Growing Green: Deep Root’s Decision to Lease or Buy Land
Capital Innovation Lab’s Money Map is a comprehensive self-directed, online resource for entrepreneurs and small business owners to learn about raising capital for their start-up or early-stage business. This fictional case study shows an example of how a business has built its “money map” and the journey and decisions that informed it.
Adam and his husband Rodney have long operated Deep Roots Family Farm, a one-acre farm on the outskirts of Raleigh, North Carolina.
The couple grows seasonal vegetables, fruits, and microgreens and sells them at local farmers’ markets. This season, many of their repeat customers have been asking if they will start offering CSA memberships soon. Adam and Rodney are excited about the increasing demand for their small business’s produce, and they want to grow value-added products as another revenue stream in the future.
Rodney has a stable full-time job as a registered nurse at a local medical center, and Adam manages the couple’s rental property on top of being the main caretaker of the farm. Rodney wants to be able to cut down his hours to focus on the farm more in the future, and they would both like to focus entirely on Deep Roots in their retirement.
Rodney and Adam started the farm with personal savings and a modest inheritance, but the business is still in its Early Stage. They know they will need to seek outside capital to scale. They have been talking with a neighbor who owns a quarter-acre lot adjacent to their farm. She recently granted them access to the land with the option to lease or even buy the whole parcel in the future. Now they have to decide whether to purchase or lease.
Scenario 1: Leasing
Leasing is a flexible option that would provide Adam and Rodney access to more land without the hefty upfront costs of purchasing it. This aligns with their goal of scaling operations in a gradual and sustainable way, and won’t hold them down long-term if they decide to relocate.
But leasing has downsides, too. It requires rental fees that could increase over time. Adam and Rodney will have to negotiate with their neighbor on lease duration, renewal options, and any restrictions imposed on land use. Securing a favorable fixed rental rate or right of first refusal for lease renewal or sale would provide stability and certainty for Deep Roots.
If Adam and Rodney choose this financing route, they will have to factor in costs for soil testing before signing the lease agreement. After signing, they will have to invest upfront in irrigation systems, fencing, and storage facilities to prepare the site, as well as required permits or licenses. They’ll need to make sure they have sufficient working capital to cover operational costs until revenue from the CSA becomes sustainable. There is also a risk of losing this investment if they can’t get a long-term lease agreement, or if the neighbor decides to sell the land to another buyer.
Scenario 2: Purchasing
If Adam and Rodney buy the land, they’ll have long-term stability and autonomy over their farm. Purchasing could also yield equity growth through property appreciation and improvements. With ownership, they can make decisions that align with the vision of their business without restrictions from a landlord.
Securing financing for land purchase requires financial planning and due diligence, such as assessing zoning regulations and conducting environmental assessments. Adam and Rodney will need to assess their borrowing capacity, research available financing options such as loans, and compare terms from different lenders to secure the most favorable options. They know that in their local real estate market, land frequently changes hands via all-cash private sales, so they would have to have their financing in place before completing the purchase.
After testing the soil, the pair will have to make large infrastructural investments such as land clearing, irrigation systems, greenhouses, and equipment purchases to transition the plot into a functional farm. Cash inflows from the farm's revenue may be limited at first, so they’ll need to plan carefully to cover expenses and ensure a sustainable transition period.
Adam and Rodney have an amicable relationship with their neighbor, and they know there are currently no other prospective buyers for the land. But unexpected costs and policy regulations could add potential delays to the purchasing process. They’ll need to act quickly and definitely to secure the property.