Finding Their Property
About nine months later, their real estate agent called them about a piece of property on the higher end of their budget at $300,000.00. This property had an eight-acre field, with two more acres on the north side that hid a small pond under some scrubby overgrowth and was capped by a stand of hardwoods on the northern property line. Maria and Mateo were very excited about this property, especially, because they could envision building a little house just to the side of the pond after clearing away some of the scrubby overgrowth. Furthermore, the land was just a mile from the church, and the farm could continue serving the same community.
Both Alejandro and Elena were settled in their separate homes and weren’t interested in living on the farm, so this property seemed to suit everyone’s needs. The goal was to do intensive market gardening, and even with four owners, they didn’t anticipate ever needing to cultivate more than six acres. After positive results from a soil test, they were all in!
As soon as they felt confident about the piece of property, they told Alejandro to go ahead and file their LLC with the state. They knew they’d need the banks and institutions they would be working with to perceive them as a single unit, so they knew it was time to start coughing up those annual fees. After having met so many times, they had made a lot of decisions about governance, so writing the Operating Agreement was a pretty straightforward process.
But the group needed financing. They didn’t have enough money to pay for the land outright. Alejandro and Elena both spoke to their banks and got bad news back–one bank refused to work with a group such as theirs, calling it too risky, and the other bank offered a loan at an outrageously high interest rate. With that, the group headed over to talk to their local FSA Loan Officer.
Approaching FSA
Sol Naciente scheduled a meeting with their local FSA Loan Officer to discuss a Farm Ownership loan. Before going into the office, they read this guide and FSA’s “Your Guide to FSA Farm Loans.” Here’s a list of items everyone gathered up to bring to the meeting:
- The LLC’s Operating Agreement,
- The business account’s bank statement for the last two months,
- Sol Naciente’s past three Schedule F forms,
- Sol Naciente’s business plan and sales records,
- Sol Naciente’s profit and loss statement for the previous year,
- Documentation of annual business expenses for the last three years,
- All four members also brought their personal bank statements for the past two months and pay stubs from the past two months,
- All four members brought identification–including documentation of citizenship,
- All four members brought a summary of their personal annual expenses and their overall net worth.
All the business records were together in a three-ring binder. Each individual owner of Sol Naciente organized their own personal documents.
These four friends knew what they were attempting was unconventional. Most farms are run by a single person or a married couple, and this is what financial institutions have come to expect. They wanted to be very prepared to speak with the loan officer. Two of them had already talked to their own bank and applied for loans, so they shared their wisdom with the group as to what to expect. The group was anxious because they knew the loan process could take a long time with the FSA. Being hopeful that they could get a low-interest rate and buy this land, they were ready to move forward!
Maria spoke to a farmer friend whose land was financed through an FSA loan to get some insight, though that person wasn’t part of an entity application. The information she gathered was still helpful, though. The group wanted to have a clear idea of what to expect from the FSA so they could spot issues if the process starts to go off the rails.
How Would Sol Naciente’s Application be Processed?
The actual applicants for the FSA Farm Ownership loan would total five! Granja Sol Naciente, LLC would be one, and the four individual members would be the other four ‘applicants.’ This is because the LLC is applying for the loan, but each individual owner of the LLC must agree to personally guarantee the loan. In the end, the agent of the LLC and each of the four individual members will sign what is called the promissory note.
You might be saying, wait! Isn’t that why they became an LLC in the first place so that they wouldn’t be personally liable for business debts!? Well, yes. But, in some instances, there are institutions with the power to ask owners to waive that protection.
It is very difficult for a business to build enough of its own credit to be able to secure a loan without a personal guarantee from some or all of its owners. No financial institution will agree to loan money if they don’t think they will be able to recover the loaned money later. In the case of land financing, it is very common for business owners to have to personally guarantee the loan. And, yes, that means that if the business cannot repay the loan, the FSA will come after each of the individual owners (and their personal assets) to fulfill the loan obligation. This is a trade-off of getting financing!
