Transition Toolkit – Stage 2

Owning land remains a core goal for many entering farmers. Some may be able to purchase land with family help, through off-farm income, or as a group. For many current farmer-landholders, selling the land is a key pillar of their retirement planning. If the intention is to transfer the land to the entering farmer, whether now or in the future, there are several approaches that can meet the needs of both parties. A variety of options are available for mortgage financing, and your lawyer and financial advisors can help you explore and access those options.

SELLING BELOW MARKET VALUE: Current farmers may decide to sell the land at full market value, or below market value, to the entering farmer(s), depending on financial needs. If you are thinking about reducing the sale price of your land, there are some important considerations:

If the land is sold below market value to an arm’s length party (e.g. not a family member), the sale must generally be reported at market value for income tax purposes.
If the proceeds reported on a tax return are significantly less than market value, financial penalties could apply.
Where certain conditions are met, land that is Qualified Farm Property may be sold to certain family members for less than market value consideration, with the income tax being calculated based on this lower number.
The purchaser will be liable for Property Transfer Tax based on Fair Market Value (regardless of the sale price) unless a family farm exemption provides relief.

PRIVATE LENDING FOR MORTGAGES: If you need to sell your land at market value but don’t have immediate need for a large lump sum payment, you may consider owner financing, also known as a vendor take-back mortgage (VTB). A VTB is a type of mortgage in which the seller offers to lend funds to the buyer to help facilitate the purchase of the property. The seller is then paid a percentage of the sale price over time with interest, which can make the upfront cost more manageable and flexible for an entering farmer.

Seeking private investors from your community is another form of alternative mortgage financing. That could be through private loans, or an arms-length mortgage through a self-directed RRSP, where a person can essentially lend their RRSP to an entering farmer who is not directly related to them as a mortgage investment. A limited number of trust companies participate in self-directed RRSPs, such as Alberta-based Olympia Trust. Before pursuing any of these financing commitments, it is vital that you contact legal and accounting professionals to ensure your plan complies with all relevant laws and regulations.

CONSIDERATIONS FOR VENDOR TAKE-BACK MORTGAGE:

This path takes a lot of dedication on the part of the landholder. While private mortgages aren’t uncommon, many accountants may advise against this type of lending relationship.
Entering farmers may qualify for a portion of the cost of the land and a vendor take-back mortgage could be used to cover the remaining portion.
A VTB often represents a secondary lien on the property, as most buyers will have a primary source of funding other than the seller.
Where the purchase price has not been paid in full, an income tax deferral may be available on the sale, subject to certain conditions.
The financial complexity of this type of agreement means it is especially important for each party to consult with an accountant, lawyer and possibly a property assessment agent to facilitate a fair and lawful transaction.
Work with a mortgage specialist to define terms tailored to your situation.

ASSESS: IS A VTB THE RIGHT FIT?

Entering farmer has the financial capacity to purchase land and repay private loans but may not qualify for a traditional mortgage. Off-farm income can reduce risk.
Before committing to a private loan, including a vendor take-back mortgage, all parties should have a clear understanding of the entering farmer’s finances and plan to pay off the loan.
The current farmer knows the farm business well and has confidence that it has the ability to generate enough income to pay the mortgage.
For a vendor take-back mortgage, the current farmer doesn’t need all the money from the sale of the land in one lump sum, and may not be counting on the transition to provide all the funds for retirement.
A vendor take-back mortgage is a serious commitment to an ongoing financial relationship between the current and entering farmer, and requires significant trust between parties.
Parties have a willingness to engage in open communication around potential risk factors, including what happens if the financial picture changes for either party.

