Helping a beginning farmer can improve sustainability in a number of ways. It can be used to pass the art of farming to a new generation, help revitalize the rural social structure and economy, provide a more flexible tenant willing to provide customized stewardship for the land, and produce economic returns through diverse markets and government programs.
How to Assist New Farmers
Find a New Farmer and Start a Conversation
First, you can actively seek out a beginning farmer as a tenant. This could be a neighbor’s child or someone else you know looking for land. Or, you can use one of the many networks available to find a new farmer looking for land. A few such organizations include the Beginning Farmer Center at Iowa State University, The Land Stewardship Project’s Farm Beginnings, or Practical Farmers of Iowa. To find a farmlink near you check the National Farm Transition Network.
There are also many tools that can be used in a lease arrangement to assist a new farmer. One of biggest dilemmas facing a new farmer is gaining the capital to start farming. Leasing can provide a way to gain access to land, learn valuable lessons about running a farming operation, and perhaps even save the needed capital to become a landowner.
Providing secure tenure is a key consideration for promoting sustainability in any farm lease arrangement. However, when leasing to a new farmer, this element takes on additional importance. Unlike an established farmer that may own land as well as rent from other landowners, a new farmer may be dependent on access to your leased farmland. Therefore, secure tenure is crucial to their ability to access capital and purchase needed equipment and supplies.
Under certain circumstances you might also consider providing an option to purchase or right of first refusal in the lease agreement. This can provide an additional layer of tenure security. If you do decide to address these issues it is especially important to include an accurate legal description of the property in lease agreement.
Reducing the rent, at least initially, is an obvious way to help a new farmer that lacks capital. A graduated rent begins with a first year reduction in the rent that is gradually eliminated. For instance, the rent might be reduced by twenty percent the first year, then fifteen percent the second year, and so forth until your tenant is paying the full rent in the fifth year.
Share Expenses and Equipment
Other cost-sharing tools can also provide valuable help to a new farmer. This can take the form of sharing some of the expenses related to production or perhaps sharing equipment you might own. As discussed in Chapter Four of “The Landowner’s Guide,” sharing in expenses, particularly in a crop-share arrangement, may have additional tax and social security repercussions.
Mentoring a New Farmer
If you are a farmer yourself or retired from farming you might also consider mentoring a new farm tenant. This provides access to land as well as a wealth of valuable information. If you do take part in the management of the farm you will want to be certain to establish your intent to enter a landlord-tenant relationship rather than a partnership or some other legal relationship. Again, you will want to also pay attention, particularly in a crop-share arrangement, to tax and social security issues.
Consider Leasing a Small Portion of Your Farm
Some new farmers may be looking to only rent a few acres to establish a small diversified operation. This can allow you to assist a new farmer while renting the remainder of your land to another farmer. This situation benefits new farmers, the land, the local economy, and diversifies your farm income.
Interviews with new farmers, aspiring farmers, Secretary of Agriculture Tom Vilsack, and other experts help shed light on how leasing to a new small farmer can benefit beginning farmers, landowners, and the land.
Landowner Assistance Programs
While landowners are the gatekeepers and many have an inherent desire to assist new farmers, they may be financially, and, perhaps, socially restrained from doing so. Some landowners are reliant on farm rental income and see entering a contract with a new farmer as a risky endeavor. There are policies that can be pursued to provide financial incentives. These primarily consist of tax credits and exemptions but also include additional CRP payments in some circumstances.
Landowners may also witness social constraints when it comes to choosing a tenant. For instance, an heir that has inherited farmland may also inherit a tenant that rented the land for many years from the new owner’s deceased husband or parent. Organizations can help landowners understand their ability to control who farms their land, communicate with current and potential tenants to improve new farmer access, and diffuse potentially problematic social situations.
