Acquiring Agricultural Land for Leasing: A Win-Win Proposition for Investors & Farmers

by | Sep 14, 2023 | Agricultural Land, Property Market Advisory Series, Real Estate Leasing, Real Estate Market Intelligence, Writer's Commentaries | 0 comments

Introduction

Did you know that the leasing of agricultural land sustains a wide variety of commercial and large-scale agricultural production activities in Kenya? From pineapple farming to wheat farming, pastoral farming to agroforestry, the cultivation of biogenic feedstock and horticultural farming, the leasing of agricultural land is widely practiced and accepted in sustaining food production across several agricultural value chains.

Income Diversification & Food Security:
Who Benefits from Leasing Agricultural Land?

Leasing Agricultural Land is a common practice that allows farmers and landowners to enter into mutually beneficial and strategic agreements for the use of land for agricultural purposes. On the one hand, landowners collect an income through the rental charged (earning passive income), while farmers, on the other hand, who may not otherwise be able to afford to purchase the land, can work the land and earn an income from farming activities (an active form of income generation)

Because Kenya is a nation of farmers (including “phone farmers” and “wanna-be farmers”), there is a widely held view that participating in the farming economy is the preserve of those who plant crops, rear animals and otherwise directly participate in farming as producers. This is a somewhat dim view because in this same nation, the producers, the ones who assume the greatest risk in the entire value chain, across almost all agricultural value chains, are the least rewarded for their effort.

Leasing Agricultural Land, therefore, is a win-win proposition. It allows the farmer to reduce risk by guaranteeing the landowner who assumes some of that risk a decent return on their investment. The landowner doesn’t have to engage in production to benefit from owning the land. Simultaneously, the farmer can sink in their capital towards production with greater optimization and can therefore achieve greater results.

Acquisition of Agricultural Land for Leasing:
Why Has This Become Trendy with Investors?

In recent times (this is 2023!), spurred by the profound economic disruption (job losses, closure of businesses and more) that resulted following the COVID-19 pandemic which has been further exacerbated by both the local and global economic downturn, there has been a growing trend among investors in Kenya who are increasingly looking for opportunities to diversify their income portfolios and improve their cash flows. Specifically, opportunities that can create passive income streams, even in real estate.

As the effects of a cash crunch, skyrocketing inflation, depreciation of the local currency and a host of other adverse economic conditions begin to bite, many investors who erstwhile preferred to buy land speculatively, are increasingly acquiring agricultural land that can be leased out to generate an income without necessarily engaging in the laborious effort of producing food or rearing animals from the land. In any event, they are not individually or collectively farmers themselves. However, possessing neither the capacity, interest or preference to commit their time or resources in the pursuit of farming activities does not limit their ability to derive benefits from farming ecosystems – if not as farmers, then as investors. And, farmers do not always possess the capital to acquire land anyway!

They are instead choosing to create or connect with farming communities and even corporate entities engaged in contract farming either in the area of horticulture or animal husbandry, to supply the land that is fit for those purposes on a contractual basis (through leasing).

The Market:
Who is Acquiring Agricultural Land for Leasing? Why?

This opportunity is especially being pursued by foreigners from the Middle East, Asia Europe and Kenyans living in the diaspora. By finding land that is ideal for animal husbandry and horticultural production these investors are acquiring land that they can lease out for agricultural production and then working with farmers to earn an income and even produce food for export into their own economies.

In some instances, rather than investing in the land for farming per se, they are instead choosing to invest in enhancing the agricultural production ecosystems where they lease land. They are also choosing to partner with contract farmers to produce food for export into their countries, controlling end-to-end the production hubs all while creating access to their own markets. On a larger scale, this investment and cooperation is also happening at the level of national governments.

While the goal is primarily the pursuit of food security in their home countries (producing food for export to their home countries), they are also increasingly seeking opportunities in newer fields, especially in the production of crops for renewable energy.

This is a double-pronged strategy that is also being aggressively pursued in light of climate change, which is adversely affecting food and energy supply chains globally. Africa, at large, is one of the region’s most at risk and most susceptible to the effects of climate change.

Six Steps to Leverage the Acquisition of Agricultural Land for Leasing?

Can one feasibly benefit from acquiring land that can be leased out for agricultural purposes? The answer is obviously yes. And that benefit can transcend even the benefit to the farmer if one takes the time to understand how to engage in the leasing business.

It isn’t risk-free.