On paper, however, the ‘borrower’ will be Granja Sol Naciente, LLC. Remember how Sol Naciente decided to appoint one member as the company’s authorized representative for two years? That means that the person who is currently the authorized representative (Alejandro) would sign on behalf of the LLC to bind the LLC on the promissory note. In effect, he would be signing first as “Alejandro Reyes, Owner and Authorized Representative of Granja Sol Naciente, LLC.” and then again as, simply, “Alejandro Reyes.” He is signing as the Authorized Representative the first time and the second time, just as himself–that’s that personal guarantee. All the other owners will sign as themselves, with no fancy titles, just their names.
In the list of documents that the group prepared to bring to the meeting with the FSA, you’ll see that they all gathered their citizenship and credit-related documents. All four individuals of Sol Naciente must be (and be able to provide documentation of being) a US citizen, noncitizen national, or qualified alien,’ such as a lawful permanent resident. Review Section 2, Criterion 1 of this guide for more detail on what type of documentation is sufficient.
Furthermore, each owner’s credit will be reviewed. That means the FSA Loan Officer will review bank statements and will pull a hard credit report on each owner. FSA will need written permission to do this and will use either a social security number or your name, date of birth, address, and employment history to verify identity with one of the major credit reporting agencies. The owners of Sol Naciente would need to make sure that none of them have any of the additional disqualifying aspects to their history, including:
- Convictions for controlled substances
- Age younger than 18 or suffering from mental incompetency,
- Delinquency on federal debt,
- Outstanding judgments, or
- Had an FSA FO loan previously or within ten years.
As far as the business’s creditworthiness, FSA will review the business’s profit and loss statements, business expenses, and Schedule Fs that have been filed in the last five years. The business doesn’t necessarily have to be returning a profit, but if it is not, then there must be a strategic plan to do so within the foreseeable future. In short, the FSA has to have faith that the business model will yield enough money to repay the loan and continue to sustain the business. Accurate projections of yield and income from sales will be paramount here. Sol Naciente is an intensive market farm, which isn’t as common for FSA. Strong sales records and market research for any projections must be provided in this case.
FSA is concerned as well with something they call proportionality. This looks less at profits and more at gross income. The FSA wants the gross income of Sol Naciente to match the annual payment of the farm’s mortgage. In this way, the business’ income will be considered proportionate to the purchase price of the land. For a purchase price of $300,000.00, Sol Naciente can estimate that they must gross at least $30,000.00 to qualify for a FSA loan. More is better! The group is eager to speak to their Loan Officer about how they can help prove the business is financially sound enough to support FSA’s extension of credit.
One question that will come up for the group is: who will actually own the land? What we mean here is whose name or names will be on the deed to the land? There are several options here, which is great because we know that Maria and Mateo have plans to build a house in the wooded area of the property.
FSA would allow Sol Naciente to form a separate LLC to hold the land. However, if this is the strategy, no members who aren’t in Sol Naciente can be added to this new, separate, land-holding entity. However, that doesn’t mean that every Granja Sol Naciente, LLC member must join the new separate land-holding entity. The rule is that if a land-holding entity were to be formed, the resulting owners of that entity must also own 50% of Granja Sol Naciente.
The land could also be owned by individual members of Granja Sol Naciente in any combination. However, the owners of the land financed by the FSA FO loan must also own at least 50% of the operating entity. Therefore, in this scenario, unless ownership in Granja Sol Naciente shifted, at least two members would need to hold title to the land.
We know that Maria and Mateo want to build a personal residence on the land. Because of this, they would like to have the land deeded to them personally and lease the farmland to Granja Sol Naciente via a long-term lease. That way, the farm’s biggest asset, the land, is held as a personal asset of two of its members. The farm’s use of the farmland is protected by a long-term lease. The group will have to decide how payments for the loan are handled if this were the set-up. The farm would pay Maria and Mateo rental installments that could be used to pay mortgage installments to FSA. Maria and Mateo would also likely be responsible for a greater share of the mortgage since they would have exclusive rights to the non-farmland portions of the land.
This setup does meet the FSA’s 50% requirement. Maria and Mateo each own 25% interest in the business, so together, they own 50% of Granja Sol Naciente.
It looks like things are coming together, but there’s still more contingencies that should be explored and that’s coming up next.