Leveraging community financing for farm and farmland protection

The project helped stakeholders understand the complex issues involved with IPAs and come up with a plan to address barriers to implementation. IPAs benefit the conservation community through the unique structuring of payments to the landowner in return for protecting their land. As opposed to cash payments, which require full payment of principal to landowners at the time of settlement, or (regular) installment sales, where principal payments are typically spaced out over only a couple years, IPAs defer the payment of principal until the end of a longer term, usually 10 to 30 years, giving the conservation community more time to pay off the purchase price. Rather than issue general obligation bonds to finance the principal payment, which requires state and local government entities pay interest to purchasers of the bonds because they are borrowing from these purchasers to pay off debt (thereby increasing the cost of the transaction), IPAs instead utilize U.S. Treasury Securities to finance the principal amount. Specifically, there is a type of Treasury security called STRIPS, also known as Zero Coupon Bonds, which do not pay periodic interest (coupon) to purchasers, but instead pay a lump sum upon their maturity, hence the term “Zero Coupon.” Because purchasers of Zeros--in this context, state and local government entities--do not receive payment until their investment matures in 10 to 30 years, Zeros can be purchased at a deep discount from their face value. The longer the maturity, the deeper the discount, allowing Zeros to be purchased at a fraction of the cost of other types of bonds. By reducing the initial costs by half, purchasing Zeros allows an entity to pay for exponentially more acquisitions in a given fiscal year with the same amount of funding, which helps counteract land escalation, a major impediment to reaching preserved acreage goals. Although landowners agree to defer receipt of principal until the Zeros mature, they are paid semi-annual interest payments by state and local government entities until the maturity date. Because an IPA is considered a state or local government bond, the interest paid to landowners is exempt from federal and usually state and local income taxes, depending on the locale. The commitment to pay both principal and interest to landowners is backed by the full faith and credit of the state or local government entities, just as the commitment to pay the full face amount of the Zeros purchased by the these entities (with financial assistance from land trusts if applicable) is backed by the full faith and credit of the federal government. Just as the concept of leveraging additional dollars to consummate multiple purchases within a given year is attractive to the conservation community, the concept of earning tax-free interest is attractive to landowners, particularly when combined with the other tax benefits of IPA. Because the receipt of principal is deferred until a future date, capital gains taxes may be deferred. This results in a higher annual interest payment, because the IPA interest payments are based on the entire principal amount throughout the period of the IPA. The annual return is not reduced by the amount of annual capital gains taxes that would otherwise be due on a traditional installment purchase. Conversely, cash easement payments do not allow for a deferral of capital gains taxes, which results in landowners retaining a smaller portion of the original purchase price. Aside from income tax and capital gains tax considerations, the other significant tax benefit associated with IPAs is the potential for claiming a charitable contribution for the purposes of receiving a federal tax deduction on any difference between the appraised value and what the landowner accepted as payment. Other benefits to landowners include the ability to leave the IPA to their heirs, or securitizing it before maturity if access to principal is desired before then. In situations where some access to cash is necessary in order to pay down existing mortgages or purchase farm equipment, a limited amount of cash may be paid by the conservation community at the time of settlement, with the remainder of the purchase price subject to the IPA. And of course one of the major advantages to landowners with IPAs is the ability to receive an offer when one might not otherwise exist due to limited (cash) funding. In summary, the key accomplishment of this project was to confirm with the entire community of farmland preservation stakeholders in New Hampshire that a carefully structured program of IPA financed conservation projects would assist all stakeholders in carrying out their work and, with supporting legislation, would be a feasible approach in New Hampshire. This consensus has created a commitment to further work to establish the legal and administrative infrastructure needed for on-the-ground IPA program implementation. Going forward, these barriers to implementation in NH need to be addressed: Providing for Debt Service - While Zero Coupon Bonds purchased today are used to finance the principal amount, enough funds must be available in future years to cover the interest payments, which requires a significant (political and financial) commitment to land conservation, as well as careful financial planning on the part of the conservation community. Identifying a lead agency – The IPA concept could be implemented at the state, municipal, or even a regional level, or some combination. There are obvious administrative advantages to a higher level implementation, but there may be political advantages to operating at a lower level. Within the state, there are several agencies that could be tapped to administer the program, or a new agency could be created. The advantages and disadvantages of each approach must be weighed and an optimal approach identified. Research and draft enabling legislation - State and local government entities currently do not have the authority to engage in IPAs. A considerable amount of effort must be dedicated to researching legal parameters prior to implementing a program. This effort must take the above considerations on agency leadership into account. Paying for Transaction Costs - Ongoing costs are part of the equation in administering an IPA Program, particularly in finding qualified bond counsel and a financial advisor well-versed in the technicalities of IPA transactions. Farmer education and financial analysis. Farm families will need financial and easement counseling in order to make an IPA decision.