you will have to pay a professional valuation fee, even though you’ve bought the land and know how much you paid for it, the bank might say that the auction was driven by emotion rather than the actual value, so you might have to get a professional valuation done as well. So for example if you are buying land for €200,000, you will need 10% on top of that for other costs.”
Dr Byrne’s advice is to shop around. If you are thinking of purchasing land ask your accountant, solicitor and agricultural consultant for advice and also for costings of their fees.
It is also worth talking to someone else you know, who has bought land, about the process. If you have a young trained farmer that may be your successor, they need to be brought into the conversation, and can help reduce stamp duty costs.
“For a young trained farmer, stamp duty is 1% at the moment so you often see people bringing a son or daughter into the business to avail of the lower stamp duty rate. With young farmers [Ulster Bank] will look at their qualifications and experience; are they really interested in this or do their parents want them to do it? What are they going to do to change the farm or do they believe in the same principles as their parents? The big thing is to understand that when you’re buying land you are looking at a long-term commitment.”
Other costs to consider include reseeding, fencing and drainage of land purchased.
Security
If you are buying land and you have no other security to put into the deal, Ulster Bank will look for 30% contribution.
“So if you are looking to borrow €100,000, you should have €30,000 in cash yourself and on top of that you have to pay the additional charges like stamp duty etc. Typically what we will see is a dairy farmer farming 100ac on the home block and 20ac come up for sale next door.
“If the farmer is willing to provide part of the 100ac as security, has the cows and has been planning on buying land for a while, in that instance we will provide 90-100% of the money needed.
“The farmer is ready to rock, has the replacement heifers and won’t need a stocking loan or anything like that. He might reseed it himself or do some fencing out of cashflow.
“Typically you might get 50-70% loan to value depending on the risk profile of the operation. So for example to borrow €200,000, we might need security worth €400,000.”
The max loan Ulster Bank will do is for 20 years, with the option of paying interest only, for the first two years. Dr Byrne says bridging loans are no longer an option with Ulster Bank.
“Farmers are often hoping that land beside them will come up for sale and it doesn’t. Then they decide to buy say 30ac about a mile away, you’ve committed to that and may not be able to afford to buy the piece beside you when it does come to the market.”
Staying in contact
Dr Byrne says that signing up to any form of bank loan is a serious undertaking and needless to say, must be repaid, so don’t enter into it lightly.
“It’s extremely important that the farmer understands what she/he is signing up for and what potentially is at stake.
“The bank will stress test your application, but you’ll need to do this too. What if your circumstances change, mart prices decline over time, or unforeseen economic movements like Brexit occur – have you still got wriggle room?
“The vital thing is to keep lines of communication open with your bank. If the farmer thinks she/he is going to experience trouble, they should come to the bank and say ‘my herd went down with TB, I need to work out a plan with the bank because I can’t repay you over the next 12 months’.
“It’s when the farmer doesn’t talk to the bank that issues can arise. If it’s your farm and you’re just having an issue for 18 months, then that’s something we can work with.
“If the past performance is good and the farmer is keeping us up to date, we will put a solution in place to get the farmer out the other end.”
Confidence
People who have experience of borrowing and are good communicators are usually happy to come in and talk to their bank, says Dr Byrne.
“If people are going to borrow money for the first time maybe land purchase wouldn’t be the first thing to dip your toe in the water with. You might start off with a stocking loan or an overdraft.
“It’s very much up to you to educate yourself. Take all the advice in the world you want but it’s your name on the end of the solicitor’s letter, so you must be in control of your situation.
“It’s your land, in your name so you need to be happy with what you are signing, and if you don’t understand it ask for help.”
Checklist for your meeting
with bank
Three years of financial accounts.Bank statements for 12 months.Details of existing commitments including leases, loans, higher purchase, creditors and debtors.Five-year business plan.1 Get financial advice before buying land.
2 Shop around – look for best value in professional fees and interest rates in different banks.
3 Draw up a five year business plan that is realistic and looks at various scenarios (eg land purchase or lease).
4 Ask yourself how much is it going to cost per year and can you manage that level of debt.
5 Obtain loan approval before a land auction.
6 Take one morning each week to take a look at finances and don’t leave it to the evenings when your head is tired.
Read more
166 acres in the treaty county guided at €1.25m
Compact residential farm in Westmeath up for auction
131ac coastal estate for sale at Enniscrone
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