CO-OWNERSHIP: Pooling resources to buy land with other farmers is one way that entering farmers can become landholders despite the high cost of real estate. This section looks at individuals co-owning land together. Co-owning a farm is a big commitment – both financially and personally – but there are many benefits: people power, access to capital, and shared workload leading to better work/life balance. Establishing a legal co-ownership agreement provides clarity about the rights and obligations of the co-owners and protects everyone in case of disputes. There are different ways of structuring co-ownership of land, including joint tenants, tenants-in-common, and incorporation. Incorporation means the land would be held by a corporation, with the individuals as shareholders. This can provide a clear ownership structure with a shareholder’s agreement that covers exit strategies. Stage 3 addresses incorporation in detail.

Joint tenants and tenants-in-common both mean that the individual owners are listed on the land title. A key difference is that if a tenants-in-common co-owner dies, the ownership does not automatically go to other owners; rather, that person’s share of property becomes part of their personal estate and can be transferred to their heirs. If a joint tenant co-owner dies, surviving co-owners inherit the deceased’s share.

CONSIDERATIONS FOR CO-OWNERSHIP:

Decision Making Process: How will decisions be made among the partners? How often will the co-owners meet to discuss and evaluate agreements?
Land Use Plans: These can be a living document and be amended as time passes, but it is important that everyone be on the same page about what specific activities will be happening in which areas of the property. For example, what farm activities will each partner be focusing on? What structures can be built and who will be using and maintaining them? What shared systems are necessary for success (e.g. water usage, housing, on farm marketing, etc.)?
Stewardship: What are the shared principles on land management and practices that the group will honour?
Dispute Resolution: Conflict will absolutely happen – the Communication section of this toolkit has tips for navigating tough conversations. Be intentional about making time for one another even amidst the chaos of starting a farm. One farmer we spoke with recommended hiring a mediator to help set up the co-ownership agreement.
Finances: Be persistent when approaching banks for financing. Some mortgage brokers may deem a shared ownership agreement as risky, so having clear plans and willingness to go through a long process with lenders is necessary.
Transfer of Assets: Is this an outright sale, or a more gradual transfer of assets? If the current farmer is considering adding the entering farmer to the title, talking to a lawyer is essential. Risks involved in joint tenancy include: one party being able to force a sale or otherwise put the ownership of the property at risk, tax implications, and the current farmer’s heirs potentially being able to contest the change in title.
Exit Strategy: What is the process if one individual wants to sell their share in the land? Do the other partners buy them out? Would a new partner be found? How? On what timeline? What would qualify a new land partner?

ASSESS: IS CO-OWNING THE RIGHT FIT?

Does each partner have the financial capacity to maintain the mortgage payments?
Do you share a common desire to live in community? What does that look like to each person individually?
Do you have clear goals? Are you willing to be honest about priorities and plans?
What experience do you have working collaboratively and are you committed to developing the skills to maintain a strong working relationship?
Are your values and goals in alignment?

Read Case Stories:

A co-operative (co-op) is a type of business that is member-owned, and democratically managed. Co-ops are established and run by their owner-members, operating on the idea that people can work together to meet their shared goals and needs. Co-ops pool the resources of members to help the collective achieve goals they would not necessarily have been able to achieve on their own. Co-ops are different from other types of businesses in two main ways:

The co-operative model is values-based, and all co-ops align themselves to a set of internationally agreed upon values and principles: self-help, self-responsibility, democracy, equality, equity, and solidarity.

A co-op is distinguished from other businesses in that who benefits from the activities of the co-op is ingrained in the structure. Where typical businesses operate to generate a profit for a few shareholders, co-op members all benefit from the success of the business. Furthermore, co-op members are all equal decision-makers, with a one member/one vote policy, rather than one share/one vote, which ensures a co-op acts in its members’ best interests. In a producers’ co-op, for example, farmers own the co-op and will always have control over and benefit from the co-op’s activities.

Collaboration in farming is highly valued not only for sharing the farm work, but also for sharing the financial burden in accessing land, equipment and infrastructure with the pooled resources of a group. The flip side is the work required by members to build and maintain strong interpersonal relationships that can navigate differences of opinion and achieve consensus. Members of a co-op should be as invested in the people and process as much as the project.

