Ron Shultz, Director of Policy Washington State Conservation Commission

Ron Shultz, Director of Policy Washington State Conservation Commission

Finding Farmland Various ways to get into farming and onto the land: Lease Rent Purchase Succession planning Trust Wills Forms of business

Farmland Preservation Loss of farmland in Washington: Between 02-07, WA lost over 4,000 farms totaling 460,000 acres. Of those 4,000 farms, 3,000 were family farms. Over 3,000 were 1-50 acres.

Washington State Farms Number of Farms by size (2007) 2,000 acres or more 1,000-1,999 acres 500-999 acres 260-499 acres 220-259 acres 180-219 acres 140-179 acres 100-139 acres 70-99 acres 50-69 acres 10-49 acres 1-9 acres 1,548 1,218 1,731 2,036 638 805 1,402 1,758 2,188 1,959 9,211 Number of Farms 14,790

Washington State Farms

Washington State Farms 2007: Size and number of farms engaging in Direct Sales (5,418 farms reporting) 2000+ acres 1000-1999 acres 500-999 acres 260-499 acres 220-259 acres 180-219 acres 140-179 acres 100-139 acres 70-99 acres 50-69 acres 10-49 acres 1-9 acres 44 38 84 118 43 63 105 211 265 279 1,807 2,361 0 500 1,000 1,500 2,000 2,500 Number of Farms

Washington State Farms Percent of All Farms Reporting Direct Sales Spokane County 12 13 Washington State 12.5 13.7 2002 2007 United States 5.4 6.2 0 5 10 15

Finding Farmland Various ways to get into farming and onto the land: Lease Rent Purchase

Washington FarmLink Finding Farmland Links aspiring farmers and landowners. FarmLink helps facilitate the transition of farms to the next generation by connecting people with the resources and technical expertise necessary to achieve these goals through: a farmer/landowner matching service; educational workshops; a comprehensive one-stop resource center; one-on-one assistance. Web: www.cascadeharvest.org/programs/washingtonfarmlink

Lease - Two forms: Crop-share or Cash Farm Lease (may include both) 1. Crop-share = where rent is paid by a share of crops produced. 2. Cash Farm Lease = traditional lease agreement. a. To a third party. b. Landowner retains interest in property. c. Leasee receives right to use the land and to remove crops. d. Lease should define acceptable use, water use, responsibilities for care of the land.

Rent the use of the land for any variety of purposes: Raising crops Raising / grazing livestock Hay production Should have a rental agreement, especially if activity will require installation of any infrastructure. Spell out who is responsible for paying for the infrastructure Describe whether the infrastructure stays or goes on the termination of the rental agreement Describe whether renter can make alterations to the land

Purchase of Property Outright purchase of property Challenge finding financial resources Farm business planning is usually an essential component to obtaining funding for either loans or grants for farm enterprises. Resource: National Sustainable Agriculture Coalition Guide to USDA Funding for Local and Regional Food Systems http://sustainableagriculture.net/

Purchase of Farmland WA Housing and Finance Commission Beginning Farmer / Rancher Loan Program What can be financed? - Acquisition of agricultural land - Acquisition, construction and/or improvement of buildings, structures and fixtures to be used in the business of farming and/or ranching - Depreciable farm property - Machinery and equipment - Animals for breeding, work, meat production and dairy

Purchase of Property USDA Farm Service Agency (FSA) Loan Programs General Information on all FSA Loan Programs Microloans Factsheet Beginning Farmer and Rancher Development Loan Program Factsheet (Also see: Center for Rural Affairs: Beginning Farmer and Rancher Development Program) Youth Loans Socially Disadvantaged Farmer or Rancher Contract Land Program Emergency Loans

Purchase of Property USDA Farm Service Agency (FSA) Loan Programs Land Contract Guarantee Program: Landowners willing to sell land to beginning farmers and ranchers on contract can qualify for a government guarantee through FSA. This program will provide one of two types of guarantees, to be in effect for 10 years: prompt payment guarantee 90% principal loan value guarantee

Purchase of Property USDA Farm Service Agency (FSA) Loan Programs Operating Direct Loan: FSA can be used to purchase livestock, farm equipment, feed, seed, fuel, insurance or other operating expenses. Operating loans can also be used to pay for minor improvements to buildings, costs associated with land and water development, and to refinance debts under certain conditions. Per farm loan limit for direct operating is $300,000 Five-year line of credit is also available Graduation to guaranteed or commercial credit is mandatory after 7 years. The 7 years can be consecutive or non-consecutive.

Purchase of Property USDA Farm Service Agency (FSA) Loan Programs Operating Guaranteed Loan: FSA guaranteed loans are available through local lenders or Farm Credit Services. While the financing is through the local bank, FSA provides a guarantee to the lender up to 95 percent. Interest rates cannot exceed the lender s average farm customer rate. In certain instances under the Interest Assistance Program, FSA will provide assistance in lowering the interest rate up to 4 percent. Loan limit for guaranteed loans is $1,094,000 (2008), a rate adjusted for inflation each year. Applicant must be unable to obtain credit elsewhere and have an acceptable credit history

Purchase of Property USDA Farm Service Agency (FSA) Loan Programs Ownership Direct: Loan can be used to purchase farmland, construct or repair buildings, or promote soil and water conservation. The loan limit for direct ownership loans is $300,000. Program eligibility criteria for a direct loan from FSA include: sufficient education, training, and experience in managing or operating a farm applicant must have participated in the operation of a farm or ranch for at least 3 years out of the past 10 years applicant must be unable to obtain credit elsewhere and have an acceptable credit history

Purchase of Property USDA Farm Service Agency (FSA) Loan Programs Ownership Down Payment Loan Program: Assistance with a down payment is provided by FSA Beginning farmer provides a 5 percent down payment FSA will then provide up to 45 percent toward the purchase, not to exceed its appraised value and not to exceed $500,000. With this $500,000 cap, the maximum FSA loan amount is $225,000. Note, however, that this is a cap on the amount of the FSA portion of the loan, not a cap on the value of the land to be acquired. The remaining 50 percent then comes from conventional sources, such as the local lender or seller-financing, with amortized payment over a 30-year period FSA loan term is 20 years, with an interest rate that is 4 percent lower than the regular FSA direct farm ownership loan interest rate, but no less than 1.5 percent.