There can also be additional financial benefits for you. Nebraska and Iowa both offer tax incentives for landowners that rent to beginning farmers. The Iowa Beginning Farmer Tax Credit Program is one such opportunity. For more information on benefits and eligibility for this program review the Beginning Farm Tax Credit Summary.
There is also a federal program for retiring landowners with CRP land. The Transition Incentives Program (TIP)allows retiring farmers to receive two years of additional CRP payments for renting or selling farmland to a beginning or socially disadvantaged farmer for a term of five years or more. The landowner must allow the tenant to adopt sustainable practices, including but not limited to organic production. The FSA is also developing a website called TIP NET that will assist connecting eligible landowners and tenants. At the time of writing this site was not yet online.
There are also programs designed to encourage landowners to enter land sale contracts with beginning farmers. This allows a farmer to purchase land by making periodic payments to the landowner. The landowner is able to receive income from the property, including interest, and spread the taxes on the sale out over a period of time. More information is available on the Aggie Bond program and the Land Contract Guarantee for Beginning Farmers and Ranchers program.
Beginning Farmer Tax Credits
Tax Credits for Leasing Land
Iowa and Nebraska provide examples of how states can promote new farmer land access through landowner financial incentives. Both states have adopted Beginning Farmer Tax Credits that provide landowners with a credit for the income derived from rental payments from a beginning farmer. Both states have established eligibility requirements and restrictions that protect both parties and help ensure productive operations and secure tenure.
Iowa’s Beginning Farmer Tax Credit is available to landowners who enter a two to three year lease with a qualifying beginning farmer. Nebraska’s tax credit requires a three year lease term. These lease terms may not be considered long-term in relation to many commercial leases, or in comparison to the actual life of many farm lease arrangements, but when compared to the year-to-year lease terms that dominate farm lease arrangements they can offer significant benefits to a beginning farmer. Most obviously, long-term lease arrangements allow beginning farmers to securely invest in the farm’s long-term productivity, help ensure recoupment for improvements, and may improve a new farmer’s potential to access capital.
Both state tax credits also place significant value on whether the lease contract provides a crop-share or cash-rent arrangement. Iowa provides five percent credit for cash rent leases and fifteen percent for crop-share and livestock-share lease agreements. Similarly, the Nebraska credit is ten percent for cash rent leases and fifteen percent for crop-share arrangements. This demonstrates the significant advantage derived from the typical cost-sharing provisions and intrinsic risk-sharing included in crop-share leases. Flexible leases, which provide the convenience of cash rent payments to landowners while sharing the risk of the operation by basing the rent on yields, market prices, or both should be considered, and according to Iowa’s Agricultural Development Authority, will fall under the crop-share credit as long as the risk is allocated between the parties. Beginning farmers also benefit from the cost-sharing provisions commonly found in crop-share arrangements.
As stated the programs are also set up to help ensure a successful operation and long-term tenure. For example, in Nebraska beginning farmers must complete financial management programs, which include “course work on the creation and proper use of record-keeping systems, periodic private consultations with financial management personnel, monthly and year-end cash flow analysis, [and] detailed enterprise analysis ….” Beginning farmers must also demonstrate adequate farming or livestock production experience and knowledge in the type of agricultural operation pursued and submit a nutrient management plan and soil conservation plan to the
There are additional requirements for the state credits to help ensure the credits are only used to the extent needed to help get the beginning farmer off to a good start and to protect against abuse and fraud. In both states the credit is not available in the following situations: the agricultural assets operated by the beginning farmer exceed those needed to support a beginning farmer or the rent is substantially higher or lower than the market rate for similar assets in the community.
In Nebraska, family members are prohibited from participation unless the lease is part of a written, binding succession plan. The succession plan must set forth a process and time table for the transfer of:
- the farm or ranch physical labor to the beginning farmer;
- the farm or ranch management and decision making to the beginning farmer; and
- the farm or ranch assets listed in the rental agreement to the beginning farmer.
