Why Do This

Forming a Farmstead Cooperative (FC) is NOT the easiest way to get money for land that you own. It may not be the easiest way to guarantee that your land will be used only for farming. At its core it imposes responsibilities on anyone owning any percentage of an FC. And it is certainly not the way to maximize the price at which you can sell your land.

Therefore the question: why form a Farmstead Cooperative?

  • You own the title to the land in question outright, and want a fair way to share access to that land with a long-term partner.
  • You prefer not to form an incorporated cooperative entity which would require that all shareholders have equal equity.
  • You want the option of cashing out some of the value of your land right now, or on a regular schedule into the future.
  • You want to guarantee that your land can be farmed for as long as possible.
  • You want to offer instant equity to other partners (members) in your land use that acknowledges the hard work it takes to keep a field fertile and tillable over time.
  • You might want to continue to have access to parts of your land, and you are willing to share that access to other parts of your land with one or more other farmers (who may or may not be FC members).

In our example the Farmstead Cooperative is organized as a limited liability corporation (LLC) which is a business organization. It, therefore, bears the onus of all corporate entities in our state such as regular registration with the Secretary of State (at a cost) plus allocating and accounting for profits and losses due to its “business” of leasing pieces of agricultural land and assets to members and non-members to cover expenses (insurance, taxes, and utilities among others) and possibly earn a profit. The LLC must also account for its own profits and losses in State and Federal tax returns, as well as account for the distribution of any gains or losses to its members.

In exchange for these responsibilities an LLC allows for an almost infinite division of itself into “shares” that can be transferred by sale or other equivalent exchange among members. And the Agreement can be customized in many ways to accommodate the needs and priorities of the owner and the future members. The key idea that the LLC can legally enforce the responsibility for taking care of all the responsibilities of land ownership PLUS those of taking care of an active farm on all members of that LLC.

The Alternatives

Easements cannot impose action, they can only dictate use by an owner. Fields become forests in Maine very quickly without action. It is still early in the use of easements to guide the use of agricultural land, and I have not yet seen how effectively land trusts will be able to enforce proper use of the land whose easements they hold. What is the future of an easement protected field that has a new house built on it in violation of that easement? If their court challenge succeeds, can a land trust spend the money to un-build a house? And how long before that field returns to the state it was in before the foundation was dug and poured, the septic field installed, and the driveway excavated, compacted, and perhaps also paved?

In the case of a FC you could point out that an LLC Agreement is just a piece of paper and is equally incapable of imposing action all by itself. The membership must execute the will of the LLC Agreement and there is no guarantee that the membership does this well. True, however one would expect that the original member who goes to the trouble to form a FC already embraces the spirit of what is described in the LLC Agreement. As an owner they also have a direct financial interest in the well being of the FC over time. New members of a FC will have (should have?) read the LLC Agreement before buying shares of an FC, and therefore should also embrace its spirit. Hopefully, as time passes and if the original member sells all their shares the new members have literally “bought in” to the concept and practice and would be expected to execute the will of the LLC Agreement, amending it as necessary when they agree a change would be helpful.

Easements also require setting something valuable aside “forever.” Who must “give away” the monetary value attached with an easement? In this way easements are dependent on a party either funding an easement by paying the landowner for it, or by an owner foregoing it’s monetary value. The FC model does not depend on any charity, it can return the full market value of a piece of land to the original owner, and it can accommodate any level of “discount” an original owner may choose to apply to the cost of shares if that is a priority of the owner(s).

Mortgages cannot deliver equity to a new owner in fractions. Mortgages are a loan of cash in exchange for the clear deed to a property and the promise to pay a portion of the principal and interest on the principal on a regular schedule. The only “equity” gained over time is the reduction in principal over time. That “equity” can be realized only by paying off the mortgage, or by selling the property to someone else at which point you must pay the bank the remaining principal, and you keep the difference. As we have seen during the recent housing crisis if the sale price is lower than the remaining principal you have negative equity. Which means the mortgage holder still owes money and interest to the bank.

At the same time commercial banks prefer to write mortgages for residential structures, not land alone. Banks also don’t offer the most favorable mortgage rates to houses on a lot of land. Typically banks will hold a mortgage on property (preferably with a house on it somewhere) because they can’t resell the mortgage, but they often put a low value on the land as an asset, and they may not offer the best rates if a property has “too much land” and little developmental value as future house lots. That leaves few financing options for farm financing, primarily just government programs that are not as flexible to obtain or terminate as a residential bank mortgage.

A Lease-to-Own agreement often resembles to a self-financed mortgage. Lease-to-Own could be very similar to the FC concept except typically the seller retains the clear (or not so clear) title to the land and thus dictates the control over what can or cannot be done with the land until the buyer completes the agreed-to term of lease payments.

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