But given the wildly popular alternative – acquiring land for the speculative consideration of its capital growth in the future – the productive use of land not only guarantees an income nonetheless. In other words, both income and capital gains can be realized if one invests strategically, and understands the needs of their target farmers well enough to provide solutions that they require in order to sustain the business. Leasing agricultural land provides both income and sustained capital growth, optimizing the value of the asset.

Investing in agricultural land and leasing it out to farmers can be a rewarding venture, but it requires careful planning and consideration. Here are the steps to follow and considerations to keep in mind:

Step 1: Set a Budget and Define Your Investment Goals:

Start by making a decision on how much you’re willing to invest. Consider not only the cost of the land but also potential additional expenses like legal fees, taxes, utilities, and maintenance. Define your investment objectives clearly, such as the potential for long-term appreciation, lease income (return on investment), or a combination of both.

Step 2: Research the Market and Engage a Real Estate Agent

Identify regions or areas with a strong demand for agricultural land and the agronomic practices most common to these areas. This will help you identify prospective farmer groups to draw your lessees from. Factors to consider include availability of water, climate, soil quality, proximity to markets, and local farming practices. Thereafter, work with a real estate agent(s) who specializes in agricultural properties. They can help you find suitable land based on your criteria and negotiate the purchase.

The research will also help you determine critical success factors, such as the demand for agricultural land for lease in an area, the potential volume of lessees (market size and depth), the competitiveness of leasing rates, potential risks and costs, the potential returns on investment, and prospective capital gains accruing from the appreciation in the value of the land. The goal of the market research is to ensure that the leasing business will be financially viable and sustainable.

Step 3: Evaluate Land Quality and Gain an Understanding of Zoning and Regulations

What is the land good for? This can be done through an assessment of soil quality, water availability, and land topography. These factors significantly affect the land’s agricultural productivity. Some agricultural land is better suited to activities such as animal husbandry, say due to the natural occurrence of vegetation and shrubland ideal for rearing animals. For long-term arrangements, would the purchase be ideal for the growth of say biogenic feedstock rather than horticultural production? Be aware of local zoning laws and regulations that might affect your ability to lease the land for farming. Some areas may have restrictions on land use. If the capital outlay on the land will be significant, it would be ideal to arrange for soil testing to determine its fertility and whether it’s suitable for the types of crops or livestock you intend to lease the land for. If there are no natural sources of water or even utility service providers, arrangements may be required for the provisioning of water. What are the nearest sources and can water be tapped from there? If not, what would it cost to, for example, sink a borehole?  A hydrogeological survey can uncover relevant information on this subject.

Step 4: Infrastructure and Access to Market Considerations

Evaluate the availability of infrastructure like roads, utilities, and access to markets. Adequate infrastructure can make the land more appealing to farmers.

Step 5: Secure Financing, Negotiate and Purchase the Land

Arrange for external financing if needed, either through a mortgage, bank loan, or other financing options. Ensure you have a sound financial plan then proceed to identify a suitable property, and negotiate the purchase price and terms with the seller. Work with a lawyer to ensure all legal aspects are in order.

Step 6: Engage a Property Manager to Secure and Manage Your Leasing Business

You could always choose to manage the property yourself, but a property manager will come with the advantage of ensuring consistent rentals and ensuring that the land is always under lease. A property management firm which specializes in leasing land, especially agricultural land, is more likely to have a steady source of potential clients within its networks so that there are no overlaps in time between the exit of one lessee and the subsequent ones. They will also take responsibility for ensuring that the lease agreements are airtight and function to the requirements of the landowner, their client.

Conclusion

Investing in agricultural land and leasing it to farmers can be a profitable and sustainable investment. It is essential to undertake thorough research, understand the local agricultural landscape, and establish transparent and mutually beneficial relationships with your tenant farmers.

Consulting with agricultural experts or local agricultural extension offices can provide valuable insights into regional farming needs and practices.

In summary, investing in land that is prime for leasing can be a valuable opportunity for investors. The market research should be designed to ensure that the investment is sustainable and will yield an acceptable return on investment over its lifetime.

Leasing Land in Kenya: A Beginner’s Guide to Understanding Lease Agreements

by | Aug 11, 2023 | Agricultural Land, Property Market Advisory Series, Real Estate Leasing, Real Estate Market Intelligence | 0 comments

Leasing Land: What are Lease Agreements?

