The Benefits of Leasing Farm Facilities
You may already be using leasing as a financial tool to keep your equipment fleet up to date, reduce maintenance costs, and procure farm vehicles. But did you know that by leasing the buildings and facilities necessary to your operation you can avoid lengthy depreciable lifespans, preserve working capital, and keep facilities in the family business? Here are four benefits to leasing buildings you may not have considered:
Improved Cash Flow & Flexibility
One of the biggest benefits of leasing is the ability to put up a structure with limited cash flow. For those looking to free up cash flow, or who do not have the cash to build, leasing provides an option to complete the project in full without providing a hefty down payment. Since leasing provides 100% financing up front, you can use that cash you’d typically put down on the project to fund other parts of your business, or simply improve your working capital.
GreenStone offers lease options through Farm Credit leasing, where leases can be written with flexible terms to be paid off early, ended, or even refinanced. Leasing allows you to put up the structures you need to grow your business while staying profitable.
Avoid Lengthy Depreciable Lifespans
Lessees can also improve their cash flow by avoiding lengthy depreciable lifespans. For example, instead of waiting 20 years for a building to depreciate before writing it off, you could lease a building for 7 years with a 25% residual. The residual is the anticipated value left owed on the lease at the end of the lease period. If your lease payments are fully deductible (see your accountant for your specific information), 75% of the building’s value can be written off in 7 years and then purchased for 25% of the price it was originally valued at.
Take for example a customer who was looking to install a new truck wash for their operation. Since this is classified as a commercial structure, the depreciable lifespan of this building was 39.5 years. Instead of waiting nearly 40 years to write off this expense, the customer leased the truck wash for 12 years with a 30% residual. They were able to write off 70% of the structure after 12 years. Leasing provided them an opportunity to preserve working capital and stay profitable while growing their operation.
Easy Transfer of Assets to the Next Generation
When you’re ready to transfer ownership of livestock or dairy facilities, grain bins, or other farm structures to the next generation, leasing provides the most efficient option. A lease-to-buy plan allows you to transfer equity and keeps it off your estate taxes. When the residual on the leased building comes due, whoever is next in line can purchase that asset for the residual amount. This is a huge benefit for family-run farms, or for lessees who are looking forward to retirement in the near future.
Lower Your Tax Liability & Estate Tax
The two major benefits you have with leasing a building instead of financing it is keeping it off your estate taxes and lowering your overall tax liability. Lease payments can be fully deductible, offering immediate tax relief instead of a lengthy depreciation timespan. A lease-to-buy option, as mentioned previously, can also help keep assets from being included in your estate taxes when the building is purchased at the end of the lease.
When it comes to leasing new construction, you’ll want to work with your loan officer to ensure your lease starts before the building goes vertical, meaning any work that’s completed after groundwork and site prep. This establishes your lessor as the legal owner of the asset right from the start. Should you start your lease halfway through the project, it could trigger a transfer tax on the amount of the project that has already been completed, and that could add up depending on the kind of work that has already been done.
It’s important to have an expert in your corner when deciding what the best financial decisions are for you and your business.
GreenStone offers the expertise and knowledge backed by Farm Credit leasing to provide you with leasing services to help expand your business.
For more information on leasing, reach out to your local GreenStone branch today or visit our leasing page.
This blog was originally published in Michigan Farm News.
