excerpted from “Cooperative Farming: Frameworks for Farming Together” by Faith Gilbert with Kathy Ruhf and Lynda Brushett, a 54-page Greenhorns Guidebook funded by SARE and available at:
What is a cooperative?
The word “cooperative” has two meanings: As an adjective it is both a type of business and an attitude that can be broadly applied. A cooperative (n) is a specific type of business that is formed expressly to provide benefit to its members, such as:
- a producer co-op that is created to provide cost savings and or marketing services to a group of producers
- a worker cooperative created to provide stable, fair employment for its workers.
A cooperative business is defined by three major standards:
- It is owned by its members, those participating in the business, not by outside shareholders or investors.
- It is governed by its members. Each member of the business has a vote in major business decisions and in electing representatives or officers.
- It exists for member benefit, not profit for outside shareholders. Any profits are distributed equitably among members. In addition, cooperatives operate according to internationally recognized core principles and values, which include operating as an autonomous organization, investing in the training and education of their members, and supporting other cooperatives and the community.
While cooperatives have an important role in farming, not all collaborative efforts meet those criteria. Buying a seed drill with neighboring farms, sharing a delivery van to a nearby city, or even running a farm together need not be classified or operated as a cooperative in order to provide fair and mutual benefit to those involved. Here, we focus on the agreements and processes that make collaboration function.
Economy of Scale: Cooperation allows little farms to do what big farms can do, like buy inputs at bulk rates, increase volume to open new markets, and lower the per-use cost of equipment. Together, producers can lower costs, access needed services or facilities, or generate more income.
People Power: Allied producers can negotiate for better prices, diffuse risk, and share knowledge, skills, and labor.
Access to Capital: Farmers can pool capital to invest in a shared business, tool or asset, and can increase their borrowing power with combined collateral and experience.
Quality of Life: Allied farmers can arrange for time off, child care, or extra hands when needed. Shared responsibilities, whether in selling, producing, or maintaining shared resources, means a lighter load for overworked operators.
Continuity: Group entities can serve as longstanding vehicles to transition land, resources, and businesses among producers. Operating under an overarching entity, an individual farmer has more flexibility to retire or relocate and transition use to the next farmer.
The Cooperative Farming Landscape
There are collaborative enterprises corresponding to virtually every component of farming. The question to start with is, “How do I want to work with other people?” This guide addresses two main categories for working together. In the first, several separate businesses share access to resources and services, like marketing, equipment, and labor. In the second category, individuals work together to form one farm operation with multiple owners, such as a worker cooperative.
- Marketing & Distribution
There are many compelling reasons why joint marketing efforts, including producer co-ops, are well represented in agriculture. Large national co-ops like Sunkist Growers and Cabot Creamery Cooperative, and smaller regional co-ops like Our Family Farms and Deep Root Organic Cooperative demonstrate how commodity producers have succeeded in the marketplace by banding together to process, market and distribute their goods. Small and large farms alike can combine efforts to overcome barriers of scale, means, skill, time, language or culture. Marketing is a fairly specialized skill set that can be a huge relief to a producer to be able to outsource. Other benefits of shared marketing include:
- Sharing of distribution costs lowers the costs for each producer.
- Several producers can reach a sufficient sales volume to hire qualified salespeople.
- Allied sellers can negotiate more stable prices and consistent sales.
- Increased product volume, consistency, and reach can open new market outlets.
- Strong shared brand can bring marketing advantages.
- Cooperative value adding, like washing or processing, can bring higher prices.
Marketing Cooperatives are businesses owned by the producers that use the business to sell their goods. The cooperative operates at cost, and distributes any surplus profits back to the members in proportion to the dollar value they’ve sold through the co-op. Multi-Farm CSAs can be groups of similar producers (i.e., vegetable farmers) that pool and distribute their products to a broader customer base, or groups of farms with entirely different products, seeking to provide consumers with many of their food needs. Some multi-farm CSAs are structured as cooperatives, such as Local Harvest in New Hampshire, a group of 8 growers producing vegetables for a 260 member CSA. A hired crop coordinator works with the growers, who bid and contract for the crops they’d like to provide. The growers are paid for their produce on arrival, minus a 20% commission to cover their operating expenses. Thanks to SARE funding, Local Harvest has put together Local Harvest: A Multi-Farm CSA Handbook laying out the details on bidding, incorporating, administration and more.
