Contract Land Sales
The Beginning and Socially Disadvantaged Farmer and Rancher Land Contract Guarantee Program provides federal loan guarantees to retiring farmers who self-finance the sale of their land to beginning or socially disadvantaged farmers and ranchers. The program is designed to encourage private land contract sales by providing a degree of protection to the retiring farmer whose retirement savings is often in the land and farm. It provides the seller with a federal guarantee much like that available to commercial banks and other lenders.
The program is structured to provide the seller of the farm or ranch two choices:
- a “prompt payment” guarantee that covers three amortized annual installments or an amount equaling three amortized annual installments; or
- a standard asset guarantee plan that covers an amount equal to 90 percent of the outstanding principle of the loan provided that the seller obtains a servicing agent.
For either option, the loan guarantee stays in effect for 10 years. The purchase price or appraisal value of the farm or ranch that is the subject of the contract sale cannot be greater than $500,000. The buyer of the farm and ranch must contribute at least 5 percent as the down payment for the land.
Under the prompt payment guarantee option, if the new farmer/buyer does not pay an annual installment due on the contract, or pays only part of an installment, USDA’s Farm Service Agency provides the scheduled payment or the unpaid portion to the seller through an escrow agent after the seller unsuccessfully attempts collection. In that circumstance, the buyer would then try to restructure the debt and obtain an approved repayment plan.
Under the asset guarantee option, the seller is protecting himself or herself against the possibility that the value of the farm may have sharply declined between the time the contract was entered and any default by the buyer.
To be eligible for a loan guarantee, the buyer of the farm or ranch must: 1) be a beginning or socially disadvantaged farmer or rancher; 2) have an acceptable credit history demonstrated by satisfactory debt repayment; 3) be the owner or operator of the farm or ranch when the contract is complete; and 4) be unable to obtain sufficient credit elsewhere without a guarantee to finance actual needs at reasonable rates or terms.
Farm Bill Changes
The 2002 Farm Bill established the Beginning Farmer and Rancher Land Contract program as a pilot program in 9 states. The 2008 Farm Bill makes the program permanent and available nationwide. The 2008 Farm Bill also includes socially disadvantaged farmers as an eligible group for the loan guarantee program. Finally, the new Farm Bill adds the standard asset guarantee option, with the stipulation that the seller obtains the services of a loan servicing agent.
Section 5005 of the Food, Conservation, and Energy Act (FCEA) of 2008 amends Section 310F of the Consolidated Farm and Rural Development Act of 1972, to be codified at 7 U.S.C. Section 1936.
The land contract guarantee program is funded out of the annual appropriation for guaranteed farm ownership loans. The farm bill authorized program level for guaranteed farm ownership loans is $1 billion, and in recent years Congress has appropriated enough funds to result in a program level of $1.5 billion. Sufficient funding should be available from this overall appropriation for guaranteed farm ownership loans to cover all eligible land contract program proposals submitted.
Existing guarantees under the original pilot program will continue and will be serviced according to the guarantee agreements. For the new, permanent nationwide program, a final rule was issued in December 2011, and the new program began being implemented in early 2012. Applications are being accepted as of January 3, 2012. Interested parties should contact their local FSA office or complete the application forms available online.
The Beginning and Socially Disadvantaged Farmer and Rancher Land Contract Guarantee program is administered by the Farm Service Agency of USDA. Information about the program will be posted on the FSA website.
For information and applications, go to your FSA regional Service Centers or to your state FSA office. You can locate all of the contact information by clicking on your state.