Looking for cows on Lease to own

[TexasBred]

I would gladly spend 5000 dollars to keep from giving the government 500 dollars

Your right. Send me what ever you want... $5, 10, 15, 50K... what ever will help you stay in that lower tax bracket. You can 1099 me for it so you won't have to pay taxes on that money.... I will pay all the taxes on it for you. Win... Win

Or I could stay home work less and hang out on the cattle boards all day ... Haha

And buy everything for cash, report it all in one year and pay out the gazoo for it. Brute you really need to look into using other people's money when it is to your advantage as well as deferred income. It can save you worlds of money. Talk cash all you want and maybe you operate that way but in reality most people can't and don't but they don't let it hold them back. A fellow has to start somewhere and use whatever tools are available. As you said "cash in the bank" is priceless (paraphrased or worth two in the bush or whatever it was. I've reviewed thousands of financial statements over the years and amazingly 99.9% always had large amounts of liabilities and it was by "choice" not out of necessity. There is always more than one way to skin the proverbial cat.

 

[Commercialfarmer]

You think people are deferring now, wait until 2013 when the real taxes hit the fan.

Talked to my accountant yesterday. He said next year is the last year without serious consequences for making a profit.

You will see a lot of businesses going up for sale and a lot of people retiring and taking their money and running.

 

[Gators Rule]

I know a quite a few wealthy people.... never have I heard any of them say the want to spread out their income. They take the cash and move on to the next deal.

Obviously they inherited their money as they wouldn't accumulate much doing it your way. Deferred income is one of the best ways to lower taxes while retaining earnings. A cow note is just as secured as a real estate note. Cows die....real estate deteriorates without constant upkeep (additional cash investment). I know a lot of banks that are very agriculture based and loan tremendous amounts of money on cattle as well a"unplanted" crops. Most farmers operate on borrowed money. Takes more than most have laying around in the bank to put in 20,000 acres of grain. Anyway, back to the original question, yes it can be done...you can make money at if you know what you're doing and it is done fairly often. Again, best wishes.

Thank you... I take deferred income every year, and will defer it for years when I'm retired...and in a lower tax bracket than I am currently. I also agree on cattle being as safe or possibly even more safe than real estate as collateral.

David

 

[Brute 23]

I understand how to use other peoples money... Infact its all I do because as you said every one has to start some where. Its never in the form of debt though.

When I use others money its for a deal that people want to put money in on. That is the origal discussion here. Yall are like politicians and have turned this into a debt vs cash deal and its not.

The original question how would a person benefit from doing this deal? It obviosly cant be answered because it wouldnt. If it was you wouldnt have a random post on the enet because some one would taken you up on it. Plus, if yall treat all yalls potential lendors like me, its not surprising they dont do the deal. :tiphat:

 

[TexasBred]

I understand how to use other peoples money... Infact its all I do because as you said every one has to start some where. Its never in the form of debt though.

When I use others money its for a deal that people want to put money in on. That is the origal discussion here. Yall are like politicians and have turned this into a debt vs cash deal and its not.

The original question how would a person benefit from doing this deal? It obviosly cant be answered because it wouldnt. If it was you wouldnt have a random post on the enet because some one would taken you up on it. Plus, if yall treat all yalls potential lendors like me, its not surprising they dont do the deal. :tiphat:

Sorry you're offended that noone would concur with your line of thinking. But I'll say again, deals like this are made everyday and DO work. Do you buy producing minerals? Maybe we can do some businesss, relieve you of some of that cash and I can defer a boat load of income. :banana:

 

[Brute 23]

My feelings are not hurt and I wasn't trying to change any ones mind. I was trying to find out why some one would do a deal like that... the factual Pros and Cons for both parties involved.... Not your opinion.

The small amount of potential tax savings and interest on the loan vs just taking cash and reinvesting that money doesn't come even close when you factor in the risk. When your a year in and some thing happens and for what ever reason this guy can't keep paying you... YOUR SOL. Every one intends to pay their bills but some time stuff just happens and they can't. That doesn't help you any and there is nothing you can do to make them.

