However, prospective land purchasers in the farming sector do have some help at hand.
The ability for some lenders to use third party securities in relation to the purchase of land has proven to be a key factor in recent years providing land buyers with restricted cash deposits the opportunity to secure land.
The concept of third party security is used where a family member or other connected party with unencumbered (unsecured) property grants a bank security over an area of land or farm in order for the borrowers to meet their loan to value requirements. In my experience acting as an agent for the Agricultural Mortgage Corporation plc (AMC) this has been absolutely vital in a number of purchasing situations where the eventual owner did not think they had a chance of acquiring any land.
A prime example of this relates to a farm purchase in Ayrshire where the purchaser’s relatives owned a farm which was not secured to any bank and by granting AMC a security over the Title the new farm was purchased without any cash deposit.
It is, of course, a requirement for all purchasers to meet affordability criteria at stress test levels and there is every likelihood that legal fees will be elevated as a result of the additional securities work and separate legal representation.
The concept of third party securities is relatively straightforward once understood and has proved to be invaluable during a number of recent transactions.
We have come across instances in the past where elderly retired members of a farming family, who still have part ownership of farming assets, are being asked to become joint borrowers on any new lending. This of course has huge implications not only in terms of time and cost but also potentially tax liabilities further down the line. A retired partner could be construed to still be part of a farming business having previously beneﬁted from agricultural property reliefs in the past. This can sometimes be a deal breaker for customers who do not wish to go down this route and this is where AMC comes into its own. AMC would not require an elderly relative who is a part owner to become a joint borrower but will recognise the connection to the overall picture.
Sadly, tenant farmers and crofters are unable to offer security freely. Crofting, whether it’s on an owner occupier or tenanted basis, does not provide the necessary legal process to allow banks to call on their security and we offer the property to the open market in the event of a loan defaulting. At present, the Scottish Government is working with the Crofting Commission to try and alleviate this but it has been a longstanding issue for many years.
Secure agricultural tenants on a 1991 Act holding could, in theory, ask their landlord to offer up their farm as security which would constitute third party security, but to the best of my knowledge this has never happened. There would, of course, have to be a very strong connection between tenant and landlord with the landlord keen to see the tenant operating a successful business and improving the holding for example by building new sheds, ﬁnanced long term by AMC and hopefully providing mutual beneﬁt to both parties. The risk of course is that the tenant defaults on the loan and the landlord’s security is called into question.
Loan to value is a criteria that all banks look at as to the potential risk and bare land usually offers the best option. Some intensive farming systems such as pigs, poultry and in certain instances dairying have large investments in specialist equipment which in reality is a depreciating asset and the bank could restrict the loan to value if the weighting of the asset is more geared towards plant and machinery. Banks also take an extremely cautious approach when looking at renewable energy structures whether it be wind, hydro or biomass as again these specialist machines have a shelf life irrespective of what guaranteed feed-in tariff or RHI payments are available.
Since 2008, all banks have taken an extremely cautious approach when valuing development opportunities whether they be houses or commercial enterprises. Prior to the crash in 2008 banks lent heavily against planning consents which literally overnight became almost worthless and there was no tangible asset from which the bank could recoup its loans. A simple house plot or new farmhouse must be built up to damp course level prior to any value being attributed to the planning consent. This is to enable the bank to sell a development site in theory with planning in place in perpetuity.
Developing farm businesses is a complex area and given the challenges that the sector faces today, more farmers will have to explore myriad options on how to make progress. We offer advice to landowners and farmers throughout Scotland and the North of England and we are there to help smooth the path of turning land acquisition ambitions into reality.