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Beginning Farmer and Rancher Land Contract Guarantee Pilot Program

Nancy L. Thompson
Thompson Law Office
The Saddlery Building
309 Court Avenue, Suite 217
Des Moines, Iowa 50309

Summary: Iowa is one of six states selected to participate in a new pilot program authorizing the Farm Service Agency (FSA) to guarantee land contracts between landowners and beginning farmers. Five such contracts may be guaranteed in the state in each of the next four years (through fiscal year 2007). Data from the Natural Resources Conservation Service suggests that 20% of current Iowa farm operators meet the FSA definition of a beginning farmer. This guarantee program is anticipated to create greater opportunities for beginning farmers to become landowners as well as operators.

Program Origins: The concept of guaranteeing land contracts originated from an evaluation of Farm Service Agency beginning farmer programs conducted in 1995 and funded by the United States Department of Agriculture. Lenders, beginning farmers, and FSA employees participated in focus groups, surveys and personal interviews to both evaluate existing programs and suggest new ideas for helping beginning farmers (see Financing Beginning Farmers: An Evaluation of Farm Service Agency Credit Programs , by Thompson, Foster et al, Center for Rural Affairs, 1995). Backed by Sens. Tom Harkin (D-IA) and Richard Lugar (R-IN), the 2002 Farm Bill authorized a limited pilot of the land contract guarantee concept. Designed as a guarantee of payments rather than a guarantee against loss following liquidation, the program is intended to be a significant advantage to both sellers and buyers while FSA's exposure is limited to the amount of just two contract payments.

Program Implementation: On September 4, 2003 FSA announced the availability of funds for the pilot program and released information regarding eligibility and application requirements for the program. Funding became available on September 4th and applications were to begin being accepted as of the same date. The six states participating in the pilot program are Indiana, Iowa, North Dakota, Oregon, Pennsylvania, and Wisconsin. Iowa ranks third in the nation in the volume of land contract sales (behind Minnesota and Wisconsin) so it is a logical state in which to pilot the new program.

Application Procedures -- To apply for a land contract guarantee, an interested seller should contact FSA, which will send interested sellers a letter describing the program. Signing and dating the letter and returning it to FSA will be considered the seller's guarantee application. The prospective buyer must then submit a number of documents including income tax or financial records, a proposed cash flow, a financial statement, and a description of the buyer's farm experience.

Eligibility -- A buyer must be a beginning farmer (in general, someone who has farmed for less than ten years but has at least three years of farming experience and who owns no more property than 30% of the county average) who is not delinquent on any federal debt and who has not had debt forgiveness from FSA after April 4, 1996. Only new contracts can be guaranteed by FSA and the purchase price of the farm cannot exceed $500,000. The beginning farmer must provide a cash downpayment of at least five percent of the purchase price. This downpayment should come from cash reserves (gifts are permitted) but if the downpayment has to be borrowed (e.g. from a family member) there can be no repayment on the borrowed funds during the ten years of the guarantee.

Guarantee Terms -- For ten years following the start of the contract, FSA will guarantee the payment of two amortized annual contract installments or an amount equal to two payments. (The Iowa FSA office intends to handle this provision as a revolving fund so that if a missed payment is paid in full prior to a subsequent missed payment, the buyer may continue to have an additional two payments or the equivalent amount of two payments guaranteed). The guarantee will also cover the amount of two years worth of property taxes and hazard insurance. The interest rate charged by the seller cannot exceed FSA's direct farm ownership (FO) loan program plus three percentage points. Contract payments must be amortized for a minimum of 20 years and balloon payments are prohibited during the ten years the guarantee is in place. Escrow agents must be used to handle all payments between the seller and buyer and it is the escrow agent's responsibility to notify FSA of a default and to remit any guarantee payments to the seller.

Guarantee Termination -- The FSA guarantee will be terminated if (a) the contract is paid in full; (b) FSA is required to pay two annual contract installments or the equivalent of two annual installments without being repaid by the buyer; (c) the seller fails to seek payment from the buyer of any delinquency or otherwise fails to enforce the contract; (d) the seller terminates the land contract; or (e) none of the above occur but ten years lapse from the date of the guarantee.

Iowa Experience: As of late October, three land contracts were in the process of being guaranteed in Iowa but none had been finalized. The program has been publicized through notices to banks and Iowa State University Extension staff. An issue not yet resolved in Iowa (as of late October) is who might serve as the escrow agent and how much and how the agent is to be paid. This issue is being left up to each of the participating states to decide. In Iowa, it is likely the buyer will be required to pay any escrow agent fees and that the fees will be required to be minimal because of the agent's limited role.

For more information contact: Chris Beyerhelm, Farm Service Agency, 10500 Buena Vista Court, Urbandale, IA 50322. Phone: 515-254-1540

Nancy L. Thompson Thompson Law Office The Saddlery Building 309 Court Avenue, Suite 217 Des Moines, Iowa 50309 515-875-4850

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