Purchasing farmland is a big step, and one many farmers see as necessary to a secure farming career. Here are some frequently asked questions about buying farmland:
I’m looking to purchase land. What are my best financing options?
The best financing option is the one that’s best suited to your own situation, the resources you have, and your ability to manage the details of each option. In fact, there are a wide variety of financing options. These include gifts, crowdfunding, loans (personal or institutional), a mortgage, seller financing, investors or partners, and a land contract.
You will find that each strategy has its own set of legal responsibilities. For example:
- Gifts may obligate the giver of the gift to pay a gift tax.
- Grants and crowdfunding very likely must be reported as business income, so you’ll want to manage income and expenses.
- Loans and mortgages are money given with the expectation that the money will be paid back, and there are consequences for missing or defaulting on payments.
- Investment is heavily regulated and the issues are complex, so you’ll want to talk to an attorney before considering an arrangement where an investor is paid back according to the success of the farm.
- One or more people may contribute capital to the business and help make business decisions. These are basically co-owners, so you’ll want to decide and document who makes decisions, how decisions are made, and what’s done with profits and losses, among other details.
- Land contracts are in a category by themselves; we’ve devoted a question to them below.
Each method of financing—even gifts—requires details to be fully discussed and written down. Borrowers should fully understand their obligations. Investments and partnerships need to list who is responsible for what. Once you’ve investigated the financing options you have and the commitments involved with each option, you can decide which one is best for you.
FOR MORE INFORMATION: Farm Commons’ webinar “Legal Aspects of Purchasing and Financing Farmland” provides more details on all the points mentioned above. Farm Commons also offers Promissory Note Toolbox for farmers interested in acquiring personal financing. The USDA Farm Service Agency website contains detailed information on FSA loan programs. Web searches can also lead you to information on crowdsourced loans, like Kiva Zip and other funding ideas.
I’m looking at a property and wondering what I can do with it, if I buy it. Can I house interns, workers, or other family members? Can I subdivide the land? Can I do retail food services? Valueadded production? Agritourism? Where can I learn about potential limitations on use?
Zoning ordinances can set limitations on the type and extent of activities that can occur on a specific piece of property, including farm property. Farm operations are generally allowed, but retail, commercial, or manufacturing ventures often are not. Where non-farm ventures are allowed, permits may be required first.
Potential purchasers will need to research and learn the specific zoning obligations for the land they are looking at. This may involve calling the local zoning authority (which may be a city, town, county, or other unit of government). Many local entities have their zoning codes online. Other options in discovering what your zoning code allows include talking with a local attorney, or asking a reference librarian for assistance.
FOR MORE INFORMATION: Many Farm Commons resources include sections on learning about local laws, including zoning. These include Farmers’ Legal Guide to Value-Added Products and Farmers’ Legal Guide to On-Farm Events. Farm Commons also offers two shorter documents about interacting with local regulators: our Farmers’ Guide to Working with Regulators and Communicating with Regulators Basics.
Can I pay in-kind for my farmland purchase, with goods or services?
Yes, you can, if the seller agrees. In-kind payments include goods like produce or value-added products, assets like timber, or labor and services. Since a lender isn’t going to want $20,000 to be paid in cheese (as delicious as that sounds), most in- kind scenarios include an agreement that some of the payments be in cash (whether in installments or a lump sum) and others in-kind.
In-kind payments require calculation of the value of the products or services paid. The value assessment for goods might be the going rate at the farmers’ market or grocery store that year. For assets like timber, or for services and labor, it could be the state’s or region’s market rates. The seller/lender and buyer/borrower need to agree on a clear mechanism for calculating this value, and should write that mechanism into the terms of the agreement.
For purposes of taxation, in-kind payments are still payments and tax rules apply. (For example, interest received by the lender is taxable income, even if it’s in the form of cheese.) The IRS can choose to calculate the market value of in-kind payments, regardless of the parties’ preferred valuation. Tax preparers or local attorneys may be good sources of information if you have tax questions before signing onto an in-kind payment agreement.
FOR MORE INFORMATION: A sample agreement with in-kind provisions is found in Farm Commons’ resource, Promissory Note Toolbox. Farm Commons’ webinar “Legal Aspects of Purchasing and Financing Farmland” also contains a discussion of in-kind payments.
Land contracts sound like a great way to finance land purchases without a lot of cash up front. Is there anything I should be careful of?
Land contracts—basically rent-to-own agreements to acquire farmland—can indeed help farmers purchase land without a down payment. But there are important things to understand if you are thinking about entering into a land contract.
First, because land contracts often include a forfeiture clause allowing the seller to cancel the contract if the buyer defaults, land contracts can contain a risk of losing everything if you fall on tough times and are unable to make a payment. Whether you are protected from that harsh consequence depends on where you live. Some states require land contracts to have protections similar to those found in a lease or mortgage, but those states are likely to also have qualifying requirements for entering into land contracts in the first place. Some states also require grace periods in case of default, where a buyer who has missed a payment can pay the remaining balance in a short period of time and then acquire the title themselves. In still other states, the buyer can recoup some of the payments they’ve made in the event of default. So, it’s important to figure out what the laws are in your state.
Second, like other leasing arrangements, parties will need to determine who pays for things, from improvements made to the property during the contract period to property taxes. Parties will need to address questions like what happens if the land is taken by the government, and whether the buyer can lease the land to someone else. As with leasing practices, the best arrangements are those that reflect the communicated concerns and desires of both parties, and are memorialized into a written agreement.
FOR MORE INFORMATION: A sample land contract, and much more, can be found in Farm Commons’ Land Contract Toolbox, a detailed, step-by-step resource on the legal issues involved in entering into a land contract.
DISCLAIMER: This guide does not provide legal advice or establish an attorney-client relationship between the reader and author. Consult an attorney for advice specific to your situation and the state in which you operate.