Joint Sales Agreements can be created between two or more businesses to sell or market products for one another. An example would be vegetable farm that wants to diversify its offerings by selling meat and eggs from another farm. The parties would write a contract stating the terms of the agreement, such as if there’s a fee or percentage taken by the host farm or seller, and the length of time the agreement will last.
Copacking and processing involve some value-adding, such as washing, freezing, canning, drying, and or cooking. These processes can be done on a small scale, or members can invest in the equipment and infrastructure to process significant quantities of produce efficiently. Grange CoPackers, a start-up cooperative in Essex, NY, has made this work by lobbying for their local grange hall to install a commercial kitchen with needed equipment like a flash freezer and steam kettle, to which they lease access.
Considerations for Shared Marketing
Whether a marketing co-op, multi-farm CSA, or other marketing collaboration, the group’s marketing strategy is the first consideration.
- Who makes up the group, and what products are they interested to sell?
- What available outlets might suit the volume you’re intending to produce?
- What do the producers consider an acceptable sale price? What would the group have to sell it for to cover shared costs, and would the outlets considered accept that price?
- Are the producers interested to change their products or volume to pursue an available sales opportunity?
The desired price point, volume, and type of product can help determine the sales strategy. Many large-volume venues like schools and hospitals need products in standardized quality and packs. Producers looking to sell to these accounts would need to focus on crops that can be grown in sufficient quantity, quality and packaging. Direct to consumer sales like multi-farm CSAs or shared market stands can bring in higher prices, be more flexible on volume, and allow for greater diversity; however, they also require more time in outreach, customer support and distribution. The direct-to-consumer distributors we spoke to needed 20-30% of the sales value to cover their administration, staff, and facilities costs.
A marketing co-op may face dissolution if its producers don’t regularly use its services and provide high-quality product to its customers, which is problematic for both revenue and customer satisfaction. Setting up written agreements with growers at the beginning of the season helps the seller to have a consistent supply, and gives the farmers an expectation of sales in return. It’s also a good opportunity to plan ahead and set expectations with producers, including:
pricing: what price will be paid to the producer?
quantity: how much will each producer supply, of what products, how often?
quality: what are the standards for freshness, cleanliness, unit size and packaging?
payment: when will the producers be paid?
Collaborative Marketing Without Pooling Products
Not all collaborative marketing efforts involve aggregating food and distributing revenues. Some farmers, like Little City Growers, run a group farmers’ market stand where they sell their produce side by side. Other groups work together to educate consumers on how to buy local produce – like a brochure mapping the farmers’ markets in the county. Farmers might together launch a CSA promotion campaign to try to pull in more members from the general public who aren’t yet familiar with the CSA concept.
In the Midwestern US and Canada, farms as far as a hundred miles apart share access to equipment for grain, hay, corn and soy. Seed farms in the Willamette Valley collaborate to jointly purchase expensive seed cleaning equipment, and many Texas cotton farmers share cotton gins. On the other end of the spectrum, too l libraries like the Atlanta Community Toolbank and Berkeley Tool Lending Library provide urban farmers and gardeners access to small-scale tools and equipment. Comprehensive equipment sharing among small-scale, diversified commercial farms is not yet common, but as new farms pop up in clusters near urban markets, the potential for tool sharing rises.
North Carolina farmers have piloted the Sustainable Agriculture Tool Lending Library, in which ten small farms share access to implements that include a post pounder, manure spreader, disc harrow, and flatbed trailer. Small and Beginning Farmers of New Hampshire received USDA funds this year to set up two equipment banks with tools for small specialty growers, including pipe benders, honey extractors, and a walk-behind tractor.
The Intervale Center, an incubator farm in Burlington, VT, is an established example of equipment sharing among small, diversified farms. he Center and the on-site farms worked together to form an equipment business providing shared access to a greenhouse, tractors and implements The equipment and greenhouses are owned by the Intervale Farmers Equipment Company (IFEC), of which the established farms and the Intervale Center are all members. The farmers pay hourly rental fees of $30-40 for tractors, flat yearly fees for access to implements, and a per-bench fee for greenhouse space. The fees are based on projected cost and projected use for the year. Any profits or losses are allocated to the members based on ownership.
