Transferring access to farm land (partially or completely) using a Farmstead Cooperative is not easy. In fact when compared to a cash sale, mortgage sale, or lease agreement it’s probably the most difficult method for a seller to use. Significantly, while it allows for shared access to land, it also demands shared responsibility for that land as long as one remains an equity member of any fraction.
The Farmstead Cooperative idea became the only way I could achieve our goals of keeping our farm agriculturally viable into the future, and offering a new farmer fair equity when they worked to maintain and improve the land. As we began the formal process of creating an “entity” under which we could organize the idea of a working Farmstead Cooperative, I sent a letter to the lawyer that we had chosen to work with on the transfer paperwork. He immediately dubbed it “The Manifesto.”
The letter reworked the outline we had sent to a lawyer friend who helped us find a Maine lawyer who specialized in land use issues. I used the letter to organize and clarify the ideas I had been thinking about around this effort, and to help me communicate to the lawyer what we wanted to create.
In Waldo County many people moved to Maine in the 1970s as part of the Back-To-The-Land movement, and they are beginning to reach retirement age. Many of those residents want to know that the land they bought from retiring farmers continues to express its agricultural potential after they pass it on. For some people that land also represents one of their major financial “nest eggs” they count on to help fund their retirement.
Concurrently since 1980 MOFGA has been training lots of young people to farm, and as a result the average age of a farmer in Maine is lower than the national average, and has actually gone down in recent USDA census reports. Meanwhile land prices have continued to rise over the past twenty years, and new farmers compete with developers and home owners who want to build homes in the rural areas around population centers. As other Baby Boomers begin to retire, and find Maine an attractive place to locate a portion of their retirement, the residential development value of Maine land outstrips the agricultural value of some of that land. Unfortunately open farmland is an easy and desirable (views! lawns!) place to build houses. New farmers are left to either lease agricultural land (that may be waiting to be built on) or go into debt to own land outright just to start their agricultural career.
Can a retiring farmer give access to the agricultural assets of their land to a new farmer without “giving away” their nest egg? Can a new farmer gain real equity in that farm (as opposed to establishing leased access for a finite period) that reflects the work and/or investment they put into its maintenance without the onus of a decades long mortgage hanging over them?
A Farmstead Cooperative (hereafter referred to as an “FC”) is meant to be an instrument that allows an owner of a specified piece of real estate containing elements attractive to a farmer to share use of those agricultural assets as well as to partially and/or wholly transfer that real estate to one or more parties who will maintain the agricultural assets. The FC entity can legally mandate the maintenance and/or improvement of the agricultural elements of that land for as long as the FC entity remains viable. If the FC member owners (“members”) ever decided that the FC is no longer viable, there is a clear pathway to changing the land ownership model and compensating its equity members according to the equity split.
Members own shares in an FC, and by transferring shares the landowner(s) can access partially or wholly monetize their “nest egg” while at the same time participating in the ongoing use of the land. The farmer can acquire tangible equity in exchange for money and/or their investment of labor and materials in the maintenance of land they are using for their farm business. Since the primary assets that form an FC entity are land and structures that are can be defined as real estate, the FC entity has tangible monetary value that can change over time with changes in property values. In addition, if a member stops purchasing additional shares (for whatever reason) they are not held in “default” of a loan but instead retain the equity they have already paid for up to that point.
The FC instrument is an option I developed to address some of the shortcomings of the existing agricultural land preservation and/or transfer techniques I found available to me:
- Agricultural Easements limit the use of land to agricultural activities, but do not directly provide for the necessary maintenance of that land to keep the agricultural potential viable. In most cases land that has been protected with this kind of easement will be managed and kept agriculturally productive. However, protected land that is not regularly managed will often grow into woods here in Maine. Once trees occupy the land that had been tillable at the time of the easement application, the amount of labor and investment required to turn the woods back to tillable land greatly reduces the potential that it would ever become tillable in its future due to a significant initial investment of money and/or labor to clear and re-till that land.