ASSESS: IS A CO-OP THE RIGHT FIT?

Know who you are working with: start with small collaborative projects and build relationships.
Commit to working collectively. Ask yourself:
- Why are you choosing to work with each other?
- How much experience do you have working collectively?
- Do you share the same values and vision?
- Do you share a commitment to democratic principles?
If the social and democratic element of your team is ready to work together:
- Do you have the skills and interest in doing the work to set up a co-op?
- What skills and resources does the group already have?
- What skills are needed, and how will those skills be developed or brought in through a third-party?
Know from the outset how the co-op would manage disbanding if the members decided to go their separate ways.

It is highly advisable to work with a professional co-op developer to support the complex process of establishing a co-op. BC Cooperatives Association, Co-op Creator, Vancity, Cooperatives First, and other co-operative organizations have resources to support you in getting up and running.

CO-OPERATIVES AS A TRANSITION MODEL

As a transition model, co-operatives can allow for the purchase of land and farm businesses despite high land costs, reflect the community-oriented values of the current farmer(s), and provide a structure for continued succession in the future. Transitioning an existing farm business into a co-operative could mean that the co-op owns the farm business, the land, or both.

A farm co-op can have long-term secure land access through purchasing land via financing from members or community fundraising. However, it is also possible for a co-op to farm the land without owning the land. In cases where the land will be held by an entity other than the farmer, such as the current farmer’s heirs, a community organization or a trust, a co-op can manage and farm the land through a long-term lease.

Co-operatives have a clearly outlined structure for when individuals want to join or leave. Co-operative farms such as Fraser Common Farm have been able to onboard new farmers as the elder generation steps back from the farm business, and the co-operative structure allows for all parties to meet their needs and contribute to the farm according to skills and capacity.

There are two main mechanisms for using a co-operative in your transition plan:

1. CURRENT FARMER TURNS THE FARM INTO A CO-OP

A current farmer can transition a farm business (sole proprietorship/corporation) into a co-operative by inviting others to join as members. This model provides the current farmer the opportunity to recruit entering farmers and cultivate relationships to ensure the farm continues into the future. In this scenario, the current farmer will be more involved with mentoring, and the transition will likely unfold over many years of cultivating relationships.

ASSESS: IS IT THE RIGHT FIT?

Entering farmers may not immediately have the resources to buy the land or business.
Current farmers want to continue to be involved for the foreseeable future, and have the time and energy.
Current farmers don’t have any immediate financial needs and want to continue living and working on the farm.
Current farmers are prepared to do the work of recruiting and cultivating co-op members, with the knowledge that it could take time, potentially years to develop.
Current farmers are eager to work collaboratively with entering farmers to plan for the future and build the co-op.
All parties are aligned with co-operative values.

2. ENTERING FARMERS FORM A NEW CO-OP

A new co-op group can form with the goal of buying a farm together from a current farmer. Buying land cooperatively may allow entering farmers to access land that would otherwise be out of the price range of an individual. In this scenario, the current farmer may or may not provide ongoing mentorship to the entering farmers.

ASSESS: IS IT THE RIGHT FIT?

Employees/interested parties can pool resources to purchase the land and business.
The entering farmers want to own the land.
The current farmers need the financial benefit of a sale to fund their retirement plans and provide for their heirs.
The current farmers want an “exit strategy” that doesn’t require them to stay on the farm or be involved for years to come.
All parties are aligned with co-operative values.

