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Two or more farmers want to work together to buy a single piece of property. Is an FSA Farm Ownership loan potentially an option for this kind of cooperative farm purchasing? Yes! This guide walks readers through exactly how to qualify while exploring other cooperative financing mechanisms and examples.
This guide addresses how to apply for the Farm Service Agency’s (FSA) Farm Ownership Loan (FO) as a group of unrelated and unmarried individuals. Farm Ownership (FO) loans are one type of loan available from FSA for purchasing a farm.
An FSA FO loan can also be used to:
The FSA specializes in helping farmers who cannot get financing elsewhere. These loans are favorable because they have lower interest rates than are available on the commercial market. There can be downsides. Primarily, obtaining an FSA loan is a time-consuming process that can make competing with buyers with access to traditional financing difficult. Typically, the traditional financing process is much quicker than obtaining an FSA loan. FSA FO loans are also capped at $600,000.00. However, the focus of this guide isn’t to explore when and how an FSA FO loan is worthwhile. This guide explores the eligibility of one specific applicant type for this loan– the group of unrelated (and unmarried) individuals.
Groups of unrelated, unmarried persons can apply for and receive an FSA FO loan. But, the path forward isn’t quite as straightforward as it is for the more typical individual or family-based applicant. This guide will illuminate the way for groups of unrelated and unmarried persons wanting to apply for an FO loan.
But before we begin, let’s adjust our terminology. FSA calls applicants who are groups of persons that are unrelated and unmarried “entity applicants.” The term entity applicant is used because the individuals involved typically form an LLC, corporation, or other qualifying business entity. The entity is the applicant for the FO loan. In turn, the entity’s owners make binding commitments to FSA in their capacity as owners, just as an individual or married couple might do. However, the distinction is essential to understand how the criteria apply to an entity applicant. We will explain further, but for now, readers should recognize that we are calling groups of persons that are unrelated and unmarried “entity applicants.”
Applicants for an FO loan must fulfill the 12 general requirements listed below. All of these factors are important to be a successful FSA FO loan applicant. Among those is an obligation to meet a “family farm” requirement. This can confuse groups of folks who want to acquire a farm together but are unrelated and unmarried, and thus not the traditional definition of ‘family.’
When analyzing how the 12 criteria apply to an entity applicant, a general principle applies: the entity meets the criterion if every individual owner of the entity meets the criterion. For example, criterion 2 states that the applicant must have no convictions for controlled substances. If we apply the general principle for an entity applicant, then every individual owner of the entity must not have any convictions for controlled substances. If any owner has such a conviction, the entity applicant does not meet the criteria.
The general principle of applying the specific criteria to each member of the entity works well with criteria 1-8. In the second part of this guide, more guidance is provided on exactly how to apply these criteria to each individual owner of an entity.
Things get more complicated when examining criteria 9-12. For example, criteria 11 states that the entity must meet family farm requirements. If the entity’s owners are not “family,” according to a definition of people who are related to each other by blood or marriage, we have some more complex concerns. What is the intent and definition of a “family farm,” and how can an entity with unrelated owners meet it? We explore this criterion alongside the training requirements (#10) and the 75% test (#12). Because these criteria are potentially more challenging and nuanced, we address them first.
A few requirements apply to all individuals signing the promissory note. Promissory notes are written promises to repay borrowed money. Every person who signs the promissory note can be held personally liable to repay the loan if the business fails to repay. It is a big deal to sign a promissory note and give what is sometimes called a “personal guarantee” to repay the loan. FSA requires all entity members to sign the promissory note, and in turn requires that everyone that signs the promissory note meet certain criteria. For example, each of these individuals must satisfy at least one of the following conditions:
• Be a beginning farmer, • Have not had an FO loan outstanding for more than
ten years before the date the new loan is closed • Have never received a direct FO loan at all
The individuals working together to seek an FSA FO loan need to distinguish themselves as a specific group of people, which is easiest to achieve if the group organizes a separate, formal business structure. The most common choices are a Limited Liability Company (LLC) or a corporation. Both of these entities can be straightforward to contract with FSA for an FO loan because they offer a distinct legal name for the formalized group of individuals. LLCs and corporations provide a clear legal structure as well. Other business structure options, such as partnerships or joint operations, are eligible, but there may be additional details to work out with the loan officer regarding the name of the contracting party.
Nonprofits, however, are not an eligible entity type. One reason is that a nonprofit has no owners, and it can be difficult to hold those involved in a nonprofit personally liable for the nonprofit’s debts. The other reason is that the FSA provides these loans to assist businesses in becoming profitable and self-sufficient. Nonprofits are generally neither of those things. Because of this, the FSA will not accept nonprofit applicants.