One advantage of easements is that they can be purchased and set aside separate from the ownership of the land itself. However because easements of this type are fairly new, many land trusts that hold agricultural easements acknowledge that the difficultly will come in monitoring land use on protected property and changing prohibited practices (including a lack of mowing and clearing, fertility replacement, etc.). Also, in some areas, particularly around population centers and/or waterfront properties, easements can reduce the price of land for a farmer, but in other areas of Maine the easement would not significantly change the land’s value.
Easements represent valuable assets of land, and unless there is limitless money available to compensate landowners for the value of an easement, then some landowners will have to forego monetizing a portion of their nest egg to “fund” an Easement. This means that this instrument is dependent on charitable funds, including sometimes exclusively a seller’s charitable spirit. I see this dependency alone as a major limitation to this option.
- Agricultural easements can lower the value of land ownership while restricting development, but farmers still need a pathway to ownership of that land. The traditional method of exchanging a clear title for a mortgage note (either through a third-party like a financial institution or by owner financing) allows for buying over time, but it forces a farmer to forfeit an immediate down-payment and then commit to a monthly payment (as well as `00% of the regular expenses like taxes, insurance, repairs, etc.) before they can begin to operate their business. They build up equity in the form of principle payments, and the loan amount does not change even if the property value does. Mortgages must be paid in full before title is transferred.
- Land Leasing, even for little or zero annual rent, does not recognize that farmers must invest labor and materials to maintain/improve a tillable field or orchard (for example) to generate crops that can be sold for a profit. In many cases (especially in Maine) land available for leasing is not in an ideal and productive condition, therefore the farmer is forced to invest years of labor and materials to raise its productivity to a profitable level.
If a lease agreement is not renewed or is terminated by the landowner, the investment in maintenance and improvement of the land remains with the property owner, who may not compensate the farmer for that improvement, and the farmer must find new land to continue their business, often of lesser productivity. Leased land works well when a farmer who already owns land is looking to expand, but it’s a difficult proposition when a farmer manages only leased land.
Leased Land is often adjunct to an owners residence, but does not commonly include a residence for the farmer. Therefore Farmers who depend on leased land often commute to work the land. This model actually works well for Farmers who have a primary residence with tillable land who is looking to expand their production in many cases. That situation still leaves the question — how does a new farmer acquire that “primary residence with tillable land” in the first place?
Leased land that is adjunct to an owner’s residence also presents a tricky set of circumstances — how successfully can the owner and the lessee define “acceptable uses” for the land in the agreement, stick to the agreement, and reconcile future concerns of the landowner who oversees the farmers actions, and must live next to those actions? Manure is a popular soil amendment, but are acceptable odors addressed in the lease agreement. There are countless horror stories from farmers about lease owners changing the terms of lease agreements in mid-growing season, and sometimes refusing a lessee’s access to the land for any reason… It doesn’t take a lot of imagination to understand how tenuous a farmer has with leased land that they’re depending on for production of crops.
- In some cases land owners are willing to exchange personal services for access to land and housing, with or without additional monetary exchange. These services agreements can vary widely from simple farm maintenance up to business labor and/or home care for the land owner. Often, in exchange for the personal services provided, the land owner promises to bequeath the property upon their death to the farmer as if it were an inter-generational family farm. Because the entire property equity remains in the possession of the land owner until it is bequeathed there is always a threat of “disavowal” of the stated (even written) promise regardless of the services rendered, thus imposing an artificial value to the personal relationship. This can work beautifully for both parties in some cases, but because the equity transfer functions much like a mortgage arrangement the farmer is unable to immediately access any equity generated by their labor, while the landowner derives immediate benefit from the services provided. In addition the new farmer must be prepared to navigate probate as part of their land acquisition work.
With the addition of a different idea of ownership and responsibility for agricultural land all of the above ideas can be combined to create much more flexible models for preserving farmland depending on the individual circumstances. Easements can still be applied to land that is actively governed by an FC. FC shares could be sold outright in a mortgage form. The FC may choose to lease land to a non-member as a way to reduce membership costs, much like an urban residential Housing Cooperative might lease street-level spaces to retail stores as a way of reducing annual membership maintenance fees.