Sharing equipment can be organized through a variety of ownership structures and financial arrangements, from handshake deal among neighbors to setting up an equipment-sharing cooperative. Organizing as a separate legal entity has liability protection advantages and can provide a better structure for investing in or replacing equipment. A separate legal entity can build up capital to hold for future purchases or expenses.
Regardless of the form (informal agreement, contract or legal entity), farmers sharing equipment should write down their agreement and include:
- Each member’s capital contribution and ownership
- How expenses will be allocated (hourly, by acreage, or unit)
- How depreciation will be calculated
- Operating policies on scheduling and safe operations
- Procedures for housing and maintaining the equipment
- Entry and exit: how members can transfer ownership
Scheduling use: Scheduling is generally the first concern for producers considering shared equipment: “What if I can’t use it when I need it?” By and large, the response from most farmers sharing machines is that because joint purchasing enables access to larger equipment, or equipment that would otherwise be unavailable, the time savings outweigh the hassle of scheduling in advance. For nearby farmers, a google calendar and 24 hours advance signup may be enough. Seasonal equipment like hay balers and combines are often scheduled at the beginning of the year. They can be rotated in order of proximity between different farms, starting with a different farm each year.
Sharing Costs: Producers can divide the initial investment cost equally among them or in proportion to projected use. Ongoing costs include depreciation, insurance, housing, maintenance, and repair, and are usually divided by hourly use, acreage, or units. Iowa State’s
Operating and Maintaining Equipment: Co-owners should set policies on what constitutes misuse, what repairs need to be paid for by the individual, and how the equipment should be returned. A logbook or other record should be kept for each piece of equipment noting usage, needed repairs, and maintenance performed. The group can assign and compensate one member to perform maintenance, or divide responsibility of various machines between the members.
Programs to share outside labor are more common. Many cooperatives have created labor-sharing pools, in which the cooperative jointly hires employees that are shared between multiple farms within an activity branch. This allows member farms to share the cost and administrative burden of hiring workers, especially for those farms that only need part-time help, and provides more stable work and more hours to the employees. Participating members commit to hiring workers for a certain number of weeks per year. The North Carolina Growers Association hosts a similar program that hires H2A workers on behalf of their farmer members or clients. The farmer association takes on the often burdensome and complex process of filing to receive H2A workers and, if needed, helps with housing and transportation.
Joint apprentice programs are another new but proliferating example of sharing labor. The non-profit Island Grown piloted the Martha’s Vineyard Apprenticeship Program in 2010, which works as a hiring and support service for Martha’s Vineyards small farms. Island Grown recruited and vetted applicants that the farms could then choose from. Once hired, Island Grown found housing for the farms without worker housing (no small feat in summer on Martha’s Vineyard) and provided educational support.
Farmers in Oregon’s Rogue Valley created Rogue Farm Corps (RFC), an entry-level farmer training program that combines work on host farms with structured education. The program provides a double benefit of improving the education experience of farm interns and reducing the burden on host farmers to provide that experience. RFC was also able to work with the state Department of Agriculture and Bureau of Labor and Industry to establish a legal framework for on-farm internships, in response to concern about labor regulations regarding internship positions.
IV. Service and Supply
Virtually any service or supply can be shared by a group of farmers. Many farmer groups form buying clubs, like a group of Hudson Valley farmers that order in non-GMO chicken feed for discounted bulk prices. The Massachusetts NOFA bulk orders offer a range of products, many of which are otherwise inaccessible to small growers due to high shipping costs. Each year, about 400 participants order supplies for organic vegetable farming and gardening through the NOFA bulk order, providing enough purchase power to obtain bulk discounts and pay an administrator for 300 hours of bookkeeping, coordinating and promoting.
Shared Service Cooperatives are based on a similar concept. The Iowa Farm Service began as a fuel supply co-op, but evolved with the needs of farmers to provide feed, fuel, farming expertise, and computer support. A few small farmers in the Connecticut River Valley jointly hire custom tractor operators to till their plots. Storage, custom hire work, and technical support services can all be shared among farms in the framework of shared service cooperatives.