Every business has owners. The essential characteristic of an owner is that they receive a share of the profits (or losses) from the business. Sometimes (especially when the business does not generate profits or losses), it can be challenging to determine who is an owner as opposed to who is simply an employee. Yet, it’s essential to determine who is and is not an owner of the entity applicant before beginning the application process. Because we know that most criteria that apply to an individual applicant also apply to each individual owner of an entity applicant, we have to get very clear on this issue.
Every business has owners. The essential characteristic of an owner is that they receive a share of the profits (or losses) from the business. Sometimes (especially when the business does not generate profits or losses), it can be challenging to determine who is an owner as opposed to who is simply an employee. Yet, it’s essential to determine who is and is not an owner of the entity applicant before beginning the application process. Because we know that most criteria that apply to an individual applicant also apply to each individual owner of an entity applicant, we have to get very clear on this issue.
A few different factors usually distinguish owners. Owners typically have significant decision-making power, such as the ability to take on debt or close down the business. Owners account for profit and loss received on their tax returns (akin to how an employee accounts for wages earned on their tax returns). While diverse groups of people may join together to form a farm operation, only some people want or need ownership, necessarily. Some folks may want something other than significant decision-making power. Others may not be prepared to account for profit and losses on an income tax return as doing so requires a social security number or a taxpayer identification number. In addition, if including an individual as an owner will cause the entity to be disqualified from opportunities like an FSA FO loan, the group may decide not to have that person be an owner.
The decision about which entity to form is often straightforward, while deciding who receives ownership may take more time. Potential entity applicants may need to assess each criterion below to determine how it impacts their situation before settling on owners. At any rate, the decision will need to be made before the application is prepared and submitted.
It is also important to assess the business’s health before applying to the FSA for a loan. The FSA will want to confidently conclude that the entity applicant owns a viable farm business. This has nothing to do with the relative size of the operation but everything to do with the business’s future prospects and ability to thrive. The FSA will be considering whether the business primarily sells agricultural commodities, makes sufficient income, and demonstrates sound business practices like recordkeeping. To understand the business’s health, the FSA officer will look at business records, which could include business plans, sales records, and production schedules.
In general, the FSA will not want to issue loans to operations that don’t keep good records and don’t expect to eventually turn a profit. If the business is in its infancy or going through an economic downturn and profits are nonexistent or minimal, the applicants need to demonstrate that the business has a plan to achieve profitability. Essentially, the FSA is looking for businesses that keep strong records and have an achievable business plan.
Furthermore, as in any credit application, the FSA will be interested in specific details about whether or not the business can repay its loan obligation regardless of whether the business is creating profits yet. FSA’s test compares the typical gross farm income generated by the operation to the annual installments for the farm’s debts. These two figures should be at least equal for the farm business to be determined to be viable by the FSA. However, gross income won’t necessarily be the only figure the loan officer takes into consideration. The loan officer has to be confident that the loan obligation can be repaid.
Now that we’re on the same page about our terminology, ownership considerations, the need for a formal, healthy business entity, and some universal criteria for the FO loans, we’re ready! Let’s explore how an entity applicant meets each of the standard criteria for an FSA FO loan.
Many FSA officers will have never handled a loan to an LLC or partnership composed of unrelated and unmarried persons, and some may think it isn’t allowed. Entity applicants might be working with a loan officer who isn’t as familiar with these types of applications, while others will find well-versed loan officers. We can assure you that it is possible to secure an FSA FO as an entity applicant and that the FSA Loan Officers have the resources available to help guide you through the process.
Preparation is key to starting off on the right foot with your Farm Loan Officer. Use the checklists we created on the following few pages to help make sure the entity is set up correctly and all individual members have the documents they need to ensure a successful application.
A farm loan officer will want to review many of your business documents. You don’t have to create top-notch financial statements explaining your profit and loss, but do spend some time organizing these records so that they are readable by people who aren’t part of your business.
Due to the FSA FO requirements, tough decisions might have to be made about who can be an owner in an entity being formed to apply for a FO loan. Use the checklist download on this page to consider the personal circumstances of each of your entity’s owners.
If any checkbox is left blank, then you know there is an issue and the ownership structure will need to be reconsidered. If you are working with an individual that you would like to co-own the business with but that doesn’t meet some of these criteria, then alternative organizational structures will have to be explored.
These questions require a bit more discussion. Owners will need to discuss each other’s history and qualifications for running a farm, determine who will participate in day-to-day management of the farm business, and who will be responsible for strategic decisions. All owners will need to divulge their credit history and how suited they are for a FSA loan.
Does an FSA FO Loan sound like it might be the right direction for you and your friend(s)? We’ve created additional tools for you all to use as you prepare to meet with FSA. If you’d like to print this information for later, you can download the PDF version. Share this resource with other farmers who are looking for ways to access land with friends!
This material is based upon work that is supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture, under agreement number 2024-38640-42989 through the North Central Region SARE program under project number LNC24-495. USDA is an equal opportunity employer and service provider. Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and should not be construed to represent any official USDA or U.S. Government determination or policy.
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