What if the Ownership of the Business Changes?
Say Alejandro got offered a lucrative off-farm job and wanted to remain a member of Granja Sol Naciente but could no longer participate in the farm’s day-to-day operation. Due to his new job, he could no longer contribute labor to the business but wanted to remain an owner. He continued to maintain the equipment during off-hours or on weekends. In order to account for his absence, the other owners decided they would shutter their farmers’ market sales and concentrate on building up the CSA program. No longer compensating Alejandro for labor (though he is still entitled to a share of the profits), the farm can now hire a laborer to help pick up the slack in irrigation planning, planting, cultivation, and harvesting that Alejandro’s absence created. Would their application have been affected if Granja Sol Naciente had been structured this way when applying for the loan?
No, this wouldn’t impact the loan. But, this is true only because Alejandro’s ownership only accounts for ¼ of the operation. If anyone in Alejandro’s position (an owner but a non-operator) owned more than 50% of the farm, then the application would not meet the ‘family’ farm definition for entities. Recall from the guide that in order for an entity to meet the definition of ‘family farm,’ the majority interest owners (at least 50%) must be farm operators.
If the loan is secured and then Alejandro steps back, the farm still meets the definition of a ‘family’ farm. The operational decisions and strategic management decisions are made by the members of the entity. Alejandro stepping back is only 25% of the ownership. If three of the members step back and leave only one member operating the farm, then that is an issue that would need to be resolved with the FSA loan officer.
What if One Member Had Wanted to Own the Land?
If, say, Mateo wanted the deed to the farm they are purchasing to be in his name alone? This might be desired because he planned to build a house where he would reside on the land and wanted to lease the farmland to Granja Sol Naciente.
This would cause an issue with the loan. Remember that the deed must be either to the entity itself or the majority-interest-operators of the farm. Mateo could be on the deed, but not alone.
Does Every Member Have Farm Experience Enough to Satisfy the FSA?
In the case of entity applicants, this criterion requires that the majority interest holders of the entity must have participated in the business operations of a farm for at least three out of the past ten years. Let’s see how this group stacks up.
With four members owning 25% each, we need two of them to have the requisite managerial experience.
Elena and Maria had just celebrated the three-year anniversary of starting and running Sol Naciente together. All the Schedule Fs that Sol Naciente filed showed both of them as owners.
Alejandro had only been working at Sol Naciente for two years, but he had significant management experience in a non-agricultural field where he managed personnel decisions, payroll, and inventory. This latter quality is one that can substitute for one of the three years. Therefore, Alejandro also meets the managerial experience criterion!
Mateo has worked on the farm for a year and a half, just a little less than Alejandro, but also has an agricultural degree from the community college. If the degree includes at least 16 credit hours, Mateo can substitute one of the required three years with that coursework. Unfortunately, though, he isn’t quite at two years experience at Sol Naciente, so he doesn’t fulfill the managerial experience requirement.
However, this is not an issue for Granja Sol Naciente, LLC’s entity application because 75% of the owners fulfill this requirement.
What if Sol Naciente Wants to Hire More Labor?
Eventually, Sol Naciente may want to hire more labor to get the work on the farm done. To remain within the definition of a ‘family’ farm, full-time hired laborers (that aren’t owners) are allowed to supplement labor by the entity owners. Market farming is very labor intensive, and Elena starts to wonder what will happen if they hire more than just the one laborer who replaced Alejandro. She can anticipate needing to hire at least two other harm hands, which would mean there would be three owners working on and managing the farm and three hired laborers supplementing that work. When does ‘supplementation’ become replacement?
The FSA loan officer will have discretion here to determine if the ‘family’ farm is outgrowing its family-like nature. There are written policies that allow farms producing high-value, labor-intensive crops like specialty fruits and vegetables to be granted exceptions from the supplementation-only labor rule. This should be a discussion Elena (and other owners) have with their FSA loan officer during the application period so that they fully understand the labor limitations, if any, that will be placed on them in the future.
And that’s all of our story, for now! Go write your own story for yourself!