 

[Gators Rule]

if him paying or not is the issue, be sure to draw up the lease legally and repo them if the lease falls through.

Sir, I'm not sure of your business prowness, nor that of your "mentors" but anyone who knows just a little about handling finances and owns a business will tell you what a few of us have stated is the best way to maximize total income. I don't mind if we disagree, as long as you don't mind being wrong. LOL I'm just kidding!!! we can agree to disagree.

 

[Brute 23]

Its your money and your choice and but I believe yalls logic is wrong. The idea of deferring income is used but not in this situation. You deferr income you know you have. Bonuses, higher than extpected income years, retirement savings, ect... This is a LOAN and you take on all the RISK of a LOAN (the part yall keep wanting to leave out). Don't try to brur the two to justify the deal. There is a proper way for a company to write off a bonus in the current year but you defer it to the next because you are assuming either taxes will be lower or you will have less income. That is not what this is. This is a very high risk loan.

 

[TexasBred]

Any loan has risk...same for a lease. But like any other loan you make the person qualify, make sure you are secured and have all your papework in order should it come down to reposessing the cattle etc. Going thru a lending institution is almost impossible for a lot of folks these days. Underwriting guidlines have been made much more stringent (which is good) but with some, by the time you prove you deserve the loan you probably can pay cash for what you want anyway. If I were approached on it I'd probably lease or even finance cattle for someone but in my own best interest I'd have to make a friend qualify just like a total stranger. I've known a few folks who leased dairy cattle...would milk them, get them bred back and when they dried them off turn them back in for a replacement fresh cow. This was strictly a lease with no chance of ever owning the cattle. Worked well for both parties in each case. Knew another who ended up picking up all the cattle and not getting paid for the last few months of the lease.

 

[Massey135]

When I use others money its for a deal that people want to put money in on.

...and that shows the calibre of your "deals." It's apparent you don't understand the power of leverage or the capital structure of any substantive project.

"Deals" are financed with any equity partner, whom generally brings 40% to the table. This equity partner or mezzanine piece will require upwards of 20% return for the non-collateralized debt capital.

The borrower will then take this money to the bank, the senior lender, to pledge against the loan. With the bank's 60% financing, they will hold a primary lean position and the mezzanine's debt will be subordinate.

As long as the cost of capital is less than the return, then you needa accept the project.

*leverage
*cost of capital
*risk premium
*required return

 

[Brute 23]

When I use others money its for a deal that people want to put money in on.

...and that shows the calibre of your "deals." It's apparent you don't understand the power of leverage or the capital structure of any substantive project.

"Deals" are financed with any equity partner, whom generally brings 40% to the table. This equity partner or mezzanine piece will require upwards of 20% return for the non-collateralized debt capital.

The borrower will then take this money to the bank, the senior lender, to pledge against the loan. With the bank's 60% financing, they will hold a primary lean position and the mezzanine's debt will be subordinate.

As long as the cost of capital is less than the return, then you needa accept the project.

*leverage
*cost of capital
*risk premium
*required return

How does that play into this? If that guy had his 60% the bank would not have turned him down. Can some one pay 20% to the bank and the equity partner's part on from cattle? We're not talking power plants here.

 

[Massey135]

When I use others money its for a deal that people want to put money in on.

...and that shows the calibre of your "deals." It's apparent you don't understand the power of leverage or the capital structure of any substantive project.

"Deals" are financed with any equity partner, whom generally brings 40% to the table. This equity partner or mezzanine piece will require upwards of 20% return for the non-collateralized debt capital.

The borrower will then take this money to the bank, the senior lender, to pledge against the loan. With the bank's 60% financing, they will hold a primary lean position and the mezzanine's debt will be subordinate.

As long as the cost of capital is less than the return, then you needa accept the project.

*leverage
*cost of capital
*risk premium
*required return

How does that play into this? If that guy had his 60% the bank would not have turned him down. Can some one pay 20% to the bank and the equity partner's part on from cattle? We're not talking power plants here.

It doesn't matter if its a lemonade stand business or a multi billion dollar development. The approach is the same. You have to acquire capital for your initial cash outlay and to cover operating expenses- the carry cost.