Group-Managed and Collective Farms
As opposed to the inter-farm resource sharing described above, group-managed farms operate a business together, keeping one set of books, maintaining a single brand, and making decisions together about how to run their farm.
Some groups might prefer to instead form multiple businesses for the purpose of accomplishing specific shared goals, but not sharing ownership or operations totally. There could be one entity that owns shared equipment and infrastructure while farmers own independent enterprises. Or, there might be one shared enterprise, such as collectively owned vegetable operation, plus a few privately owned operations on the side. It makes sense to keep separate ownership of enterprises for which you have incompatible financial or management goals, or little incentive to share start-up costs and risk.
The advantages for individuals to cooperate in one business entity include:
- Less administrative burden – one business to market, one tax return, one blog to maintain, etc.
- Less management pressure – more brains in the business.
- More flexibility and shared risk – you can step in for each other if needed.
- Specialization—members can delegate and be responsible for different aspects of the business.
- Purchase power – sharing the upfront investment, with less redundant buying.
- Solidarity, fellowship, combined energy and drive – invaluable assets.
As an alternative to hiring employees, having a group of owners instead means having a team that’s invested in the success of the farm and knows the business well. Owners have less incentive to move on than employees. Ownership brings benefits (such as equity) that make the hard work in start-up phase worthwhile if the business has little to pay in first-year wages. Also – owners don’t have to be paid minimum wage or receive worker’s compensation.
The challenges to managing a business together are that your relationships have to work, you have be well organized, and you have to be willing to make decisions with other people. In the following chapter, we’ve laid out the components of structuring and maintaining a group business. Each of those components is especially critical for a group farm, where members are making a long-term investment and the risk is high.
Worker cooperatives are businesses that are owned and governed by their workers. Decisions are made by consensus or majority vote, and each worker-owner has one vote regardless of their place in the organization or their equity share.
While some are characterized by a “flat” structure, in which all members participate equally, this isn’t essential for a worker co-op. Many worker cooperatives are hierarchical, in that they have managers and employees, have tiered wages, or hire staff, seasonal workers, or outside managers that are not owners. In general, all workers that meet the membership criteria can become members, build equity, and participate in governing the organization.
What are the financial considerations for your group?
- How much capital is each person able to invest?
- What contributions of labor or capital is each person willing and able to commit?
- What are the financial needs of each of your members – if entering an income-generating venture, what do they absolutely need to make from the business?
- What are their financial goals for the business?
And lastly, what does each member consider a “fair” arrangement? Having the above questions answered among you can help your advisor understand your goals and how to reach them. The legal entity you choose may also have an impact on how you structure your finances. Cooperatives, non-profits, and most other types of corporations have requirements for how they are owned and how profits are distributed. Partnerships and LLCs are very flexible and you can arrange your business, how you like; however, most states have default agreements for LLCs and partnerships that apply unless you specify otherwise (and flexibility comes with added responsibility to create clear, sustainable agreements).
Unless you are planning a non-profit organization, having a group business means sharing ownership. Before all else in this process, you should ask yourself the question: do you want to share ownership of whatever you’re planning? Are you prepared to cede some control and listen to the opinions of other group members? Likewise, are you prepared to be accountable to others in sharing risks and benefits? In some cases, it may serve everyone better to maintain private ownership and provide access in other ways if desired (land, equipment, and other resources can be leased, for example). Otherwise, you can proceed to determine a fundamental piece of your shared venture: how will we own it?
Are ownership and membership rights connected ?
Often in business there is a link between how much of the business a member owns and their decision-making ability or their share of profits. The default rules for an LLC, for example, assume that members will split profits according to the percentage of the business they own. In a cooperative, ownership is intentionally disconnected from both ability to make decisions and share of the profits. Each member has equal voting power regardless of how much of the business they own, and profits are distributed based on use, not ownership. Where you stand on this issue and whether or not this is practical for your situation will inform how you arrange your legal and financial agreements.
Allocating Profits and Losses
On what basis will you distribute profits and losses among the members?
A cooperative operates at cost and distributes profits and losses back to the members based on use. Any remaining costs or surplus are passed on to the owners in proportion to how much they’ve worked (worker cooperative), sold (marketing cooperative) or purchased (consumer cooperatives, service and supply).
