I Want to be a Farmer (Part 2)

Leases for farmland can be much more creative and flexible than a regular lease for office space or store fronts. Option one: a regular short-term lease. These can be done on a year to year basis and sealed with a handshake. A one year oral agreement is defensible in a court of law. Option two: a long-term lease. Should the lease term exceed three years you will need a written agreement outlining the payment plan and property use restrictions. Farmland rents are generally a price per acre and paid for the entire planting season, not monthly like other leases. A more flexible version of a long-term lease, and option three, is a crop-share lease. This helps to spread the risk around. A land owner takes a percentage of the crop or percentage of sales. Instead of paying a flat fee, the farmer and the land owner share the risk and reward for whatever is grown. Option four is to lease from a government or non-profit entity. Parks, cities, counties, and churches tend to own unused land. This is a great option for those not connected to farm communities and networks. Farmland leases through private owners tend not to be publicized but public entities offering leases need to give everyone access. Fifth, should a long-term lease of up to thirty years be insufficient, a ground lease can be used. The term is generally from 40-99 years, 99 years being the longest lease allowed in most states, and can be used as a basis for obtaining a mortgage. A lease with first right of refusal offers added protection to the lessee by giving them an option to purchase the property in the event it is offered for sale. This does not guarantee the option as the lease may run out before there is ever a sale and it does not necessarily set a price for the sale. The lessee would need to match the seller’s price.

Each of the six options mentioned are lease options. They are secure and some of them are long term. However, there are still those out there that want to own farmland. Here are some ownership options for you. First, there is what is called a fee title purchase. This is your traditional purchase option where you are paying a fee to have your name on the title.  Most buyers take out a mortgage to pay for this type of ownership. It’s the same as a regular home purchase. The important things to remember when doing a standard purchase is the cost of owning verses leasing and the amount you are able to finance. When it comes to a farm purchase you will be required to have an appraisal done. This appraisal is always calculated to the highest and best use of the property. For small urban or suburban homes this is a simple process. The only possible use for a 60’ x 100’ lot with a house currently on it that is zoned residential is for someone to live in the home. The zoning limits the use as does the size. When looking at a farmstead, say 15 acres in a suburban area that’s within 30 minutes of a major city, the highest and best use is uncertain. It could be used for a rural estate, a farm, or a housing development. The appraisal value will come in at the highest and best use of the property, which may or may not be farming. This raises the value of the property and, as a consequence, it’s price. The second factor in a fee title purchase is the amount you are able to finance. A significant down payment is expected and additional money for any improvements to the property. A lender will look at your personal financials and the money you can expect to make from running the farm business. They are mostly interested in your ability to repay the loan and without experience in managing a farm they will only consider off farm income to determine the amount you are able to borrow.

Should this first purchase option put farm ownership out of your reach, a second option is a fee title purchase with sweat equity. Most people have either time or money but not both. An injection of time into a large purchase can help to offset the cost. If a seller is flexible, a buyer can trade work for a decrease in purchase price, essentially making a work down payment instead of a cash down payment. A third option also requires a flexible seller. The option is termed a land contract sale and offers owner financing. This is an excellent option for those without good credit or who are unable to make a sizeable down payment. The buyer takes control of the property immediately and the seller makes principle and interest payments to the seller. There are no outside lenders involved. This spreads out capital gains tax for the owner and if the buyer defaults the land goes back to the owner. A fourth choice combines the sale of the farm with an agricultural conservation easement. By leaving the right to develop or subdivide the property with a land trust, the farm owner can enjoy the benefits of a tax deduction and less capital gains tax. The seller, though limited with future development options, benefits from a lower sale price and the value of owning property protected in perpetuity. Fifth is a variation of an easement sale. Many states have agricultural easement purchase programs where government funds are used to purchase the development rights on farmland. These are generally offered through a competitive application process.

Other options for keeping the price of land low for the farmer is to use a shared ownership model or a silent partnership for land purchase. Sharing ownership between several farming partners, limits the initial expense of the land for each owner. Carefully consider the type of entity designed to govern the farm. Will each owner be farming their own portion of the land or will they share the farm plan for all of the acreage? In a silent partnership, an investor makes the financial investment while management decisions stay with the farmer. The financier usually wants to see the farmer succeed and does not invest for real estate speculation. A community land trust is a non-profit organization that owns land in order to benefit the community. The trust owns the land and leases it to the farmer.

The next several options require a bit more creativity and may be considered too complicated or untested for some situations. First, the transfer of farming rights is a newer option and has only been tested in a few states. This is a deed restriction that works similarly to an easement for mineral or timber rights. For example, a land owner sells the farming rights to a 20 acre parcel of his 40 acre farm. The purchaser then farms that land and, if the land owner sells his property, the farmer who owns the farming rights continues to farm the land. Should the farming rights owner choose to sell his rights, he can sell them back to the land owner or to a third party.  A second creative option occurs through a partnership with a residential development. When developers purchase farmland for housing, many communities prefer having open space as part of the development. Incorporating a working farm into the development plan serves the community with open space and a very local food system while the farmer benefits from working close to his market and not having to pay for the ownership rights to the land. These innovative developments can be managed by the developer, the homeowners’ association, owned privately with an ag easement in place, or a city or non-profit if the developer donates the land.

Options for land tenure can be complex and usually require the assistance of legal counsel for implementation. For more information on any of the tenure arrangements discussed here, email farmlink@cvcountryside.org

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