Increasing numbers of farmers are exploring financing alternatives by reaching out to customers and community members to finance infrastructure improvements, equipment purchase, soil and water quality enhancement, farmland preservation or other community oriented benefits. In 2012, the University of Vermont Extension brought together 20 team members specializing in law, accounting, taxation, farm business management and community development to research the opportunities and implications of alternative financing instruments. The team produced the Guide to Financing the Community Supported Farm, a sixty page resource guide to provide information on these financing alternatives. The guide identifies eight specific finance mechanisms that are being used by farms in VT to finance operation and investments. These include owner financed sales and land contracts, partnering with farmland investors, share leases, the creative use of promissory notes, revenue-based financing, equity financing, multi-season CSAs and crowdfunding. The guide also presents the case studies of four farms in Vermont that are using these varied strategies to support their businesses.
Small and beginning farmers engaged in sustainable agriculture in the Northeast often don’t have business models that provide immediate cash for loan repayment required by traditional debt financing. Increasing numbers of these farmers are exploring financing alternatives by reaching out to customers and community members to finance infrastructure improvements, equipment purchase, soil and water quality enhancement, farmland preservation or other community oriented benefits. In many cases, community members are approaching existing commercial farm businesses and requesting that the farm implement various activities, like pick-your-own-access, to the specific benefit of community members.
Alternative or “community” financing, however, can have serious legal implications. Limited resource small and beginning farmers lacking access to legal services are unaware of the legal considerations and strategies to reduce liability risk. This project was developed to support informed decision making by farm managers that may not have had the capacity or resources to research these unique finance mechanisms with legal or tax professionals. This project does not serve as a substitute for professional legal and tax consult. It is, however, intended to inform managers when such consult will be needed.
For this project, we assembled a team of six farmers, five attorneys, five agricultural service providers, and two financial experts to produce a 60-page guide that will help farmers in the Northeast identify practical financing alternatives. We have partnered with innovative farmers who have already implemented or explored “community financing” to fund their business. Our goal is to expand upon these farmers’ knowledge and experience by conducting research and investigation into which legal and financial mechanisms have the most potential to improve a farm’s bottom line, its natural resource base, and surrounding communities. We detail how these mechanisms can be used legally and effectively.
Our targeted beneficiaries will be farmer partners and other farmers in the Northeast who are similarly exploring ways to finance sustainable agriculture supported by their communities.These partners include farmers who wrote case studies for the guide and farmers who reviewed the guide. These farmers, their families and business partners posed the research questions that the guide intended to answer. The guide may be useful to non-farming community members as well. However, our primary objective is to serve farmers because there is generally a greater need for legal outreach and education for them. Farmers generally work much longer hours than the average non-farming neighbor, and thus have less time to research complicated legal and financial issues on their own.
Farmers also usually have less disposable income than the average community member, and are less able to afford legal services enabling them to utilize innovative financing mechanisms. These factors increase the risk of liability for farmers. Finally, farmers are most in tune with the true needs of farm operations and what benefits they can realistically provide the community.
Our research questions:
I. What innovative financial or legal strategies can be used to improve a farm’s bottom line, its natural resource base, and its surrounding communities?
Findings: We have identified eight specific finance mechanisms that are being used by farms in VT to finance operation and investments. These include
1. owner financed sales and land contracts,
2. partnering with farmland investors,
3. share leases,
4. the creative use of promissory notes,
5. revenue-based financing,
6. equity financing,
7. multi-season CSAs and
8. crowd funding.
II .What are the advantages and challenges of using each strategy? This is discussed in the Results section.
III. How can farmers use these strategies to legally and effectively finance their community supported farm? This is discussed in the Impact of Results section below.
We put together a team of 20 individuals to address the questions that our farmer partners and other farmers had about alternative financing models. Each team member provided different areas of expertise that included: accounting, law, farm business management, social and community development. We all met at the start of the project to confirm what areas of focus were critical to include in an educational guide for the broader audience of farmers in the Northeast exploring options and considerations in developing unconventional financing arrangements. We identified who was going to take the lead on each topic or financing model and our team members set out for the next 8 months to conduct research.