In a non-profit, workers in the business are employees that receive a salary, and any profit or deficit that is generated stays in the business.
A co-owner of an LLC or partnership is not an employee and therefore does not receive a salary. The owner takes as income the gains of the business, thus profits and income are synonymous in these cases.
It is essential to have an agreement upfront about how one or more members will leave the group, if necessary. Severing a business relationship can be painful on many levels, not least of which is untangling assets where there is no clear agreement on who is entitled to what. A buy-sell agreement includes a few key components:
- It provides the terms for the remaining members to buy out a departing member.
- It specifies what events – such as death, divorce, or disability, or expulsion – would trigger an automatic sale of a member’s share.
- It sets the valuation method for how much each member’s share is worth.
Valuation methods include:
Market value: You could determine a member’s share as their portion of the total market value of the business. The challenge is that the market value of the business is difficult to determine. The members either need to periodically review and agree on a value for their shares, or hire an appraiser. Hiring an outside appraiser is expensive (several thousand dollars, typically), so not the best first choice for reaching and agreement. If no agreed on value is in place when a member needs to leave, this can be a messy process.
Book value: Ownership is tracked in individual capital accounts. These accounts increase with capital contributions to the business plus shares of profits allocated to each member. They decline with distributions taken and any business losses. The capital account balance is their “ book value” equity in the business. This book value is not adjusted for appreciation or sweat equity. Some buy/sell agreements use book value since it is already calculated and not subject to dispute (unless they were not calculated accurately). If a group uses book value, then each member gets out what they have put in. It is also a disincentive to leave, since a member would have to walk away from some potential value. It also makes it more affordable to allow new members to join.
Valuing by Formula: Note that the above arrangement doesn’t account for the increasing value of the business itself, generated through sweat equity. To provide some return for the increased value of the business, a group could set a predetermined formula for valuing each member’s contribution, such as a percentage return per year worked.
Much of the value generated by farm businesses is not easily liquidated. Soil fertility, property improvements, or reputation in the marketplace cannot be sold to pay out a departing member, unless the whole business or property is sold. Since many farm businesses aren’t able to come up with large amounts of capital in any given year, it’s advantageous to set a several-year window of time in which the departing member can be paid back. The remaining members sometimes pay interest on the amount owed.
Groups seeking to operate by cooperative principles can organize as a cooperative corporation. According to the IRS, a cooperative is a business that is member-owned, member-controlled, and generates member benefit.
1 A cooperative is owned by the members, the people that use the business.
- A producer cooperative is controlled by producers who use the business to process, sell, and/or distribute their goods.
- A worker cooperative is controlled by workers who use the cooperative to make their livelihood.
- A consumer cooperative is owned and controlled by the people that use the cooperative to source and purchase needed goods.
2 A cooperative is democratically controlled by its members.
Cooperatives are governed by majority vote or consensus. Most cooperatives are governed as one-member, one vote, regardless of how much any member has invested. The members assemble regularly to vote on major decisions and elect a board of directors to oversee daily activities. Some also hire a manager or management team.
3 A cooperative generates member benefit.
Unlike most corporations, which are designed to bring financial gain to outside stakeholders, cooperatives are founded to provide a particular benefit to those who participate in the business, and must state this purpose in applying for cooperative status. Cooperatives operate at cost, and must distribute any surplus (net profits) back to its members. Each member receives their share of the profits, or patronage dividends, in proportion to how much they’ve used the cooperative’s services. These patronage dividends can be paid out as cash or as additional equity in the cooperative, or some combination of both.
Restrictions and Requirements: Cooperatives, as a type of corporation, have required management practices, including formal processes for electing officers and directors, filling vacancies on the board, holding board and shareholder meetings, keeping meeting minutes, recording board resolutions, keeping records, and filing annual reports. They must also meet the requirements of the state’s cooperative statutes. The formal structure of a cooperative corporation means that the provisions that keep them dedicated to member benefit and democratic management cannot be changed, or written out of their bylaws by future members.
