Farmer Profile: When Financing Gets Personal
This story comes from a member of the Farm Commons community who wanted to share her experience in the hopes that it would help others achieve success in their farm businesses. Please note, we have changed names and identifying details in this story to protect the privacy of the farmer, but email email@example.com if you would like to learn more about this situation or be put in touch with the farmer.
Communication and trust are big themes in this guide, as well as in Farm Commons’ work in general. They are the cornerstones of any strong relationship, business or otherwise. But sometimes communication can be difficult, especially when dealing with sensitive topics. Anyone who has been in a domestic partnership knows how true that can be! When you combine romance and farm business, both the importance and sensitivity of communication rises.
No one knows that better than farmer Vicki Potter. Vicki met her partner, Jessie, when they were both in graduate school. They started dating, bonding over many mutual interests – including a shared passion for farming. They each had been farming for other people for the past few years and, after about a year, they realized that it made sense to start looking for a piece of land to farm together. After a 2-year search, they found a suitable piece of property and began their journey to finance their farmland purchase.
Financing a property purchase can be challenging, but Vicki and Jessie had one thing on their side: Vicki had inherited a small amount of money from her grandfather, just enough to put a down payment on the piece of land they had their eyes on and make their mortgage payments manageable. With that, the couple was able to secure a loan through the Farm Service Agency (FSA). FSA loans are joint loans, so they also had a commercial loan through their local farm credit bank.
The situation was made slightly more complicated by the fact that Vicki and Jessie were not legally married. Both of their names were on the deed, which was under their personal names both because their LLC wasn’t set up yet and because the property was their home as much as their business. They had to decide who should be listed as the primary loan carrier on each loan, as well as what made sense from tax and asset perspectives. Eventually, Vicki was listed on the commercial loan, and Jessie on the FSA loan. Finally, they were ready to start farming.
About a year and a half went by and, while the farm was flourishing, the same couldn’t be said for Vicki and Jessie’s relationship. After trying to work things through, they decided it was time to go their separate ways. One small problem – what would happen to their farm and home? Very quickly, Vicki realized that they had failed to address any sort of contingency plan about what would happen if things went wrong. Some of the questions that came up were:
What happens to the house? Who continues to live there and take care of it?
Can one person buy out the other’s stake in the business, or does the business have to be sold even if one person has the financial ability to buy out the other?
What happens to the LLC? Does it have to be disbanded, or can one person continue to use the name and operate the farm as is?
How do you account for each person’s cash and labor contributions?
In Vicki’s own words:
“Through the whole process we had kind of started writing all of our documents down, but we never finalized them, and we had never addressed how the business would be dissolved if it had to be for some reason. Those are things that people don’t like to think about, but it would have been really helpful if we had thought through what would happen to the LLC, how it would be divided, and what happens to the property. We hadn’t outlined any of that. All those conversations are all really hard to have when you are going through a break-up at the same time. It would have been so much better to have them when we were level-headed and planning – not when we had to figure them out.”
Vicki was the only one in the financial position to take on the farm, and the couple was able to settle on a sum that they were both comfortable with for Vicki to buy out Jessie. But, they still had to address how to handle the two loans that they had taken out and the accompanying mortgages. Although Jessie was listed as the primary name on the FSA loan, both partners were actually listed. In order to transfer the loan to one person, they would have had to go through the whole application process from the beginning, which could take a very long time. Luckily, Jessie was able to pay off the remainder of the FSA loan with her savings, but she doesn’t know what she would have done without that ability. She still holds the commercial loan after the lender went through a mortgage liability release process and determined that she was financially secure enough to hold the loan on her own.
Vicki says, “I was young when we started out this process, and buying a house and a piece of land in itself was really testing my learning curve. So much so that I wasn’t forward thinking enough about what might happen. Luckily we didn’t buy a property beyond our financial means and I had savings and support from my family. I can’t imagine being in that situation without all those resources, which gave me a safety net. There are some things that I might have done really differently from day one if I had known the way things were going to turn out. So having those big conversations is really important, and then writing down what you decide is key. It worked out for us, but I don’t know what I would have done if I didn’t have the money to just pay off our FSA loan and buy Jessie out. It would have been much different, and I probably would have lost the property and my business.”
Talking through the details of what might go wrong and how you will deal with the outcome is key in successful business planning. Even if it’s uncomfortable, having this type of detailed conversation before engaging in joint financing and business ventures will save you a lot of trouble and the potential loss of your business down the road.
NOTE: This farmer profile is an excerpt from the brand new Farm Commons giuide, Financing A Farmland Purchase:Legal basics for traditional and non-traditional farmland purchases. This guide can be downloaded for free at farmcommons.org/resources.