This helps protect against abuse or fraud and also illustrates the additional assistance needed for beginning farmers that lack access to family land and emphasizes the importance of pursuing an enforceable succession plan.
There has also been a great deal of discussion in relation to a similar federal tax credit.
Tax Credits for Leasing Equipment
Landowners in Iowa and Nebraska, as well as other states may receive tax credits for leasing equipment as well. While certainly not applicable to all landowners, it is worth mentioning in relation to retired farmers or those who have inherited farm equipment as well as land.
Wisconsin’s credit provides an example of how the programs can provide financial incentives to the owner but also help ensure the success of the new farmers involved. The Wisconsin credit requires approval by the Department of Agriculture of beginning farmer applications, which includes the beginning farmer’s business plan. This provides an incentive for experienced farmers to ensure the beginning farmers have a sound business plan as part of the application.
It also illustrates a significant opportunity for retiring farmer landowners to mentor the next generation. Mentorships ultimately benefit both parties as the beginning farmer is provided additional knowledge that helps ensure secure future income for the landowner. Such provisions in incentive programs are useful for encouraging these relationships. The parties should, however, be careful to avoid any appearance of a partnership and to state their intent to form a landlord-tenant relationship and behave accordance with those stated intentions.
Land Contract Programs
An installment land contract, also referred to as an installment sale contract, land contract, and contract for deed, is a conditional sales transaction in which the vendee makes a down payment followed by periodic payments and the vendor retains title to the property until all payments have been made. The vendee is considered to have equitable title to the land and all rights accorded thereto, including possession, quiet enjoyment, and exclusion, but is also expected to pay taxes, maintain insurance, and keep the premises in good repair. The vendor does retain legal title until the final payment is made. One of the principle features of the installment land contract is the forfeiture clause, which allows the vendor to terminate the contract, regain possession, and retain the vendee’s prior payments if the vendee defaults on the contract.
For more information on how land contracts work, the inherent benefits and risks for landowner and new farmer, and how the contract can be drafted to minimize risks while taking advantage of the benefits, visit the “Land Sale Contracts for Beginning Farmers” page.
The principle programs providing incentives for landowners to enter installment contracts with beginning farmers are the Aggie Bond programs and the relatively new Beginning Farmer or Rancher Land Contract Sales Program.
Aggie Bonds for Landowners
The Aggie Bonds program allows states to provide lenders, including landowners that enter installment sale contracts, a tax exemption on interest from financed purchases by beginning farmers. State Agricultural Development Authorities issue tax-exempt private activity bonds to lenders to finance the loans or sale contracts. The exemption on interest is intended to create a lower interest rate on loans or contract sales for beginning farmers.
Therefore, landowners willing and able to receive installment payments for their land are able to receive principle payments as well as interest on their sale, reduce their federal income tax and, in some cases, state income tax, avoid other land transaction fees, and finance a beginning farmer’s farmland purchase. While certainly not a budget neutral program for the federal government or the states that provide similar tax exemptions and administer the program, there is no pool of either federal or state funding, the program is not a loan guarantee, and the risk associated with the loan or contract is said to remain with the respective lender and landowner.
However, precisely how risky this is for landowners using installment contracts depends on the remedies provided by state law in case of default as well as fluctuations in the agricultural economy and the difference in land values at the time of purchase and the time of default. In relation to remedies in case of default, the common law provides for forfeiture of the land, returning the land to the landowner with a clear title and retention of the previous payments. However, the states have developed a diverse array of procedures and protections in place before forfeiture can be effected. Although, traditionally strictly enforced, regardless of the equity and improvements the vendee had built, courts have recently placed, albeit to different extents, restrictions on forfeitures.
Landowners also face a certain amount of risk in installment sale contracts from fluctuations in land values as well. For instance, the use of installment contracts grew a great deal during the late 1970s. This was a particularly popular method of land transfer for retired farmers. Then, during the farm crash of the 1980s, many farmers were unable to make their payments and were forced to forfeit the land. While the landowners regained possession of the land, it was only worth a fraction of what they sold it for and were potentially left without any source of immediate income.
