Having an Interest

I hope that many people have an interest in the idea of a Farmstead Cooperative.

In this case I’d like to address the concept of “interest” when addressing a financial transaction of LLC shares over time, and how that transaction compares to a typical mortgage agreement.

Typically mortgage holders are paid interest over and above the payback of the mortgage amount/principal. Interest is the cost of borrowing a big chunk of money to purchase real estate, repaying it in bits over time a set time period — usually 15 or 30 years for most mortgages held by US banks. The mortgage is secured by a lien on the title of the land, which remains in the bank’s name for the duration of the mortgage agreement. Once the entire principal of a mortgage note is repaid on schedule (or ahead of schedule), and all interest due during the term of the mortgage is paid, the bank releases the real estate lien, and the title of that real estate is ‘free and clear’ of any claim by the bank.

Interest payments are the primary means of income for commercial banks all over the US. Borrowers are willing to pay to borrow money because they believe that they will benefit more by having the use of a big chunk of money for a set period of time than the cost of borrowing that money.

That’s the simple way to explain a financial instrument that is also tied up (in the US at least) in a tangle of financial regulations and insurance products. The fine-print documents that make-up a typical US mortgage can run from 30 to 60 or more pages requiring at least an hour of ‘signing on the dotted line’ — much more if you wait to read the mortgage agreements at the closing itself.

However, transferring shares of an LLC — especially if done over a set period of time like a mortgage — is very different. The title of any real estate owned by the LLC is held by the LLC of which all members own a share. An agreement to gradually sell the shares of an LLC is very different from the agreement to gradually pay back a large loan. Still, the word ‘interest’ remains an important factor in both agreements.

In the case of a gradual transfer of shares the seller of LLC shares retains an ‘interest’ in the property owned by the LLC as long as they continue to own shares. That ‘interest’ gives the seller all the benefits of being a member of the LLC as defined in the By-Laws. Literally this is a ‘common interest’ between the purchaser and the seller who both maintain some control of the present and future use of the property owned by the LLC. A bank cannot tell the mortgagee what color to paint the house, but an LLC member can.

I believe this is an important concept for both parties to digest when writing up any Purchase and Sale Agreement to transfer LLC ownership shares.


The Agreement

SEE IT HERE: Farmstead Cooperative LLC Agreement Template version 1.0 Build 150407

Linked above is a rendered version of the LLC Agreement that we will be using (minus our specific names, etc.) to organize our effort to create a Farmstead Cooperative. It is marked up with footnotes that I’ve added to help clarify some of the legalese, but also to emphasis some of the important concepts. Once downloaded you can “turn off” or remove these notes by manipulating the style sheet in the header. You can also work with the document in a word processor like Microsoft Word (see instructions below).

Yes it is LONG, and probably boring on a narrative level, but the idea behind it is that the language is based on legal precedent in an effort to create a structure that will perform exactly as we want it to perform in every possible challenging circumstance, especially if challenged in a court of Maine law.

In many ways, I’ve learned, that documents like this function within the legal system just like software functions when it is compiled and run by a digital processor. Software code is not easy for the lay reader to understand, but it is meant to perform a specific set of tasks for the user through the refractory of the digital processor. In that same way legal language is software programmed for the court system to perform a specific set of tasks. In that spirit, please enjoy.

[To simply save the document to your computer for off-line review click the link above and then use your browser’s “Save As” menu item to save the document as an .html file. Then you can open the off-line copy in a browser, or in a word processor (like Microsoft Word) — just make sure you set your word processor to open documents with a .html extension, usually called “Web Pages” naturally.]
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The Manifesto

Manifesto DeliveryTransferring 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.

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