CONSIDERATIONS FOR OBTAINING FINANCING AS A CO-OPERATIVE:

To purchase land, the co-op needs to make a down payment pooled from the members.
The co-op needs to demonstrate the ability to make loan/mortgage payments, and should have a realistic business plan with cash flow projections.
Financial institutions usually require three years of financial history for a business to qualify for a mortgage; this is equally true for co-ops. A lender will usually seek personal guarantees from each member. These guarantees would be reviewed whenever someone left or joined the co-op to requalify, and there is no guarantee of requalification.
Once the co-operative has been running for three or more years and is operating successfully, it is possible to remove the personal guarantees and transfer the liability to the co-operative itself.
It’s important to find a lender that understands co-operatives, and won’t impose added barriers to accessing resources. In general, credit unions, also known as financial services co-operatives, are a good place to start.
Vancity has co-op specific lending available, such as a loan for those needing to finance their membership share in a worker’s co-op and microfinancing for start-up co-ops.
Other financing sources include Futurpreneur, Canadian Co-operative Investment Fund, and worker co-ops, e.g. the Canadian Worker Co-op Federations’ Tenacity Works Fund.
Lenders will be looking closely at:
The co-op’s Memorandum of Association and Rules of Association; particular attention will be paid to the purposes of the co-operative, the membership share and the financial commitment members are making to their co-operative, and opportunities for members to participate in the governance of the enterprise;
The experience of the members, including whether they are farm school graduates and/or have farming experience, and any skill gaps and plans to fill these; and,
A business plan to help assess the farm’s capacity for financial viability.

Read Case Story:

C ase Story: Turning A Farm Into a Co-Op – Horse Lake Farm Co-Operative

A current farmer can get a measure of assurance that their farmland will be used for agricultural purposes into the future by transferring ownership to a trust, whether by sale, gift, or will. Holding land in trust can provide security and stability to a farm business and entering farmer without the entering farmer assuming ownership of the land. A trust is legally required to use the land according to the rules set out when the trust is established.

A trust is a legal arrangement where one party (the settlor, in this case the current farmer/landholder) transfers property to a second party (the trustee) for the benefit of someone (the beneficiary, in this case the entering farmer, and/or the farm business). Under this arrangement, the trustee has legal ownership over the property, while the beneficiary is the “beneficial owner.” A land trust is essentially a not-for-profit trust established for the purpose of holding land.

TRUST CONSIDERATIONS:

A trust can be non-charitable, or charitable, with different implications.
A trust can be created to hold a specific property, or the property can be transferred to an existing trust whose mandate matches the vision and mission of the farm owner.
Donating land isn’t required to put it into trust, though for current farmers whose primary vision is to preserve the land for agriculture, and whose financial needs do not require profit from a sale, donating land to a trust can be an excellent way to to meet the current farmer’s goals.
A trust can include provisions for the current farmer’s personal vision around continued access to the land for themselves and their family.
Putting farmland into a trust usually doesn’t include the farm’s machinery, equipment, livestock, and inventory, unless specified.
When a farm business is incorporated and shares are transferred to a trust, the trust effectively owns all the farm’s assets, including land, machinery, equipment, livestock, and inventory.

TAX CONSIDERATIONS:

A trust is treated as a distinct individual for taxation purposes.
Transferring ownership to a trust with charitable status may provide tax benefits.
Putting land into a trust can include provisions for the current owners to continue to live on or use the farmland, through a lease or life estate.
Rules governing non-charitable trusts require a “disposition” of trust every 21 years, which will trigger capital gains taxes. Charitable trusts are tax-exempt.
It’s important to include a “gift-over,” which outlines what happens if the beneficiary dies.
Considerations around probate fees, capital gains, and other tax law surrounding trusts are complex and require the expertise of a lawyer well versed in trusts and tax law.

ASSESS: IS A TRUST THE RIGHT FIT?

The landholder wants to prioritize farmland preservation over financial benefit.
There is an existing community organization with the capacity to hold land in trust.
There is widespread community support to allow for potential fundraising.
The entering farmers don’t need or want to own land, or can’t afford to buy land.

Read Case Stories:

KNOWLEDGE & SKILLS ASSESSMENT
TESTING THE MODELS Sample PDF | Blank PDF (we recommend downloading the sample PDF first to review instructions)

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Transition
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STAGE 2: Assessing Feasibility

Transition to Private Ownership