Taxation: Profits that are distributed as patronage dividends are taxed once on each member’s individual tax returns. A certain percentage – usually up to 80% of profits – can be held in the business in the members’ internal accounts for future capital needs. If funds are held within the cooperatives capital reserves, they are taxed as corporate profits. The tax rules for cooperatives vary from state to state.
Organizing a cooperative as an LLC
For some groups, forming a cooperative corporation may not be possible, such as if the group doesn’t meet the minimum number of members required to form a cooperative. Or, the state the group operates in may not have cooperative statutes in place. In those cases, groups can form and LLC with an internal structure adhering to cooperative principles. Cooperatives organized as LLCs, as long as they operate by the one member-one vote rule and distribute profits back to members according to use, can still be designated and taxed as cooperatives by the IRS. However, only cooperative corporations can use the word “cooperative” in their name.
If your group has chosen to organize as a cooperative or as an LLC with cooperative principles, there are a number of support organizations and possibly grant funding to support your formation process.
Cooperative Farmland Holding
Not all groups of farmers who want to “farm together” do so on shared land. Farmers could, for example, each have their own farm property and share labor or equipment, or market cooperatively. But sharing farmland, farm infrastructure and sometimes housing—the real estate components of a farm operation—is a core component for many cooperating farmers.
As with all the other aspects of group farming, decision-making, communication, control and authority are the most important considerations for group landholding. Some of these aspects will be addressed in the specific structure and agreement language you create, but good communication can’t be pinned down in a document. Farmers who farm and hold land together need especially good communication skills, along with the ability to build trust, negotiate differences and manage conflict. Creating a shared vision for a farm property can be a powerful tool to create solidarity and an essential reference in difficult times.
Tenure means “to hold.” Basically, you can hold land by owning it or renting it. These two options will be discussed below. The advantages to shared land tenure can be financial (affordability, leveraging more equity), strategic (shared risk) and psychological (broadened commitment and process).
- Depending on the land acquisition model, shared land tenure could be more affordable. Sharing land may provide a feasible way to enter farming where options are limited.
- Multiple farmers on a large farm property can be a great way to make good use of a former dairy or other large farm whose former use may no longer be viable.
- Farmers who share land may feel a deeper level of commitment to their common endeavor. Whether leasing or owning, the ties that bind farmers to the land and each other are not easily walked away from.
This shared commitment can be a great strength.
- Shared ownership gives the farmer owners the opportunity to build equity, depending on the specifics in the ownership agreement.
- The legal agreements spelling out the terms of shared ownership or tenancy can be complex. Shared agreements may require more “ process.” However, formal structures are essential to address key considerations such as how a farmer enters and exits the group.
- There is potential for increased liability from working together. If someone does something wrong, the whole group could be vulnerable. Having a formal structure that addresses liability for each individual is the best strategy to mitigate exposure for individuals in the group. An LLC is a good structure for this purpose.
What are the stewardship goals, and what practices will the farmers employ? Groups could include land management policies in a shared lease, in the operating documents for a shared entity, or in a contractual agreement between separate parties. policies could include:
- Acceptable or desired crop and animal management practices, such as cover cropping or grazing requirements
- Allowed and prohibited uses and inputs
- Use and maintenance of access roads, field edges, and other ancillary parts of the property
- Trash, recycling, parking, equipment and vehicle storage
Some good sample policies for stewardship can be found on the National Incubator Farm Training Initiative (NIFTI) wiki, which hosts site management protocol for several incubator farms. Holding Ground: A Guide to Northeast Farmland Tenure and Stewardship, available at www.smallfarm.org, has s chapter devoted to stewardship principles and policies.
Who will farm what part of the shared property? How will crop rotation be addressed on shared land? A land assessment is a good first step to understand the carrying capacity of your land and what areas are suitable for what enterprises. A solid land plan can also help prioritize improvements and plan for efficiency. Extension personnel, hired land planners, and the USDA Natural Resources Conservation Service’s soil mapping database are good resources, in addition to your own observations and judgment.
Special attention should be given the land’s limiting factors. A shortage of tillable land or water or limited access to needed utilities and infrastructure might make good starting places to plan shared use. The biggest challenge might be anticipating how each enterprise will change or grow. Groups planning to farm as separate businesses should have business plans that address projected growth that each business can share with the others. While plans are likely to change, it’s important to have some understanding of what your needs will be several years ahead. Holistic Management International offers trainings and materials on land planning, noted in the resource section.