Purchase of Property USDA Farm Service Agency (FSA) Loan Programs Ownership Joint Financing 50/50( Participation Loans ): This program does not require a down payment by the beginning farmer. FSA will provide up to 50 percent of the financing at an interest rate the same as the regular direct farm ownership loan program. Ownership Guaranteed Loans: This is similar to guaranteed operating loans, above.

Purchase Part of Property Transfer of Interest in Property o Could reduce tax consequences associated with will. o Transfer all of property or only portions. o Transfer as complete sale, installment sale, lease, or outright gift. o Tax consequences associated with transfer might be more beneficial than estate tax. o Transfer can be done in a way the current owner can continue to farm or observe how the recipient will farm the land.

Bundle of Property Rights Right to Harvest Sell Develop Or Subdivide Access Exclusion Water Rights Right of Use

Landowner is giving up a right to do some act, voluntarily restricting use of the property. Examples: Easement to protect prairie habitat may allow only limited grazing. Easement to protect trumpeter swan habitat graze only at certain times. Purchase of development rights landowner may not build on or subdivide the property.

Emotional aspects of conservation easements and farmland protection.

Tax aspects of conservation easements: Conservation easement can reduce property taxes because it changes the valuation of the property. From highest and best use to a fair market value Property tax based on ag land, not developable land. Can reduce property tax by as much as 80%

Finding Farmland Succession planning Trust Wills Forms of business

Succession Planning What is succession or transition? Transfer of the property or operation to another. Several options, right one depends on what the landowner wants to do. First priority family considerations. Second priority discussing decision with others. Third priority establish the right legal tool to accomplish the desired outcome. Tax considerations may be critical.

Succession Planning According to the USDA: Only 1% of family-owned farms are transferred to a third generation. 30% of all family-owned farm businesses have not considered a successor. 63% waited until owner is 65 to identify successor. 58% of farm owners list inadequate succession planning as the biggest problem facing their business.

Tools for Farm Succession Estate Planning A plan which describes the distribution of the assets of an individual after the incapacitation or death of that person. Addresses inheritance, payment of creditors, and taxes on the estate of the deceased. Tools include: General Power of Attorney Trust Will Transfer of Property to Another

Tools for Farm Succession Estate Planning General Power of Attorney o Legal document giving authority (or power ) to make certain legal decisions for the grantor. o Example: farm owner can grant authority to child or other person to take actions concerning the farm in the absence or incapacity of the farm owner. o More typically used in health care decisions

Tools for Farm Succession Estate Planning Trust o Property is transferred to another to be managed in the interest of a third party. o Typically done with financial assets. o Land or farm business could be placed in trust with proceeds distributed to trust beneficiaries. o Reasons might include to provide steady revenue stream for beneficiary who doesn t want to run the farm.

Tools for Farm Succession Estate Planning Wills o Simple tool but surprising how many don t have one. o In Washington, property goes to surviving spouse, then to children equally. o Many wills call for dividing property equally among the children. o Need to inventory the property and consider estate tax consequences. o Significant tax consequences could mean looking at other approaches.

Tools for Farm Succession Form of Business When the landowner wants to stay active in farming. Business form will remain after incapacity or death of the landowner. Form of business will impact income flow and taxes. Most small farms could form as partnership, S Corporation, or Limited Liability Company (LLC). Selection of a business structure should be done in consultation with an attorney and accountant.

Tools for Farm Succession Form of Business Four most common forms: Sole Proprietorship General Partnership Corporation (C and S) Limited Liability Company Choice depends on many factors including complexity of operation, number of individuals involved, tax issues, liability issues, etc.

Tools for Farm Succession Form of Business Sole Proprietorship Going into business for one s self. Taxes flow like personal income taxes. When sole proprietor dies, the business ends. No shield to liability and non-business assets subject to debt settlement.

Tools for Farm Succession Form of Business General Partnership Contractually arranged between the parties. Agreement should specify who is contributing what into the venture, who will do what, and dissolution arrangements. Income charged to partners, not business entity. Partners are responsible for each other s actions, and business debts and obligations.

Tools for Farm Succession Form of Business Corporations Legal entity separate from owners and mangers. Created by statute and must be registered with the state. May be C or S all are C unless they are specifically set up as S. S or subchapter S corporation differs from C in that the profits and losses are not charged to the corporate entity, but to the owners on individual tax returns. Sub S benefits are liability and other protections similar to C corporation.

Tools for Farm Succession Form of Business Corporation A C corporation has limited liability or corporate shield. Owners and shareholders are protected from personal liability for corporate debts and obligations. Corporate formalities such as a board, separate accounting books from personal, issuing stock, etc. Advantage corporation continues on after death or incapacity of one of the owners.

Tools for Farm Succession Form of Business Limited Liability Company (LLC) Retains limited liability of owners similar to corporation. Don t require formal management of a corporation. Taxed similar to partnership flow through to owners. Works best when few owners or shareholders.

Ron D. Shultz Director of Policy Washington State Conservation Commission rshu461@ecy.wa.gov (360) 407-7507