Each team member worked individually during this period. We did maintain an email list serve during the research period. This was used to pose challenging questions to the group that were tough to answer individually and to share announcements relevant to the subject matter we were exploring. While it would have been nice to have more collaboration among the team members, working individually during the research period worked very well. It gave each consultant the space they needed to work and allowed them to produce results at their own pace.
Coordination of 20 contributors revealed that that each team member has a different personality and work ethic. Some enjoyed more close conversation with the project coordinator as drafts were developed while others preferred to work independently until final stages. The 8-month period was more than adequate. It was designed as such in order to give farmer partners the chance to participate and write their pieces when they had time before the beginning and after the end of the growing season. All four farmer partner authors were able to submit drafts in a timely manner for the most part.
Guide Development, Peer Review and Editing
Once the independent research phase came to a conclusion, the project timeline became extremely tight. There was one month budgeted for the project coordinator to incorporate all drafts into a single master draft. There was one month budgeted for the expert review team to review the master draft and relay feedback to the project coordinator for incorporation.
These time frames should have each been doubled. One reason was that a small percentage of contributors had trouble meeting the first deadline for submission of draft material to the project coordinator. Then, a small number of the expert reviewers had trouble submitting their review feedback by their deadline. The major lesson learned was that a project of this scale should have deadlines presented that are actually two weeks ahead of when the material absolutely must arrive back to the project coordinator. Reviewers underestimated the requirements to provide meaningful feedback on the 60 page manual with detailed footnotes and a document full of complex and unknown legal and accounting issues (even for attorneys and accountants).
There does not have to be two deadlines. A future project manager, however, is suggested to budget at least 50% more time in the project schedule. Out of 20 contributors, one must expect that three or four might need to submit their materials late.
The other reason why two more months should have been budgeted into the timeline for draft compilation and draft review is that some drafts came in more “guide-ready” than others. Some of the drafts required significant editing. This prolonged the time it took to compile a master draft that would be ready for reviewers. During the review stage, some concepts required much further investigation than others. In other words, the reviewers provided more stimulating questions than answers! This was great, but it required more time to research the issues than originally anticipated.
Development of Farm Case Studies
The written farm case studies were a productive exercise and stimulated further questions on the part of the farmers writing them. On various occasions, totaling about 8 additional hours, the guide team provided technical assistance for the farmers to address their additional questions and point out how the guide research material applied to their specific situation. The farmers all expressed their gratitude and appreciation for the additional focus.
As for publishing the case studies, the feedback from our review team included the common question: “Are these case studies meant to be advice for other farmers or are they meant to be documented examples of farmers using alternative or community financing?” The answer was clearly the latter and we decided to include a small disclaimer that made this clear in the guide. The disclaimer communicated that other farmers should not confuse the farm case studies as advice and readers should consult with their own independent business counsel to determine what practices make sense for them. Once we confirmed we needed the disclaimer, we realized we needed the University attorney to sign off on the disclaimer. This added a couple of extra weeks to our already tight production schedule. For future projects, at least two weeks should be budgeted to wait for logistical approval for things such as legal disclaimers and sorting out copyright issues.
Publication of the guide: printing, web access
A major lesson learned towards the end of the draft compilation and prior to publishing was that a publication such as ours becomes significantly more attractive and its information more accessible once there is a graphic design and layout done by a design professional. We overlooked this need in our original budget. Fortunately we were able to obtain supplementary funding of roughly $1,000 to hire a graphic designer to do layout and design. This is an invaluable component to the project and should be an integral part of the publication process. The graphic designer can be fairly quick once all text is formulated and all images are selected. That is easier said than done, as the graphic designer likes to have everything grammatically perfect before the design process is started. Future projects that include the development of multi-chapter guides are advised to budget professional services for graphic design and print/web layout.
To ensure smooth layout and design at the finale, it behooves the publication team to have at least two individuals on board skilled in copy editing and proofreading. We were fortunate to have three individuals come forward from within UVM Extension to assist. They were not paid out of our shoestring budget but future projects would definitely include at least 20 hours for proofreading and final-stage editing.
