Previous court rulings say Skyline’s financing model violates Saskatchewan law
Skyline Agriculture Financial is appealing a court ruling that prevents it from offering a unique financing model for growers interested in acquiring Saskatchewan farmland.
In 2014, Saskatchewan’s Farm Land Security Board ruled that a 15 acre parcel of land financed by Skyline violated the province’s land ownership laws.
Saskatchewan’s Court of Queen’s Bench in a March 26 judgment upheld that ruling.
“We have decided to appeal be-cause our view is that we’re onside with the text of the legislation but more importantly we’re onside with the intent of the legislation,” Skyline chief executive officer Mark Reineking said in his first public comments on the case.
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Reineking and his business partner Brad Kopp formed Skyline at the behest of Saskatchewan farmers seeking a more flexible form of financing to grow their operations.
The partners had previously worked at Silver Wheaton Corp., a company that financed silver mines.
Skyline developed a new model for financing farm operations by working in conjunction with Farmers Edge, an agronomy company with 1,200 clients who farm more than four million acres of land.
Reineking believes the Skyline model meets the main objectives of the province’s farmland ownership laws, the first of which is to maintain opportunities for Saskatchewan residents to own farmland.
“Our view is that we don’t just meet that intent but we really enhance it in that we’re creating new opportunities for farmers in Saskatchewan to own and operate farmland.”
The second thrust of the legislation is to develop strong rural communities and Skyline does that by ensuring existing landowners have a way to pass the farm on to the next generation without sacrificing the appreciation in land values that occurred during their time owning the property.
There are two non-traditional aspects to Skyline’s model of financing — a land value hedge and an interest rate hedge. In both cases the farmer owns the land and Skyline has no more rights to that property than any other financial institution.
The land value hedge allows farmers to offset a portion of their land value risk to Skyline, allowing the grower to acquire more land than under a traditional lending arrangement.
“Essentially it’s a contract that says if land values go up over the period of the contract a payment would be made to Skyline and if land values go down over the period of the contract a payment would be made to the farmer,” said Reineking.
A case study on the company’s website details how a farmer with $500,000 in equity who could afford to buy 1,000 acres of farmland and rent 2,000 acres under traditional financing arrangements could finance all 3,000 acres using Skyline’s land value hedge.
The interest rate hedge allows farmers to swap their fixed interest rate mortgage for a variable rate mortgage tied to the farm’s revenues.
For example, a farmer with a $5 million mortgage at a four percent fixed rate would be paying $200,000 per year in interest.
Using normal production and commodity price assumptions, that would equate to 14.5 percent of the mythical farm’s average annual revenues of $1.375 million.
Skyline would reimburse the $200,000 interest payment to the farmer in return for 14.5 percent of the farm’s revenues.
If the farm’s revenues dipped to 50 percent of normal it would owe Skyline $100,000, which is $100,000 less than it would have owed under the traditional mortgage.
If the farm’s revenues soared by 50 percent it would owe Skyline $300,000 or $100,000 more than under the traditional mortgage, but Reineking pointed out that it would be in better shape to make that payment.
Reineking said Skyline’s board of directors includes Don Black, former chair of Farm Credit Canada, and Colin Felstad, former chair of the Alberta Canola Producers Commission and former director of the Canola Council of Canada.
He said both men feel the unique financing model would help address the looming problem of transferring farmland to the next generation.
Skyline insists it wouldn’t own the farmland but the Farm Land Security Board sees things differently.
It considers Skyline to be the landholder because it has the potential to benefit from future appreciation of farmland under the land value hedge and to pocket farm revenues under the interest rate hedge.
Skyline says it will finance its lending operations through either a public share offering or by partnering with Canadian pension plans.
The board says there could be foreign shareholders under the first scenario and foreign beneficiaries under the second, which is why it believes Skyline’s financing model is in violation of the legislation.
Reineking believes the consultation and review of The Saskatchewan Farm Security Act launched by the government in April provides a way for Skyline to convince the public it has no intention of circumventing the province’s farmland ownership rules.
“It has given us a platform and an opportunity to get the story of Skyline out, what we’re trying to do and what our intentions are,” he said.
Many Saskatchewan farmers were upset with the Farm Land Security Board’s decision to allow the Canada Pension Plan to acquire 115,000 acres of farmland for $128 million because they feel such institutional investments drive up land values.
Reineking said that is not the case with Skyline. It gets involved in a purchase after two farmers agree on a price and the buyer seeks financing for the purchase.
“We truly are not a price setter. We are a financial institution,” he said.
The Skyline model could work in other jurisdictions but the company is determined to launch in Sask-atchewan first because it was Sask-atchewan farmers who got the ball rolling.
The Saskatchewan Court of Appeal doesn’t sit during the summer months so the case will most likely be heard in September.
