Now what?

Decisions need to be made on the function of the building, timing of construction, the best location of the building and how to finance it. Often a visit with an ag lender is early in the process.

Sometimes Angie Erbson, a loan and lease expert, sees the farmer before the engineering drawings are complete.

She suggests designing the building that not only suits today’s needs but for the next five to 10 years.

“It’s always cheaper to build right now than later,” said Erbson, senior leasing specialist with Compeer, a member- owned, Farm Credit cooperative which provides loans, leases, risk management and other financial services in Illinois, Minnesota and Wisconsin.

For some farmers, a conventional loan, either short-term or for 15 to 20 years is the best option. Some mortgages may require larger down payments or collateral, said Erbson.

Other farmers may find a tax deductible lease is a better option for tax reasons.

In a leasing situation, some farmers will choose to buy out the lease from Compeer when the lease period ends. Others renew it and buy it out later. Rarely does the lease holder turn the building back to Compeer, she said.

The return options is more often used with trucks or trailers or mobile purchases, she said.

Leases are sometimes popular in generational farmers. The original client can buy out the lease at the end of the term or it be transferred to the next generation without inheritance taxes, she said. Sometimes leasing is another tool in the toolbox for estate planning, she said.

Others choose a lease for cash flow purposes. The lease can be adjusted to match timing of a livestock contract or annual harvest, for example.

Money doesn’t start going out until the building is compete and there’s no need for a down payment, which may also be helpful to someone just starting out, she said.

Russ Deter, vice president for commercial lending for Farm Credit based in Effingham and serving 60 counties in southern Illinois said the lender tries to tailor a credit package to what a client needs and structure loans to what that best suits their purposes.

“We need to understand the financial operation and their goals,” he said.

Loans depend on what they are for. If it’s for real estate there will be a longer amortization period.

During the construction period, floating interest rates are the norm, so with rising interest rates today, farmers may prefer to structure the loan in a way to avoid floating rate. They may use additional equity to get a fixed-rate loan, he said.

Older borrowers also prefer fixed rates. For some younger farmers, this is the first time they’ve seen rates go up.

“They have never had to deal with high interest rates,” Deter said.

He agreed with Erbson that leases have a place in lending for buildings. It depends what you want to accomplish, he said. Some favor them for tax benefits or eliminating the need for a down payment.

Construction of new buildings slowed when materials costs skyrocketed and labor was scarce during the pandemic.

Demand for money to build contract hog barns is also lower right now than a few years back, as is lending for monoslope cattle buildings. Demand for new dairy facilities has been slow for an extensive period during consolidation in their industry, Deter said.

For now the most popular structure to make money is grain storage, said Deter, who expects that will likely be the case throughout 2023 as well.

Ag builders see the same trends acknowledged by their lending counterparts.

Taxes considerations can expedite someone’s plans for building, as can impending rising interest rates, said Blair Neihouser vice president of sales for FBi buildings which operates in Indiana, Illinois and parts of Iowa, Wisconsin, Michigan and Ohio.

At the end of 2022 – as building material costs were down, interest rates were rising, people had profitable harvests and tax decisions and depreciation were on their minds – interest in taking action on a needed building grew, he said.

There was a sense of urgency for those with plans, because waiting “means it costs more money,” he said.

Building costs also usually go up the closer it gets to spring. And the cost of money will get worse over the next six months.

“While supply chain constraints are not the same as they were earlier last year, they are still something to consider,” he said.

“Time cannot be overlooked as a variable,” he said as getting labor is still at issue.

When making the investment, it’s important to be aware of when the building will be usable to function as it was intended to, he said.

“Make decisions with eyes wide open and all things considered,” Neihouser advises.