This project produced a complete 60 page guide that provides the most current business,legal and tax advice available to describe innovative farm financing instruments. The majority of this project was devoted to the applied research needed to develop specific chapters in this guide. A summary of the analysis of the 8 options are below.
II.What are the advantages and challenges of using each strategy?
Strategy 1: Owner financed sales and land contracts:
Advantages: Farmers can reduce land purchase closing costs and obtain financing for land purchase that might not otherwise be available from commercial lenders. If owner-sellers are in agreement and accounting implications are well-understood, farmers can obtain below-market interest rates on the financing from the owner-seller. Land contracts provide an additional layer of risk reduction for sellers, making it easier for farmers to acquire land via the Land Contract. USDA FSA is now guaranteeing Land Contract agreements, as of January 2012.
Challenges: In cases where the owner seller is not the only source of financing, it might be relative cumbersome to manage mortgage payments to multiple lenders. Diligence is required to understand full legal and accounting ramifications. For example, if interest on the loan from the owner-seller is not stated, it is imputed according to the IRS Applicable Federal Rate and the IRS Below-market loan rules. This can complicate things for both farmer buyer and owner seller. See chapter 3 of the guide, Owner-financed Sales and Land Contracts, for more information on considerations involved in owner-financed sales and land contracts:
Strategy 2: Partnering with farmland investors:
Advantages: When investors are supportive of farmers transitioning into eventual ownership of the property, farmers can acquire large working farms that are sufficient for establishing economies of scale that make their efforts worthwhile. Investors can supply a significant amount of capital that might be otherwise unobtainable.
Challenges: Not all farmland investors are supportive of the long-range aspirations of the farmer, some are more motivated by the potential income derived from leasing land to a farmer, and some are motivated by the long-term capital appreciation of land that stays owned by the investor. Written agreements can specify a certain degree of autonomy for a farmer operating or transitioning towards ownership of investor-owned land. The potential for miscommunication and disagreement is high, however, when the investor and farmer have different ideas about what should or should not take place on the land as time goes on. See Chapter 4 of the guide, Considerations for Dealing with Farmland Investors, for more information:
Strategy 3: Share leases:
Advantages: A share lease is a simple variation of a conventional farm lease agreement, which lawyers, accountants and insurance agents and NRCS/FSA officials are generally very familiar with. This makes it easy and efficient to access support from these services when applicable. Unlike in other capital sharing agreements among private entities, a share lease does not involve the formation of more complicated legally structured entities. Terms of cost and revenue sharing can be easily customized according to the assets available of all parties involved.
Challenges: Share leases are still leases, and do not typically allow the farmer to transition into ownership of the land or other capital investments. Share leases involve a significant amount of planning and communication at the outset, including clear accounting and detailing of all costs that will be shared, and specific, documented plans for how revenues will be realized and shared. For more information, see Chapter 9 of the guide, The Share Lease Agreement:
Strategy 4: The creative use of promissory notes:
Advantages: Promissory notes can be simple agreements to draft, as long as criteria are met for making the document a legally binding contract. A tremendous amount of flexibility and creativity can be integrated into the note when detailing terms of repayment of the loan. Promissory notes can be an easy way for two individuals to document a loan between one another.
Challenges: IRS Below Market Loan rules govern tax treatment of loans between individuals and these rules can be difficult to understand. Tax advisers or tax attorneys are often needed to interpret the rules and to determine if certain exemptions apply. Promissory notes are also generally considered to be securities as defined by the Federal securities laws. This means that a farmer needs to have a thorough understanding of the securities regulations or consult with an attorney if they want to use the promissory note to borrow money from many people or from people whom the farmer does not know. For more information, see Chapter 5 of the guide, The Promissory Note:
Strategy 5: Revenue Based Financing:
Advantages: Repayment of a loan where re-payment schedules are based on revenue realized by the farmer can put less stress on cash reserves when sales are down. They also allow for the bulk of repayment to occur in good years/seasons. Supportive neighbors, friends, family or other individuals can offer the revenue-based agreement on very favorable and flexible terms to the farmer.
