Leveraging community financing for farm and farmland protection

Final Report for CNE08-056

Project Type: Sustainable Community Innovation
Funds awarded in 2008: $10,000.00
Projected End Date: 12/31/2010
Region: Northeast
State: Maryland
Project Leader:
Dr. Lynda Brushett
Cooperative Development I
Co-Leaders:
Michael Speltz
Society for Protection of
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Project Information

Summary:

Farmers, agricultural educators and service providers, farm and conservation organizations, legislators, community leaders, municipalities, land trusts and other easement holding and easement funding organizations (stakeholders) explored the feasibility of using Installment Purchase Agreements (IPAs) funded with Zero Coupon Bonds as an additional purchasing mechanism to purchase easements on agricultural land and a way to stretch public land conservation dollars in New Hampshire as is done in Maryland and Virginia.

As summarized by the American Farmland Trust:
* An installment purchase agreement (IPA) is an innovative payment plan that spreads out payments so that landowners receive semi-annual, tax-exempt interest over a term of years (typically 20 to 30). The principal is due at the end of the contract term. Landowners can sell or securitize IPA contracts to realize the outstanding principal.

* Jurisdictions can purchase zero-coupon bonds to cover the final balloon payments. “Zeroes” do not generate regular interest income. Instead, they yield a lump sum when the bond matures. Because zero coupon bonds cost a fraction of their face value, the public entity is able to stretch available funds to cover more purchases. “Zeroes” with a face value equal to the purchase price are usually purchased the day before settlement.

Because acquiring development rights is expensive in New Hampshire, because state and local communities have limited funds with which to purchase conservation easements, and because the mechanism can provide tax and financial benefits to farmers, IPAs have the potential to provide a significant means of leveraging precious financial resources for farm and farmland protection for the mutual benefit of farmers and communities.

The project began with an in-depth study to assess 1) regulatory, funding, financial and stakeholder concerns regarding the use of IPA’s in NH, followed by 2) recommendations for addressing barriers so that IPAs could be a tool for conserving NH farms and 3) a NH specific IPA proposal. Stakeholder meetings reviewed study findings, explored how IPAs could be used and financed, along with benefits and drawbacks. Participants acknowledged, that while not suited to every farm situation, the tool had important advantages for some landowners and could extend limited conservation dollars to conserve more land.

Because the regulatory issues raised in the study could not be addressed without legislative action and related preparatory legal work, the project was not able to achieve its final objective: At least one farmer and one town will be working together to implement NH’s first IPA. The project did develop consensus to further explore IPA program development and administration as IPAs can significantly leverage precious financial resources for farm and farmland protection for the mutual benefit of farmers and communities. Farmer education and design of a decision-making tool to weigh the IPA option per family circumstances and with other alternatives would be a key part of the program.

Project Objectives:

Because acquiring development rights is expensive in New Hampshire, because state and local communities have limited funds with which to purchase conservation easements, and because the mechanism can provide tax and financial benefits to farmers, IPAs have the potential to provide a significant means of leveraging precious financial resources for farm and farmland protection for the mutual benefit of farmers and communities. The goal of the project was to determine whether and how the mechanism would work in NH and whether any institutional or other changes would have to occur before the mechanism could be operational.

The project began with these objectives/performance targets: At the end of the project 1) regulatory, funding, financial and other stakeholder concerns will be known and a plan will be operational for overcoming any barriers; 2) stakeholders will understand IPAs, how they work for all stakeholders, as well as benefits and drawbacks; 3) all issues associated with using zero coupon bonds to fund IPAs will be noted and solved; and 4) at least one farmer and one town will be working together to implement NH’s first IPA; 5) the project will provide a model for the other New England states to adopt for their farm viability programs.

Milestones
a. Stakeholders participate in IPA discussions to learn about the program, consider how it would impact them and express concerns and other feedback.

Accomplished. Stakeholders provided the research question and issues, reviewed findings, discussed implications, raised additional implementation needs, and provided input to next steps.

b. All issues associated with using zero coupon bonds to fund IPAs will be noted and solved.

Partly accomplished: All issues were noted, plans to address were made, though several key issues relative to bonding authority and principal repayment timeframes will take legislative action to solve. (New Hampshire municipalities enjoy only those powers invested in them by the State.) In addition, compatibility of using long term (15 to 20 year) IPA’s with the Farm and Ranchland Protection Program (5 year) needs to be worked out. The project has set in motion actions to resolve outstanding barriers.

c. Project collaborators develop an IPA program that fits NH needs, statutes and governance structures.