You want say 100 cows and for numbers sake, lets say their priced at a grand each. Thats $100,000.
You go to the bank and present your plan- to borrow 100 grand for the purchase of cows.
They say the commodities market is too volitile and the underlying assets (the cows to be purchased) aren't enough collateral to secure the loan. The bank says the proposed underlying assets only secure 60% of the loan and they would consider if you can bring 40% to the table. What to do now?

Find an angel(investor), someone willing to invest in your operation. Because this person provides capital to you very quickly with little due diligence on his part and with little or no collateral on your part, this type of financing is aggressively priced. The risk premium the angel has assessed on this project requires a return in the 20-30% range. ( He will get 20-30% return on his investment). The angel requires such a large return +20% because 1) His loan is non collateralized and 2) because his debt is subordinate to the banks financing.

You then take the angels money, the 40k, to the bank ( a down pmt if you will). Your now qualified. The bank then approves the additional capital (60k) you need at a prime rate, say 6%, and take a primary lean position on all 100k worth of cattle. The cost of capital from the bank is considerably cheaper than the angels because
1) their loan is collateralized ( 100k worth of cattle on a 60k note) and 2) they hold the senior position on the collateral in the event you default.

With the Mezzanine financing (using an equity partner/angel/investors funds), and the banks capital funds, I can now purchases 100k of cows and if you applied like your should have at the bank, as an LLC, you are now running cattle and producing beef with literally ZERO equity (hmmm Tom Lasater?) and your not personally on the line for a single penny. Is that "risk free" enough for you.

Lets use the proclaimed national average of $100/hd profit in a cow/calf operation for our numbers. I assume the $100/hd was calculated as EBITDA.
You owe the angel his 20% return the first year. You owe the bank 6% of the loan spread out over the useful life + the principal. 3600 in interest (6% x 60k) + 60k principal. IF the cattle have a useful life for 10 years, thats 360 dollars in interest and 6k in priciple that you owe on an annual basis.

$100 x 100hd = $10,000

YEAR 1
The angel gets his 20% ( of the 40k) = $8000
The bank gets their 6% (of the 60k) = $3600
Principal $6000
<$17600>
Ok, so you didn't cover the cost THE FIRST YEAR so you personally invest $7600 into the project to pay off the angel ( he accepts the 20% of 40k pmt (8000) and renders his equity position)

YEAR 2
$100 x 100hd = $10,000
Bank pmt of P +i = $9600
PROFIT $400.


YEARS 2-10 all have cashflows of $400 PROFIT . After yr 10, that is over 4k in annual cashflows and now you get to sell the cows and retain the salvage value as well. $500 x 100 = $50000

The sum of these cashflows + the salvage value is well over 50 grand. Thats 50k that only required a cash outlay( money out of your pocket) of $7600 in the first year. At any point during the investment you could have wiped your hands and walked away whistling dixie and not have owed a swingin richard a dime. The bank would just seize the underlying assets (the cows) and since they only financed 60k of the 100k value, the collateral would cover the debt and you wouldn't be left with any deficiency balances. At worst, you might have to restructure your corp after the default but thats a tiny repercussion for the chance to leverage that 100k.

Ideally, somewhere around year 6, you should have enough equity in the cattle that your could then releverage and buy 100 more and then 100 more and ... It is not so much about making money in the short term, but more about establishing equity as to avoid the mezzanine piece.

 

[TexasBred]

When I use others money its for a deal that people want to put money in on.

...and that shows the calibre of your "deals." It's apparent you don't understand the power of leverage or the capital structure of any substantive project.

"Deals" are financed with any equity partner, whom generally brings 40% to the table. This equity partner or mezzanine piece will require upwards of 20% return for the non-collateralized debt capital.

The borrower will then take this money to the bank, the senior lender, to pledge against the loan. With the bank's 60% financing, they will hold a primary lean position and the mezzanine's debt will be subordinate.

As long as the cost of capital is less than the return, then you needa accept the project.

*leverage
*cost of capital
*risk premium

You may play with this mess but no GOOD banker is going to touch it especially when cattle is concerned. Crap like this is what has gotten our banking industry in the mess it's in now.