Legal and Social Considerations
Whatever the arrangement, the documents that consummate and sustain the land tenure have to be clearly written. If not drafted by an attorney, they should be reviewed by one. It’s better to err on the side of too much detail than not enough.
- Financial Agreements. Whether leased or owned, initial and ongoing costs need to be thoroughly researched and spelled out for everyone. How are investments and improvements in the property handled?
- Identity and Branding. The public may see the property as one farm, where each of you wants to promote your own business. So, how the businesses relate to the property in your public relations and marketing is an important consideration.
- Entry and Exit . How do farmers join and leave the landholding arrangement? What are causes and process for termination? How are new farmers chosen? Can ownership or lease rights be assigned or transferred?
- Liability is always a major concern for farmland owners—and for landlords. Ask a legal or insurance advisor about how the group should set up liability insurance and minimize risk.
As mentioned above, there are two tenure options: to own or to rent. Within each of these main forks in the road there are several variations. Each has advantages. The best model depends on many factors including the goals and desires of the farming group, what is being leased or purchased, financial feasibility, and logistics. Farmers can co-hold “plain” land, land with farm improvements such as barns, sheds and fencing, a farm that includes housing, or only farmer housing without—or separate from—farmland. A group could purchase farm or residential structures on rented land (see below on ground leases). Regardless of the model you pursue, there are some basic things to consider.
- Be clear on who is in the land holding group. Are all the farmers in it or some of them? Are non-farmers involved? Do non-farmer landholders have a say—or an equal say—in how the land is used? What might be the power relationship between farmers who have a stake in the land and those who don’t?
- What are the legal and financial consequences of a chosen landholding approach? For example, how easy is it to get out of a particular landholding structure if things don’t go well? What might it cost a farmer to exit? Are all the farmers in the group equally prepared to have their names on the title? Be sure to thoroughly investigate the tax implications of the model you choose.
- How will lenders regard your tenure choice? For example, will a lender lend to you for infrastructure if you have a short-term lease? Depending on the arrangement, financing can sometimes be more expensive to obtain if leasing than owning the ground you’re building on.
- What are your—and your group’s—beliefs about the placement of equity? Some people see investing in real estate as an excellent method to grow equity. Others prefer—or need to—invest in other capital assets. If you rent property, your net return to family living is likely to be substantially higher than if you are paying a mortgage and related ownership costs. In that case, you can invest those higher net returns in a retirement account or other investment vehicle.
There are many variations to land leasing. In the resources section of this guide you will find references and links to information about leasing farmland. Regardless of the specific leasing model you select for your group, it’s important to be well informed about lease basics. Look at sample leases and be familiar with what constitutes a good lease.
Ultimately, a tenant farmer group’s vision has to accommodate the landlord. Understand farm leasing from the landlord’s point of view. The landlord is a landowner who cares a lot about the property, how it is cared for and what happens to it. A landowner who makes land available for a farming tenant is entering into a relationship and taking on a certain amount of risk. Owners of farm properties vary as to their knowledge of farming and their desire to be involved or informed.
Taking on a farmer group as a tenant, or multiple farmer tenants on a property adds additional elements of complexity and risk for the landowner. Coming to the table with a clear vision and objectives for how the land will be treated and used will engender confidence and trust. Designating a point person to communicate with the landlord also helps streamline communications.
Scenario 1: Separate Leases
In this scenario each of the farmers in the group enters into his or her own lease, and each has control over and responsibility for his/her own leasehold. The farmers may cooperate by forming a business together or for sharing equipment or markets. This option allows for relatively simple entry and exit for each farmer, although the group might be set up such that the collective has some control over future use of that leasehold. For example, the landlord could agree (in writing) that if one farmer terminates, the other farmers have a say (along with the landlord) in what happens with that vacated parcel, or who gets to lease it next.
It would make good sense, particularly in relating to the landlord, to have a standard lease template. Establishing leasehold boundaries, with attention to any shared spaces and use of common ways, is critical. Good leases make good neighbors. Lastly, how will communication with the landlord be handled? You don’t want six farmers calling the landlord about a broken fence, and neither does the landlord.