In its simplest form the FC allows for fractional ownership of real estate that has restrictions AND requirements attached to ownership of the land. The original model has been the Housing Cooperative in which members own a building and then have access to specific parts of that building (sole access to a specific apartment; shared access to an elevator, lobby, basement storage, etc.).
The FC is *not* a farm business, but a mechanism with which one or more members can access agricultural assets as well as participate in the necessary maintenance. The cost of that maintenance is shared by all members as laid out in the By-Laws of the FC based on the division of equity as well as annual use of each part of the land (“sub-asset”). Ongoing operation of the FC should be able to be disposed of in a single annual meeting of members, organized and governed by the By-Laws.
Profitable agricultural production cannot be a mandate of the By-Laws of an FC — only the regular maintenance necessary to maintain the agricultural potential can be mandated as a responsibility of ownership. Profitable agricultural production may, however, be a (desired) side affect, and typically the profit of that production is wholly owned by the member or members who worked on that, not by the FC. Instead the FC charges its members only for regular expenses (taxes, insurance, repairs), and these charges can be in the form of a “rent” or “lease” payment for access to all or a specific set of sub-assets. Which members access what sub-assets and the rent they are charged for that access is one important topic for the annual meeting of the FC.
There is no imperative in an FC for one partner to buy-out all the shares in an FC — members could exist at static partial equity divisions indefinitely. Members could sell all or part of their shares at any time, or members can be given incentives to proceed toward a complete Buy Out. The terms of any share transfer agreement (price, time period, etc.) would be governed by separate Purchase and Sale agreements between buyer and seller with the only stipulation that a sale must comply with conditions for transfers set in the By-Laws.
An FC could be wholly owned by one member, or an unlimited number of members may own shares in an FC (each share transferred according to an unlimited set of agreed upon purchase and sale agreements). The FC By-Laws are changed only by a vote of equity members in an FC as allowed for in the By-Laws. The term “Cooperative” in the FC name is not meant to imply that this Entity is also a communal venture governing many aspects of shared living and working among the members. That kind of arrangement could be codified in the By-Laws of an FC, as could a myriad other arrangements, but the FC model begins as a mechanism for the shared use of land. By purchasing one or more shares of an FC a party gains membership and the benefits described in the By-Laws, and that party also agrees to the operation and maintenance of the FC as described in the By-Laws.
METHODS OF ORIGIN:
- Establish a set of By-Laws for the ongoing operation of the FC in which the minimum necessary meetings (ideally once annually) are set, as well as the mechanisms for changing the By-Laws, and for dissolution of the Entity, as well as:
- the FC By-Laws will establish a number of equity shares in the FC available for transfer according to separate Purchase and Sale agreements.
- the FC By-Laws will establish the list of assets (and any distinct sub-assets) included in this FC together with a description of their prescribed functionality and maintenance.
- Incorporate an FC with the Maine Secretary of State. In Maine it makes most sense to organize as an Limited Liability Company (LLC).
- Transfer a piece of property wholly owned by one or more individuals into an FC LLC wholly owned by the same individual(s) who become its initial member(s).
- Apply any deed-based restrictions on the land, such as an agriculture and/or conservation easement that may also be desired.
- Research the tax implications for the individual(s) upon the transfer of partial shares in that entity to new or existing members.
It bears repeating: transferring access to farm land (partially or completely) using a Farmstead Cooperative is not easy. In fact when compared to a cash sale, mortgage sale, lease agreement it’s probably the most difficult method to use. Significantly while it allows for shared access to land, it also demands shared responsibility for that land as long as one remains an equity member of any fraction.
I still think, though, that the FC model offers maximum flexibility to land owners to access equity in a piece of farmland along with maximum protection of the agricultural land, and therefore we have chosen to apply it to our situation. We will try to be as honest and upfront in this blog about how it has worked (or not worked), how it can be improved, and whether it has achieved our goals.