The U.S. Department of Agriculture’s Farm Service Agency (FSA) recently announced provisions of a new lending program implemented to guarantee repayment of loans between private parties for the purchase of qualified farmland real estate, when traditional lending institutions were not a viable option for buyers and sellers contemplating transfer of agricultural land.

Titled, “The Land Contract Guarantee Program,” it was drafted and adopted in a bi-partisan effort as a key provision of the 2008 Farm Bill passed by the United States Congress, and designated to be made available in January, 2012.

The fundamental purpose behind the creation of the program is to provide a valuable alternative for transfer of farm real estate to beginning or socially disadvantaged farmers, to help ensure the future viability of family farms. Besides beginning farmers, who are individuals and families that have experience in agriculture whether by growing up on family farms, or by managing farms and production of crops and livestock, participants in the Land Contract Guarantee Program include minorities and women who have been involved in agricultural concerns for at least three of the past ten years.            

The program does not provide direct cash financing for buyers, but instead guarantees repayment to sellers by utilizing one of two plans offered.

Farm Loan Manager Lisa Ruff of Yakima FSA explained, “Sellers may request buyers, through Farm Service Agency, that repayment of loans agreed to under private contract for the purchase of farmland be guaranteed up to the amount of three amortized annual installments, plus the cost of any related taxes and insurance or, alternatively, that FSA obligates to repay 90 percent of the outstanding principal balance owed under the purchase and sale contract.”

FSA Farm Loan Chief Melissa Cummins says, “Purchasing farmland is one of the biggest obstacles facing beginning farmers and minority customers and this program provides them with a new option. The guarantee provides an incentive to sell to individuals in those groups as it reduces the financial risk to the seller due to buyer default on contract payments.

Guarantees can be used for financing the purchase of a farm with a purchase price up to $500,000. The buyer is required to pay a down payment of five percent of the purchase price, plan to operate the farm, and be able to project the ability to make the land contract payments.”

To qualify for assistance, buyers must meet eligibility requirements similar to those for the Guaranteed and Direct Farm Ownership Programs. Buyers must be owner/operators of the land contract farm at the time the contract is complete. Buyers must also show a feasible business plan of operation. The guarantee period is for up to 10 years.

The interest rate is fixed during the guarantee period, and is not to exceed the FSA Direct Farm Ownership rate in effect at the time the guarantee is issued plus 3 percent. The current direct farm ownership rate interest rate is 3.375 percent, but the rate may be renegotiated after the guarantee is terminated.

The newly introduced Land Contract Guarantee Program has not generated many applications so far, but the program is in its early stages, is a permanent program without burdensome qualifications imposed, and appears potentially to be a very useful tool in supporting agricultural enterprises for families and minorities as well as beginning farmers.

Additional information including a complete list of borrower and seller eligibility criteria and application material can be obtained at any FSA office or through the FSA website at www.fsa.usda.gov.