Agricultural Hard Money Loans 

Understanding Hard Money Loans for Agriculture Properties

1. What is an Agricultural Hard Money Loan?

2. Why Do Farm, Ranch, and Winemakers Use Them?

3. What are Terms and Pricing for Agricultural Hard Money Loans?

4. What are the Pros and Cons of Using a Hard Money Loan?

Qualifying for an Agricultural Hard Money Loan

1. Property

2. Financial Statements

3. Exit Strategy – Bank and Government-Backed Loans

Agricultural Hard Money Loans: An Alternative to Bank Financing

Agricultural hard money loans are a type of financing for farmers, ranchers and wine growers. Unlike traditional bank loans, hard money loans are funded by individual trust deed investors or mortgage funds known as private money lenders. These loans can close faster, but also come with higher pricing than traditional financing, which we’ll cover in greater detail below.

Understanding Hard Money Agricultural Loans

Hard money agricultural loans can be the right solution for a farmer, rancher or wine grower who needs a short-term private money mortgage to bridge the gap from their current position to where they want to be.  

What is an Agricultural Hard Money Loan?

Agricultural hard money loans are shorter-term mortgages provided by individual trust deed investors or private money lenders. These loans are primarily asset-based, meaning the loan amount is decided by the value of the real estate secured as collateral for the loan.

Hard money loans differ from bank financing because lenders don’t scrutinize the borrower, business credit and financial statements in the same way as a bank-secured portfolio or government-backed financing. Most private lenders want borrowers to have good credit and sufficient cash flow to service the debt on the hard money loan. However, they won’t do a deep financial analysis of the accounting or tax returns. It will mostly be a high-level review of previous financial statements and anticipated revenues from upcoming harvests.

Why Do Farmers, Ranchers and Winemakers Use Hard Money Loans?

Agricultural property owners can encounter situations that require short-term financing. First Capital Trust Deeds (FCTD) has helped this group of property owners with several different scenarios over the past few years.

Acquiring a New Property

A rancher in Northeast California wanted to buy his retiring neighbor’s cattle ranch. He would pay cash for the cattle and equipment, but needed a mortgage to acquire the 850 acres of land, which included three homes and multiple structures. FCTD worked with a private lender in Northern California to do a cross-collateralized blanket loan, encumbering the borrower’s existing property and the ranch he was buying.  

Bypassing the Bank Process

A rancher in Southern Oregon wanted to acquire 5,000 acres near several of his existing properties and didn’t have the time or patience to go through the bank underwriting process. It was easier for him to take out a 24-month loan from a private lender, and use the cash flow from current operations to pay down the debt quickly.

Buying Out a Family Member

With family farms, it’s common for family members to want to be bought out of their share of the business. FCTD worked with the owner and operator of a Salinas-area farm to buy out a family member who wanted to use the money for a business opportunity.  

Predevelopment Expenses for a Residential Subdivision

Farmland is often converted into residential housing and commercial developments. A farmer from the Willamette Valley in Oregon owned property in the path of development and wanted to partition off approximately 20 acres of his land for a new housing development. He used a 36-month hard money loan for predevelopment costs on the new subdivision, encompassing legal, engineering and environmental expenses. After the predevelopment work was done, he broke ground on the subdivision, or what we in the business call horizontal construction.  

What are Terms and Pricing for Agricultural Hard Money Loans?

Terms and pricing for hard money agricultural loans can vary dramatically. There is no one-size-fits-all pricing matrix for private loans secured by agricultural properties.  

Each property, leverage or loan-to-value (LTV) and circumstance are unique to the specific borrower. Additionally, each lender providing hard money agricultural loans has their own particular pricing structure.

In some cases, a farmer may know of a local hard money lender who often lends against land. That hard money lender may offer a $500,000 loan at a 10.00% interest rate, with a cost of two points and a balloon payment in 24 months.