Scenario 2: Single lease
In this scenario a group of farmers holds a single lease with a landlord. In this case, there is one tenant, which is an advantage from the landlord’s point of view.
While it’s possible for a group of farmers to jointly sign a lease without forming an entity for that purpose, this is not recommended. The better option is to form a legal entity, such as an LLC, to lease the land. This entity would then execute a sublease with a group farm business or separate subleases with individual farm businesses. The farmers in the land leasing entity would typically—but not necessarily—be the same group of farmers as the group or individual farm businesses. This scenario may seem like an extra step, but the advantage is that there is a firewall between the risks associated with holding the land and those connected to the business.
An entity might have more than one lease with one or more landlords. This option might play out if, for example, a landlord cannot offer the same lease terms for all portions of the property or if there are separate leases for land, buildings and/or housing.
Scenario 3: Ground lease
In a ground lease, the tenant has a long-term lease for the land but owns some or all the structures on it. For example, a group of farmers would lease land from a land trust. They would purchase the house and barn on the property. Or they would have permission to build a house or barn with their own funds that they would then own. In this scenario, the farmer tenants build equity through their ownership of the structure(s), which they can sell back to the landowner or to the next tenant.
By purchasing land, you hold all the rights associated with ownership, subject to applicable laws and regulations. As with owning a business together, clear policies for governance, authority, and effective decision making are key to success.
The chosen method of holding title to land affects each owner’s rights to transfer the property and to use it as collateral. The ownership structure also determines what will happen to the property when one owner dies or leaves and whether the property can be used to satisfy a debt or judgment. Regardless of entity chosen, the group will need a detailed agreement that specifies the rules for entry and exit, management, and decision-making.
If the group does not form an entity to hold title to the land, the owners are considered tenants in common. Tenants in common each own a fraction of the entire property (not a specific part of it) and each has an equal right to the possession and use of the property (Note that in this case, tenant means a co-owner, not a renter.) Each tenant in common can sell, convey, mortgage or transfer that interest. Tenancy in common is usually used for married couples or for a small family business. It is not recommended for an unrelated group because it provides no liability protection and has other risk factors.
A better choice would be to form an entity to own the land, such as an LLC. For all the reasons mentioned earlier in this guide, an LLC has advantages as a legal entity. Unlike tenants in common, the ownership portions (interest) within an LLC could be equal or unequal. For example, two farmers could contribute more and therefore own a larger percent of the property. The LLC’s operating agreement would specify the rules for entry and exit, management, decision-making, allocation of expenses and other details of ownership. The LLC that owns the land could lease to the group farm business, or to separate businesses, just as a landlord would as described above. An LLC could also other members outside the farmer group as owners, such as investors or community members. The agreement will specify classes of members; which are silent versus who makes decisions.
Separating ownership of the land and the business provides significant advantages in minimizing risk. This makes it possible to transition a member in or out of the business without requiring buying in or out of the property. If acquiring land through financing, it frees the business from carrying a large debt – which again, can make it easier to transition members in or out of the business. It also provides protection for the landowners, since the land can’t then be seized to pay debts if the business goes under. It allows for different rules to apply for business operations and landownership. For example, the business could be owned equally and governed by consensus, while the land is not. The landowning group could be a few of, but not all of the farming group, or it could include friends, family, or supporters. In other words, having separate entities for land ownership and business operations frees the group to be more flexible with their arrangements, makes transitions easier, and builds in protection for both business and landowners should either fall apart. The land owning entity would then lease to the business – even if the land owning entity and the business consist of the same people.
The long-term commitment of owning land together, combined with the relatively complex legal and social considerations, make group land ownership a significant undertaking. Owning and leasing each have their own potential benefits and challenges, which a group can weigh for itself. Leasing may be a more accessible option for groups just starting out and wanting to test their relationships before committing to land purchase.
Great strides have been taken in the past decade toward developing new models for land affordability and accessibility for farmers. Best practices in group land purchase have yet to be fully explored or documented. However, many of the considerations involved are not unique to farming or group purchasing, and should be within the domain of a good lawyer, particularly those with backgrounds in farm transfer or cooperative businesses.