Leasing land, and in general, leasing property for a rental fee is one of the most lucrative ways to profit from the ownership of real estate assets. Leasing allows the property owner (landlord) to earn a passive income from their property while simulteneously allowing the lessee (tenant), the ability to utilize property they would otherwise be unable to afford to purchase outright.

In the world of real estate, lease agreements play a vital role in providing a legal framework for property rentals. Leases, or lease agreements are the binding legal agreement entered into by the proprietor/owner of a property (also referred to as the lessor or as landlord) in which the rights of use of the property are conferred to a lessee or tenant, and which clearly stipulates the terms and conditions under which the property can be used and the relationship that subsists between the two parties.

Leasing Land: Why is Leasing Growing in Popularity?

The most basic premise that makes leasing attractive is that it allows two parties to engage for economic benefit – one to utilize an asset they may not be able to afford to purchase to either generate an income or derive some other form of benefit, and the other to benefit by merely owning that asset.

Leasing, in particular the leasing of agricultural land, as an investment strategy, has gained significant traction post-pandemic as more property investors seek to diversify their risk exposure in the real estate market and augment their incomes.

While it is becoming increasingly unattractive to merely buy land speculatively, acquiring property which, on the other hand, can at the very least generate some revenue, is becoming an increasingly attractive proposition. Especially among the middle-class bourgeois, who tend to buy land almost exclusively for residential development in the indeterminate future, or speculatively. The slew of economic challenges currently being experienced both as a result of the Covid pandemic and due to events globally, has cooled off the hitherto bullish market sentiment on the acquisition of land. In particular, the acquisition of small-holder plots (burotti maguta maguta) which are notoriously difficult to sell or lease in the secondary market where there is no immediate value proposition in terms of generating an income.

For both prospective tenants seeking to rent a property and landlords looking to lease out their property investments, understanding lease agreements is critical for ensuring a smooth and secure rental experience.

In this comprehensive guide, we will delve into the core concepts of lease agreements, explore the key elements of a lease agreement, the different types of leases, and shed light on the advantages and drawbacks that leasing affords both landlords and tenants. We will in a follow-up post, explore the registration of leases, the key distinctions between registered and unregistered leases and the importance of registering lease agreements, especially as relates to commercial leases.

Did you know agriculture is the largest economic sector in Kenya, and that the vast majority of agricultural production on commercial scale is achieved on leased land?
What opportunities lie in the leasing of property in Kenya? start by gaining some basic knowledge of land leasing as a commercial activity.

Leasing Land in Kenya: A Beginner’s Guide to Understanding Lease Agreements

Leasing Land: The Key Elements of a Lease Agreement

In Kenya, unless otherwise provided in a lease instrument, lease agreements are governed by the general provisions of Part VI of the Land Act, 2012 as provided for under S.55(1) of the Act.

A well-drafted lease agreement should encompass essential elements to protect the interests of both parties involved. Here are the key elements found in a typical lease agreement:

1. Details of the Parties Involved:

The agreement will clearl identify the lessor (landlord) and lessee (tenant) with their full legal names and addresses, and clearly define the relationship between the parties to avoid any confusion.

2. Property Description:

The agreement will include a detailed description of the property being leased, including its physical location, physical address, unit number or land reference number (if applicable), and any specific areas or amenities accessible to the tenant.

3. The Term or Duration of the Lease:

It will specify the duration of the lease, whether it’s a fixed-term lease, month-to-month lease, or any other arrangement and clearly outline the start and end dates of the tenancy.

4. Rent and Payment Terms:

State the monthly rent amount, the due date, and the preferred payment method. Additionally, mention any penalties for late payments or bounced checks.

5. Security Deposit:

Detail the amount of the security deposit and the conditions under which it will be fully or partially refunded at the end of the tenancy.

6. Utilities and Maintenance Responsibilities:

The agreement will clarify which party is responsible for paying utility bills and maintaining the property. Typically, landlords handle major repairs, while tenants handle day-to-day or routine maintenance.

7. Restrictions and Rules:

Outline any restrictions on subleasing, pet ownership, smoking, and other specific rules that tenants must abide by during their tenancy. In overview, the lease agreement may also include details about the rights and responsibilities of the landlord and tenant, such as who bears responsibility for paying utilities, property maintenance, responsibility for paying land rent and rates. It may also include exit provisions which speak to the condition upon which the property reverts into the control of the owner, as well as provisions on limitations of use such as provisions on subletting, use or storage of certain fuel types on the property, restrictions on the admission of domesticated animals and pets or even restrictions on the number of occupants allowed on the property.