Or, a private lender could use a line of credit from their bank to offer a loan for $1.5 million at 12.49% adjustable rate (tied to the prime rate) for five years with a four point origination fee.

For closing costs, you should expect to pay an origination fee, appraisal or valuation fee, title, escrow and recording fees.  

What are the Pros and Cons of Using a Hard Money Loan?

Hard money agricultural loans have both advantages and disadvantages that borrowers should consider before applying.

Pros:

• Faster approval process:
  Hard money loans typically have a shorter approval process than bank or government-backed loan programs. Since they’re mostly asset-based, the lender can fund a loan in as little as one week or as long as four weeks – which is usually due to turnaround time on an appraisal.
• Flexible terms:
  A hard money lender will work with the borrower to settle on terms acceptable to both sides. In the case of the Oregon rancher buying 5,000 acres, he provided financial statements from the previous three years, showing significant cash flow and minimal debt, which gave the lender confidence that most of the profits for the next two years would pay off the private loan.
• Forgiving of one-off financial blemishes: 
  Every person in business faces a one-off situation that throws them for a loop or puts a blemish on their credit and finances. When this happens, it can be difficult to get bank financing. However, hard money lenders are willing to overlook minor snags for borrowers who weathered a financial storm and are working their way forward.

Cons:

• Higher pricing than banks: 
  Since hard money loans are asset-based and made by individuals or mortgage funds, they have higher costs than bank loans, which are often government-backed programs.  
• Short-term loans: 
  Hard money loans are generally short-term, from 12-36 months. Some lenders will go out longer, to 5 or even 15 years, but those are uncommon. A borrower needs to have a plan to pay off the hard money loan within a tighter time-frame.
• Risk to the borrower: 
  Because of the higher pricing and shorter terms, a hard money loan carries a greater risk to the borrower. If something unforeseen happens, they may struggle to service the debt or pay the loan off at maturity. 

Qualifying for an Agricultural Hard Money Loan

If you’re going to take out a hard money loan for your farm, ranch or winery, you’ll want to have your property and finances organized for private money lenders to easily evaluate.  

Property Valuation

The lender will want to get a valuation on your property (or properties) to be secured by the mortgage or deed of trust. Some lenders will order a full appraisal. Other lenders, including local lenders, may perform their own valuation. Most will want to do a site visit to assess the collateral and get to know the borrower better.  

Financial Statements

Make sure you’ve filed your tax returns and your most recent year’s extension, prepared your bank statements, supplied a year-to-date (YTD) P&L and balance sheet, and included contracts related to the harvest. If you’re refinancing an existing mortgage, provide the mortgage statement to the lender. Some lenders won’t ask for taxes and YTD financial statements – but it’s good to have these ready just in case.  

Exit Strategy – Sell, Pay Off or Refinance

You’ll need to have an exit strategy for repaying the loan. The three exit strategies are:

1. Sell the property:
   The Oregon farmer who subdivided part of his property to develop a residential housing tract paid off the loan by selling the lots to home builders in his area. 
2. Pay off the loan through amortization:
   The Southern Oregon rancher paid off the $500,000 loan as a 24-month amortizing loan, paying a fixed amount of both principal and interest each month until the loan was satisfied at the end of the second year. 
3. Refinance:
   If the hard money loan is a temporary bridge loan, let the private lender know the type of bank loan in which you plan to eventually refinance. Banks and institutional lenders originate a number of government-backed loans at lower pricing with longer durations that can significantly improve the cash flow situation for a farmer.

Conclusion

Agricultural hard money loans can provide a valuable alternative to traditional bank financing for farmers, ranchers and winemakers. These loans are primarily asset-based and funded by private money lenders, resulting in higher prices but faster closings. Borrowers should weigh the pros and cons before applying. To qualify for an agricultural hard money loan, borrowers should organize their property and financial paperwork and solidify an exit strategy. Overall, agricultural hard money loans can be a valuable tool for those in the industry seeking short-term financing solutions.