Many economists are optimistic that recent increases in land values are not supporting a similarly dangerous farmland bubble, but, nonetheless, landowners do face a certain amount of risk should land values drastically drop and the vendee is unable to make payments. Thus, the Aggie Bond program, as it relates to landowner installment land contracts, provides significant benefits to both landowner and beginning farmer. It does, however, as there is no loan guarantee, leave a certain amount of risk in case of forfeiture.
The USDA Beginning Farmer or Rancher Land Contract Guarantee Program
This program, as its name implies, takes a different approach to encouraging land transition to beginning farmers through installment land contracts. Administered by the Farm Service Agency (FSA) the program offers two types of guarantees, available at the request of the vendor.
First, is the “prompt payment guarantee.” This guarantee provides payment, which covers up to the amount of three amortized annual installments or three annual installments plus the cost of any related real estate taxes and insurance.”
Second, the “standard guarantee plan” covers “an amount equal to 90 percent of the outstanding principal of the loan.”
Significantly, if the loan guarantee is only available at the request of the landowner, the program focuses the benefits exclusively on the landowner, albeit with the express purpose of incentivizing landowners to transition land to beginning farmers. While perhaps increasing the number of installment contracts made to beginning farmers, the program does not afford additional protections against forfeiture and loss of the beginning farmer’s equity in the land.
Its also worth mentioning that the USDA guarantee does provide greater incentive for the government to take a more active role in assuring the beginning farmer’s ability to make payments. For instance, the program requires an acceptable credit history and underwriting criteria, as determined by the USDA, as well as a downpayment of at least five percent of the purchase price.
CRP Transition Incentives Program
USDA’s Transition Incentives Program (TIP) provides two years of additional CRP payments to retired farmers with expiring CRP land. This program is available to a national audience but is still rather narrow as it only applies to retiring farmers with expiring CRP land.
The program is available to such landowners who sell qualifying land to a beginning farmer or enter a lease of at least five years. Here, the required five year tenure provides even greater security to the farm tenant than the Iowa and Nebraska tax credits. The lack of a maximum lease term, a feature not present in the state tax credits, presents additional considerations to address. First, it’s simply necessary to ensure that long-term lease arrangements comply with state law. For instance, Iowa’s Constitution specifically limits agricultural leases to no more than 20 years. This likely does not present an issue for most landowners, but there are cases of attempts to create a perpetual lease at the discretion of the tenant as well as a growth in the use of agricultural ground leases for terms of up to 99 years by community land trusts and other non-profit organizations.
Second, while tenure security remains a key feature for the success of beginning farmer businesses, long-term lease arrangements can present additional challenges and risks. For instance, inexperienced farmers, may simply be unable to manage a profitable operation, and depending on the terms of the lease, may find themselves defaulting on the contract, losing access to the land, and owing back rent, fees, or damages. Therefore, provisions may also be needed to ensure the beginning farmer can terminate the lease early if needed. Such provisions will need to balance the tenant’s potential need for early termination with the landowner’s need for secure income. Possible remedial provisions could include requiring advanced notice of termination in order to find a replacement tenant, a fixed termination fee, or inclusion of a named assignee. Provisions are also needed to address the tenant’s rights regarding improvements if the lease is terminated early, or simply if the landowner is unwilling or unable to enter a long-term lease arrangement.
To be eligible for TIP participation the landowner must also:
- allow the beginning farmer to begin organic certification,
- allow the beginning farmer to develop a conservation plan for the land, and
- allow the beginning farmer to install conservation practices and improvements in accordance with the conservation plan during the last year of the contract.
The farmer must:
- have been a farmer or rancher for 10 years or less,
- obtain a conservation plan and implement sustainable grazing or crop production in accordance, and
- not be a family member of the landowner.