Partly accomplished: An NH IPA program was specified but needs legislative action to implement. Collaborators have developed a set of issues that need to be addressed before implementation is possible

d. Collaborators share IPA program information through networks.
Accomplished. IPA information continues to be disseminated though agricultural, municipal, state and conservation networks.

Barriers to completion: In order to use IPA’s in NH, legislative changes to facilitate bonding, debt service, and principal and interest payments to landowners have to be researched, drafted and approved. Project resources and timeframe were not sufficient to allow this specialized work to occur. Project collaborators are preparing a phase two of the project to support implementation.

Introduction:

It is well documented that New Hampshire has been the fastest growing state in the Northeast for the last four decades. (1) Unfortunately, this growth has occurred primarily in the areas of the State that contain its best agricultural soils, which are inherently very limited. (2) Numerous factors have contributed to the loss of prime and important farmland in New Hampshire, particularly its adjacency to several major metropolitan regions (3), the high quality of life and favorable tax structure that attract commuters, second-home buyers, and retirees, zoning ordinances that are largely ineffective in reducing residential sprawl, and lastly, limited funding to offer landowners as an incentive to preserve their land rather than develop it.

Although New Hampshire perennially has one of the highest median household incomes in the country (4) along with one of the lowest income-to-poverty ratios of any state,(5) government funding for land conservation has been limited. Undoubtedly, this is due in large part to its tax structure, which results in one of the lowest tax burdens in the nation (6) and is the state determined to have the highest overall economic and personal freedom in a recent study published by George Mason University. (7 ) However, in its Grading the States report published by The Pew Charitable Trusts and Governing Magazine, New Hampshire earned a recent mark of D+, down from its C mark in 2005, for government performance. (8) And in its report assessing states’ effectiveness at open space protection, the Sierra Club ranked New Hampshire 43rd out of the 50 states. (9) Limited public funding for land protection has resulted in New Hampshire having the lowest per capita expenditures on farmland preservation in the Northeast and consequently the third lowest percentage of farmland protected in the region (10).

Because public funding in New Hampshire has been difficult to procure, land conservation often is an eleventh-hour proposition, where a threatened property is identified and a town conservation commission, state agency, and/or land trust must scramble to come up with the necessary funds to protect it--a formidable task, particularly when the areas under the most intense development pressure are characterized by high land values. Exacerbating the problem is the reliance on cash as the preferred payment method, requiring full payment of the purchase price at the settlement table.

The project addressed how conservation transactions through an Installment Purchase Agreement (IPA) can be more financially beneficial not only to the conservation community but also to landowners along with the regulatory and other barriers to implementation in NH.

1 http://www.spnhf.org/research/papers/nhcl2005es_hi.pdf
2 http://www.farmland.org/resources/fote/states/map_newhampshire.asp
3 http://www.census.gov/geo/www/maps/msa_maps2007/msa2007_previews_html/cbsa_us_wall_1107.html
4 http://factfinder.census.gov/servlet/GRTTable?_bm=y&-_box_head_nbr=R1901&-ds_name=ACS_2007_1YR_G00_&-_lang=en&-
format=US-30&-CONTEXT=grt; http://www.census.gov/hhes/www/income/income04/stategrid04.xls
5 http://www.census.gov/prod/2008pubs/acs-09.pdf
6 http://www.taxfoundation.org/taxdata/show/336.html
7 http://www.mercatus.org/uploadedFiles/Mercatus/Publications/Freedom%20in%20the%2050%20States.pdf
8 http://www.governing.com/gpp/2008/nh.htm; http://www.pewcenteronthestates.org/report_detail.aspx?id=32742
9 http://www.sierraclub.org/sprawl/report99/openspace.asp
10 Deborah Bowers, ed., Farmland Preservation Report (Street, MD: Bowers Publishing, Inc.), January 2007.

 

Cooperators

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Research

Materials and methods:

The project assembled a ‘think tank’ committee of stakeholders: farmers, agricultural educators and service providers, farm and conservation organizations, legislators and community leaders to develop the project’s research agenda by reaching out to these groups:
Society for the Protection of New Hampshire Forest
NH Coalition for Sustaining Agriculture
NH Land Conservation Coalition
NH Association of Conservation Commissions
UNH Cooperative Extension
American Farmland Trust
NH Farm Bureau
NOFA NH
Local Government Center
Upper Valley Land Trust
State Legislators
Land and Community Heritage Investment Program

Natural Resources Conservation Service
NH Department of Agriculture, Markets and Foods
NH Agricultural Commissions

The ten member stakeholder committee met at the Society for the Protection of NH Forests in Concord NH January 2009 to review and decide on research questions: What did farmers, land trusts, communities ad others need to know before IPAs could be introduced in NH. The land conservation consultant who would undertake the study participated by video conference.

