Important considerations for capital investments
Dollars and Sense
GreenStone FCS | April 24, 2017
Leo Pasch, Vice President of Risk Assets and Timothy Weihing, Vice President of Credit, GreenStone Farm Credit Services
For many farmers, it seems hardly a year goes by without some form of capital investment, whether in equipment, facilities, livestock or land. While experienced farmers are most likely well familiar with the process, including purchasing used equipment from dealers or fellow producers, it is well worth revisiting some important considerations when making any capital investment.
Determining whether it is time to make a capital investment depends on several factors. The first is recognizing whether you really need the asset: If you are replacing a piece of equipment, for example, is the current asset truly obsolete or inoperable, and is it being fully utilized?
If you determine the new asset is needed, the next step should be to thoroughly analyze whether it will pay for itself over its useful life, based on a realistic analysis of the long-term cost of the asset, including any loan interest, and the income it will generate over time based on anticipated market prices for the commodity being produced with the asset.
If there is no break-even point, you should strongly reconsider making the purchase, unless there are other influencing factors such as an exceptionally strong financial position. In such a situation, it is especially wise to discuss the capital purchase with your financial advisor.
A lien is a security interest to another party for some form of consideration, usually a loan or other monetary consideration. In short, it is a prior claim on the asset. This becomes a risk in a used capital-asset purchase if the buyer is not aware there is a lien. For example, a farmer pays for a piece of equipment, takes it home, and then discovers there is a lien holder who already has claim to all or part of the equipment.
In this situation, the buyer does not actually have proper ownership of what they believe they have purchased. In the worst-case scenario, the lien holder will physically claim the asset or demand payment – for a second time – from the buyer for the amount of the lien, leaving the buyer to reclaim their original payment from the seller.
Having a lien on an asset you wish to purchase is not necessarily a dire situation or the end of the deal. We all know it is quite common in agriculture for equipment and machinery to be bartered, traded and sold, and many of these assets carry liens. In most cases, particularly with the vast majority of producers who are in good standing with their lenders, the seller can get a release of the lien from the lien holder.
While the sale of used assets carrying liens is not a roadblock for a farmer-to-farmer transaction, it does behoove buyers to do their due diligence to determine if a lien does exist, especially as we enter more challenging economic times that can have an impact on some producers’ financial situations.
For land purchases, even neighbor-to-neighbor, buyers should always pay to get title work completed either through a title company or an attorney, and make sure you have a valid land contract.
For other capital assets, such as equipment and machinery, the first step is simply to ask the seller if there is a lien. If the buyer knows who the seller’s lender is, they can also contact them directly and ask about the specific asset; the lender will not reveal confidential financial information such as the amount of the lien, but they will disclose whether they hold one.
The third step is to conduct an online search at either the Michigan or Wisconsin Secretary of State web sites. Anyone can conduct a simple search for active liens by seller/owner name, and in Wisconsin, you can search by address. The results will not specify which specific asset has a lien, but simply whether the individual owns something that has a lien.
If the results are affirmative, then more questions of the seller will need to be asked. In Michigan, a more detailed online search is possible for a minimal fee. Considering the alternative, the time and possible fee of researching for liens on an asset you are considering purchasing are resources well-spent.
The final option to discover if a used asset you are planning to purchase has a lien against it is to contact your own lender and ask them to research it for you.
At GreenStone Farm Credit Services, we have a vested interest in helping our customer-owners succeed and ensure their capital investments are wise ones.