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Serving: United States

How government loans can break down land ownership barriers

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FSA farmland loans offer up to 100% financing and are a valuable resource in helping producers generate the capital needed to purchase their first farm.

My most recent post generated some questions about young and beginning farmer loans, and whether I can share any tips or real life examples. I believe these programs are underutilized so I encourage you to contact your local FSA office to gain a better understanding of them. Your state finance authority may also offer similar programs. The information provided here is strictly from my viewpoint and I am not affiliated with the USDA, the Finance Authority, or any financial lending institutions.

Here are some tips to help you navigate through the process.

Get started now - From personal experience, it takes 30 to 60 days to work through the paperwork and eligibility process. Start now so you are financially ready when a farm purchase opportunity comes available.

Know your numbers - USDA tends to be cash flow lenders rather than net worth lenders. You will need to clearly illustrate the cash flow projections from not only the farm you are purchasing but also where the cash flow is coming from, to help supplement loan payments.

Identify a hypothetical farm - FSA prefers you bring them the actual farm you wish to purchase to crunch the numbers. However, this can put you at a competitive disadvantage when a farm comes up for sale and you need to act quickly. Consider taking your personal financial statement to the FSA office now, along with a “hypothetical” farm to run the numbers. Ask FSA if they can make a “what-if” determination on your eligibility. This prep work along with having the application completed and ready to submit can position you to gain loan approval much faster.

Zero or minimal down payments? Yes

The FSA farm ownership loan is popular in part because you can purchase a farm with zero or minimal down payment. An important distinction from some of the other FSA programs: its eligibility is not limited to a maximum 10 years of farming experience. Why is this significant? It is estimated only 15% of farmland is owned by those 55 years or younger. This indicates there are a lot of young and middle-aged producers who have yet to purchase their first farm.

This program offers 100% financing by way of FSA funding up to 50% of the purchase and the other 50% from traditional or private lending sources.

What about private contracts?

A lesser known fact is the other 50% can also come from the seller in the form or a private contract.

The current FSA interest rate is 2.5% over 40 years. Commercial rates trend at around 4% for a 30-year fixed rate. The lowest interest rate which can be structured privately with a seller is at the long term applicable federal rate (AFR), currently around 1%.

How it might work

A 48-year old producer is interested in purchasing 80 acres (77 tillable) in Cedar County, Iowa. Total purchase price is $640,000. Here are three scenarios’ comparing the loan costs from the lending sources noted above:

 

FSA:                 $320,000 @ 2.5% 40 years = $12,660

Seller:               $320,000 @ 1.0% 30 years = $12,350

Total:                $25,010 payment per year / 77 acres = $325/acre

 

FSA:                 $320,000 @ 2.5% 40 years = $12,660

Seller:               $320,000 @ 3.0% 30 years = $16,190

Total:                $28,850 payment per year / 77 acres = $375/acre

 

FSA:                 $320,000 @ 2.5% 40 years = $12,660

Lender:             $320,000 @ 4.0% 30 years = $18,330

Total:                $30,990 payment per year / 77 acres = $400/acre

 

You may be asking why would a seller ever want to carry part of the loan with a private contract? Some of the reasons include:

  • capital gain tax rate treatment is preferential over ordinary income
  • a contract allows a seller to spread any tax over the term of years
  • for some, earning 3% interest on a steady stream of land payments feels more stable compared to alternative investments
  • it can fit into an estate plan to leave heirs with a stable stream of land payments versus a lump sum of cash

What if the seller has no interest in carrying part of the purchase?

This is where the last scenario above offers a valid alternative versus the likely down payment requirement with traditional financing. This is a stumbling block for many. In this particular case the producer would need to come up with $240,000 cash to use a traditional loan.

This is a just a snapshot of three scenario’s in working with one FSA program on one specific farm. Feel free to use this as a baseline to crunch your own numbers and make your own comparisons.

Downey has been helping farmers and landowners for the last 20 years with their family farm transition, leasing strategies, finances, and general land consultation.  He is the co-owner of Next Gen Ag Advocates and an associate of Farm Financial Strategies.  Reach Mike at Downey@farmestate.com.
The opinions of the author are not necessarily those of Farm Futures or Farm Progress. 
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