The consultant was selected for his experience in the use of IPA’s and his familiarity with NH agriculture and conservation programs. Based on the research agenda, he investigated the opportunities, benefits, drawbacks and barriers to adding IPAs to NH’s farmland conservation options, prepared a comprehensive report for review by the stakeholder committee members in June 2009 and July 2010. Periodic e-communication to stakeholders through three key networks, NH Coalition for Sustaining Agriculture, NH Agriculture Commissions and the NH Land Coalition, along with e-communication by the groups within those networks (many of whom are listed above) kept people appraised and aware of the project.

After making appropriate changes and a legal review the consultant presented findings for broad stakeholder input on January 26, 2011 from 2 PM to 4 PM. Outreach included a notice in the NH Weekly Market Bulletin, e-mailings to members of the NH Coalition for Sustaining Agriculture, NH Agriculture Commissions and the NH Land Coalition. Fifty people attended the meeting at the Society for the Protection of NH Forests in Concord; people were required to pre-register for the meeting. The land use consultant gave a presentation and answered questions by video conference. A lawyer who specializes in NH land conservation presented commentary on regulatory and legal issues as part of the stakeholder meeting.

A follow-up stakeholder meeting at the Society for the Protection of NH Forests on March 7, 2011, from 9 AM to 11 AM. was attended by 50 people fine tuned issues needing further study and action. Outreach for this meeting was similar to the first meeting. Project materials are posted on the web.

Research results and discussion:

The project learned that IPA’s can be a resource to NH farmers, land trusts and municipalities if legislative changes can be made and educational resources can be put in place. Cooperative Extension, Farm Credit, land trusts and other organizations engaged in farmer and land conservation education and technical assistance acknowledged the need for programming that helps families understand the financial and other details of IPAs so that they can make wise, informed decisions about the use of the tool based on their individual situation.

IPAs are ideally suited to the culture of New Hampshire, where taxes remain a concern for the landowner, while funding remains a concern for the State and its municipalities. For some farmers, IPA will be financially attractive means to conserving the farm for from both a cash flow as well as a tax benefit perspective. At the same time IPA are attractive to government conservation agencies and land trusts who need to stretch scarce conservation dollars over as much land as possible.

Participation Summary

Education & Outreach Activities and Participation Summary

Participation Summary:

Education/outreach description:

Project outreach was accomplished though the organizations listed in Section 4. Methods. Two topical workshops reached more than 100 people and the report and PPT are available at http://www.forestsociety.org/landconservation/community-resources.asp

All proved effective in helping people understand, discuss and provide feedback on a very technically challenging subject.

Project Outcomes

Project outcomes:

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.

Assessment of Project Approach and Areas of Further Study:

Potential Contributions

Besides making IPA practices and benefits accessible to stakeholders, the project went a long way to sort out implementation issues and barriers in developing an IPA program. This foundational work is of value to other states who want to add this resource to their farm viability programs. They can build on the foundation created by this project.

Future Recommendations

As discussed above, this project established that an IPA farmland preservation program is both desirable and feasible in New Hampshire. To make the transition from a widely accepted concept to a fully implemented program the following tasks, described in more detail above, must be accomplished:

1. Create a financially and administratively sound method of funding annual interest payments on IPAs.
2. Creating the administrative infrastructure needed to manage and implement an IPA program.
3. Draft any required enabling legislation to authorize the approaches identified in tasks 1 and 2, above; shepherd this legislation through the appropriate governing bodies.
4. Ensure that individual project transaction costs and requirements, in terms of both funding and expertise, are identified and available.
5. Develop an expert third party source of advice for farmers, independent of the purchasing agency, that can guide them through the process of assessing the value of and determining the terms of an IPA, for their individual situation.

While the current project has generated a viable concept and won broad-based support for its implementation, that very implementation will require significant, detailed, technical work and planning, as outlined in the five tasks listed above. Project staff recommends this work go forward and hopes to cooperate with SARE and other agencies, as appropriate, to fund and accomplish these tasks.

Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the view of the U.S. Department of Agriculture or SARE.