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By understanding how current leases affect your farmland loan and taking the necessary steps to address any issues, you can ensure a smoother loan approval process and make informed decisions about your property purchase.
In Ag Land Loans 201: Loan Preparation, a new guide from the FBN® Finance team, we explore how current leases could impact your farmland loan, as well as what to expect for upfront costs and closing costs for your land loan, whether your purchase should be set up as an LLC or corporation, and what financial information you’ll need to provide when applying for a land loan. The guide is available for free download here, or continue reading below for more information on the role of leases on loans.
Existing leases can provide a steady income stream, which can be a positive factor for lenders. This income can help demonstrate the property's ability to generate revenue, potentially making it easier to secure a loan.
The terms of the lease, including the duration, rental rates, and payment history, will be scrutinized by the lender. Long-term, stable leases with reliable tenants are generally viewed favorably.
The presence of leases can affect the appraised value of the property. Income-generating leases can increase the property's value, while restrictive or below-market leases might decrease it.
Lenders may use the income approach to valuation, which considers the property's ability to generate income. This approach can be influenced by the terms and stability of existing leases.
The income from existing leases can impact the loan amount you qualify for. Higher income can support a larger loan, while lower or uncertain income might limit the loan amount.
A stable income stream from leases can potentially result in more favorable loan terms, including lower interest rates, as it reduces the lender's risk.
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Lenders will review the terms and conditions of existing leases to understand their impact on the property's income and use. This includes lease duration, renewal options, rent escalation clauses, and any restrictions on property use.
Lenders may require that existing leases be assigned to them as collateral. This means that in the event of a default, the lender would have the right to collect rent directly from the tenants.
Existing leases grant certain rights to tenants, which can affect your ability to make changes to the property or terminate the lease. Lenders will consider these tenant rights when evaluating the loan. Lenders will want to ensure that leases remain in effect and tenants continue to pay rent, even if the property changes ownership.
As part of the due diligence process, you will need to provide copies of all existing leases to the lender. This includes any amendments, extensions, and related agreements.
Lenders may require tenant estoppel certificates, which are statements from tenants confirming the terms of their lease and that there are no undisclosed agreements or disputes.
Existing leases may include restrictions on how the property can be used, which can affect your plans for the land. For example, a lease might restrict certain types of farming practices or limit development.
If you plan to develop or change the use of the property, existing leases could delay or complicate these plans. Lenders will consider how these restrictions impact the property's value and your ability to repay the loan.
Ensure that all existing leases comply with local laws and regulations. Non-compliant leases can pose legal risks and affect the loan approval process. Consider having a real estate attorney review the leases to identify any potential issues that could impact the loan or your use of the property.
Estimate your ag loan payments with our free Farm Land Loan Calculator.
Gather lease documents: Collect all existing lease agreements, amendments, and related documents.
Tenant communication: Communicate with existing tenants to understand their lease terms and any potential concerns.
Legal review: Have a real estate attorney review the leases to ensure they are legally sound and identify any potential issues.
Consult with lender: Discuss the impact of existing leases with your lender and provide the necessary documentation.
Whether you’re looking to expand your ag operation with a new land purchase, refinance an existing loan, or finance improvements on your land, FBN Finance offers ag lending solutions. You can apply online through our streamlined digital application.
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