Buying a Farm with Landbank Funding
Buying a Farm with Landbank Funding
Hluhluwe Properties receive numerous requests daily from people looking to buy farms after they have spoken to Landbank. Generally, almost all of them have it wrong as to what farms sales Landbank will approve and fund.
People only tend to hear what they like to hear. After a meeting at Landbank, where they are told that they will be assisted, they are instructed to go out and find a suitable farm to buy. They find their way to us, assure they have an investor that will back them and now they only have to secure the right property to take the process forward.
Let us take one step back and talk about Landbank the company.
WHAT OR WHO IS LANDBANK
Landbank is a commercial bank. Do not let the government backing make you think otherwise. Landbank is not in the game of giving away free money.
Landbank does not give out grants.
Landbank is there to make money. Landbank will not back a failing farm, nor will they back anybody just for the sake of the national land issue.
They might be more lenient than other commercial banks, but they are still a bank and need to make money to keep the shareholders happy.
WHAT DO YOU NEED TO BUY A FARM
To be able to buy a farm with the help of Landbank, you must be able to buy the farm, but also have enough working capital to take you through to the first harvest.
Landbank need to make sure you will be able to produce a harvest as only then will you be able to service your loan.
If you think about this, you will realize that you not only need money to buy a farm, but you also need money to farm it for the first year. So you need:
Price of the farm + costs to run the farm for a year = Total funding needed.
Now let us look at some policies.
Landbank will give you a loan of up to 60% of the value of the farm, and if you are from the previously disadvantaged group, you can get up to a 90% loan.
But they will only allow up to a 55% debt ratio, or if you are from previously disadvantaged groups, a 70% debt ratio.
This means, that even if you are from previously disadvantaged groups, Landbank will only go up to a 70% loan if you are a first-time buyer with no other properties or money to offset the debt ratio.
To put it simply. If you are a first-time buyer of a previously disadvantaged group with no other farms/properties/money, you will have to cover 30% of the farm price yourself. Thus, you either need to get a grant for the amount, or have your own money. Thus, to buy an R10m farm, you will have to have access to R3m of your own or grant money. For a start.
Interest or the repayment on your farm should be less than 50% of your operating profit.
Free cash must be at least 1.5x of the debt repayment (interest + capital for the year)
The farm value must be in line with the asking price. Thus their valuation of the farm including the assets should not be less than the asking price.
These are general policies. Landbank will always look at each case on an individual basis. The affordability and productive value of the farm are also taken into account.
NOW LET US LOOK AT SOME NUMBERS
Let's take the example of a farm with an asking price of R5m. The numbers below are not exact, but close enough to give you an idea of how it works.
Yearly repayment for the farm is plus-minus: R545k
If you look at the policies above, interest or repayment should be less than 50% of the operating profit.
Required operating profit: R1.14m
Your free cash must be at least 1.5x of the debt repayment
Required free cash: R820k
Thus, if you find a farm with the selling price of R5m and with an operating profit of R1.14m, you will be able to get a 100% loan if you have R820k in the bank for operating costs
LET US LOOK AT SOME OTHER NUMBERS
Let's say you would like to buy a farm with an asking price of R15m. Let us also assume that the valuation of the farm is spot on for this example. Lets us further assume that the farm only has an operating profit of R1m
Yearly repayment: R1.6m
Required operating profit: R3.2m (repayment should be less than 50% of the operating profit
Required free cash: R2.4m
This farm will require a deposit from the prospecting buyer to be able to get a loan from Landbank.
Because the operating profit is R1m, Landbank will only fund a repayment amount of about R500k. Thus Landbank will only give you a loan of around R5m for this farm.
The buyer will need to put down R10m of their own money to make the numbers work for the loan. They will also need about R2.4m of additional cash for operating the farm. This is also very dependable on the type of farming, but let's assume this is correct for this example. Thus you would need about R12.4m in the bank to buy this specific farm.
This is where the problem lies in the communication and expectation of new farmers or first-time buyers.
Most first time buyers are told that Landbank will grant a loan of up to 90% of the farm value. In their mind, they only “required” R1.5m (the other 10%) of their own money and Landbank service the rest of the 90% to buy the farm.
As you can see with the calculations above, this loan will never be approved.
Simple as that.
OTHER FACTORS TAKEN INTO ACCOUNT
There is, of course, other factors that can be taken into account when you apply for a loan.
Things like different farming practices. Vineyards or orchards that might still come into production and push up the operating profit in the next few years.
You might bring something new to the farm. Your business plan might have some new channels of income, not being used by the existing farmer.
All these types of possibilities will be taken into account, but I am sure you will almost need a bulletproof business plan if this is the part where you are going to persuade Landbank to give you a loan.
The bottom line is that most farms do not make enough money for a first-time buyer to get a loan and be able to pay off the farm and live on it.
You will need a good share of your own money or you will need to find free money somewhere else to help you buy a farm.
Grants are something new or previous disadvantaged people can pursue. There is also a catch with grants as well. We had situations where Landbank will approve a loan if the buyer gets a grant, and the granting institution will grant the money if Landbank approves the loan. Stalemate!
In my experience and from what I have learned in the past few years, is that most farms in the Western Cape will almost always only be able to support a maximum of a 60% loan of the value of the farm.
What this means in short. Even if you are from previous disadvantage groups, you will not be able to buy a farm with Landbank if you do not have access to at least 40% of the value of the farm, plus some more to spare to take you through the first year.
Thus you will almost certainly have to get a grant or money from a rich uncle to the value of 50% of the farm. Otherwise, you will just not be able to buy a farm.
Conclusion & FINAL THOUGHTS
Buying a farm still remains a case by case basis. There are guidelines, but there is always something different on each farm. All of the above is not set in stone.
That being said. New prospecting buyers must look and understand how farming works. It is just not that easy to buy a farm. Even second or third-time buyers need to really understand farming and do homework if they like to use the services of a commercial bank, like Landbank
Hluhluwe Properties understand the processes and know what farms will work or not.
Contact Gerry Eliot for more info 082 370 9520