8. The Period of Notice:

The agreement will include the notice periods required for lease termination or lease renewal. This will provide clarity on the actions required by either party at the end of the lease term.

9. Legal and Late Fees:

Mention the legal actions that may be taken if either party breaches the agreement and the potential consequences, such as eviction. Also, specify any late fees charged for delayed rent payments.

10. Endorsement of the Agreement:

Ensure both parties sign the lease agreement and date it. Signatures validate the contract and show mutual agreement to its terms

Leasing Land: Understanding Different Types of Leases

In the Kenyan context, lease agreements may be broadly classified into the following three categories:

Periodic Leases

Periodic leases, as defined in Section 58 of the Land Act 2012, are lease agreements whose term or duration is unspecified and where the parties to the agreement make no provision by which notice of termination of the agreement has been defined. In this case, the tenancy may be from week to week, month to month, year to year or such other period on which the rent is based. Further, for agricultural land, periodic leases are deemed to have a term of six months. Where a land owner permits the exclusive occupation of his land or any part of it by any person at a rental, but without any agreement in writing, that occupation is deemed to be a periodic tenancy. For periodic lease arrangements, termination takes the form of notice by either party to the other, with the length of the period of notice not exceeding the period of tenancy.

Short-Term Leases

The Land Registration Act, 2012 Section 58, stipulates that a short-term lease is a lease made for a term of two years or less without the option for renewal and includes periodic leases where the owner of land permits the exclusive occupation of the land or any part of it by any person at a rent but without any agreement in writing. Notably, short-term leases may be made orally or in writing and are by their nature not registrable interest in land. These leases, as distinguished from periodic leases, have a defined term.

Registered Leases

Lease arrangements that have a fixed term that extends beyond 2 years and those with the option to renew beyond two years and also the option for termination through the issuance of a notice, (but which are not by their nature periodic leases) are termed as general leases. Leases with a term exceeding 2 years should be registered.

Registration of Leases: How to Secure Your Rights & Interests Over Leased Property

Leasing Land: Advantages of Leasing

Leasing comes with several noteworthy benefits:

1. Cost-Efficiency

Leasing enables businesses to access expensive assets without incurring the full upfront cost of ownership. Instead, they can make periodic payments, preserving valuable capital for other essential operations.

2. Flexibility

For businesses that require to set up in diverse locations which may require them to either be in one location for limited or short spells, or which require them to have robust mobility, room for expansion, or even those that require up-to-date equipment or technology, leasing offers the flexibility to upgrade or change assets easily, giving them an edge over the competition.

3. Lower Maintenance Burden

In many cases, the lessor assumes responsibility for maintaining the leased asset, saving the lessee from any additional maintenance costs they would have otherwise incurred if they outrightly owned the asset(s).

4. Taxation Benefits

To the lessee, costs associated with leasing, including the rentals payable to the lessor, are tax-deductible. This reduces their tax liability on the business they undertook using the land or property they leased. This benefit allows businesses leasing land or other property to significantly write off these costs of doing business against their revenues thereby reducing their tax burden.

Considerations and Drawbacks

While leasing presents numerous advantages, it’s essential to consider potential drawbacks:

1. Limited Control

As the lessor maintains ownership, lessees may face restrictions on modifying or using the asset in certain ways. This may limit their utility for the asset in turn stifling their growth.

2. Early Termination Penalties

The premature termination of leases often results in penalties and/or additional fees, affecting the lessee’s finances. If an unforeseen event occurs that may cause the lessee to terminate the lease, say for example, if that event causes the business to shut down permanently, then this can leave the lessee in a precarious financial situation that may be difficult to mitigate.

Conclusion

Leasing is an integral form of investment in real estate. It offers access to valuable assets and properties without the burden of full ownership, providing flexibility to capital in the use of many real estate assets. Understanding the intricacies of leasing empowers individuals and businesses to make informed decisions. The benefits of leasing, such as cost-efficiency and flexibility, greatly outweigh any drawbacks, making it a pragmatic, viable and attractive option for many entities seeking to thrive in a highly dynamic marketplace such as the real estate market in Kenya.

As a property investor, if you haven’t yet begun to pay attention to this mode of investment in real estate, you need to pay closer attention to the vast opportunities that exist in the market today to generate stable income and utility from the land you own. We can help you achieve this!

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