Challenges: When re-payment is set as a percent of revenue the farmer repays more money in good years. This leaves less available to put towards other capital improvements or cash reserves moving forward for the business. This model is generally not appropriate for newer operations where profits in good years are generally needed to repay outstanding debt or make capital investments. Tax treatment of revenue-based repayments for both borrower and lender may be complicated, requiring significant accounting preparation and oversight. For more information, see chapter 7, Revenue-based Financing:
Strategy 6: Equity Financing:
Advantages: Equity financing can be a source of large sums of money at one time, allowing operations to finance large capital improvements or production expansion that might be difficult to finance using other sources.
Challenges: equity financing involves considerable risk on the part of a farmer, because the equity investor takes ownership of the farm or food business. It is generally not an appropriate model for most farm businesses where profit margins are below equity investors’ expectations for returns. For more information, see chapter 6 of the guide, Demystifying Equity Financing:
Strategy # 7: Multi-year CSAs:
Advantages: Farmers can develop strong relationships with their customers who desire to support the operation beyond small purchases. Multi-year CSA shares allow farmers to sell (actually, “pre-sell”) a large amount of product which creates the budget from which costs will be covered.
Challenges: Multi-year CSA shares are not loans, thus the transaction is taxed as an ordinary sale/purchase. Tax implications of the transaction can get complicated. Multi-year CSA shares can also easily be construed as “investments” or “securities.” The arrangements require a fair amount of clarification and documentation that the transactions are not securities, but rather ordinary consumer transactions. This is required to preempt future confusion or legal liability on the part of the farmer. For more information, see sidebar on page 3 of the guide titled “Are CSA Membership Shares “Securities”? in chapter 1 of the guide:
… and Chapter 8 of the guide, The “Multi-year CSA” Financing Model:
Strategy # 8: Crowdfunding:
Crowdfunding is a rapidly emerging model that gained prominence among farmers with whom we worked just after our written guide was published. While it was not covered in the guide in detail, the model was discussed extensively during workshops as part of the post-publication outreach phase of this project. Advantages: Crowdfunding can engage the philanthropic community; online crowdfunding platforms have to date been donations-based. Crowdfunding can raise a tremendous amount of publicity via the internet about an innovative project- the benefits of doing this can last well beyond the initial fundraising pitch.
Challenges: Laws surrounding crowdfunding are rapidly changing, namely with the passage of the Federal “Jumpstart Our Business Start-Ups (JOBS) act in April 2012. The JOBS Act which will legalize many forms of previously regulated ways to solicit loans and investment capital from large public audiences. The accounting implications of crowdfunding also remain largely unstudied in this rapidly evolving landscape. Future editions of the Guide to Financing the Community Supported Farm will research the model in detail once the rules for the JOBS Act have been written (the SEC has been given 270 days since passage to document how the new law will be implemented).
III. How can farmers use these strategies to legally and effectively finance their community supported farm?
Findings: We have found that farmers are using the resources generated by innovative community finance to support all aspects of their operation. Part of the original impetus for creating the educational guide was to empower farmers to do much of the leg work in crafting the creative financing agreements themselves—to avoid accounting and legal costs. One of our key findings has been that while the guide can indeed serve this purpose, it becomes especially important to seek legal counsel and tax advice when finalizing unconventional farm acquisition, person-to-person loans, and even creative capital transfer arrangements within the realm of friends and family. We make it clear in many places in the guide that it is highly advisable to meet with independent business counsel, an attorney and an accountant to make sure that additional risk is not being assumed by the farmer through this creative agreement. The costs of crafting the agreement should be weighed against the benefits to determine if the source of community financing is appropriate.
This project did not propose specific verification framework or results evaluation outside the direct objective of producing the guide and conducting initial outreach efforts to make the guide available to Northeast Farms and community members.
Education & Outreach Activities and Participation Summary
The outreach campaign was a success and due to popular demand for information on the project, implementation of outreach activities exceeded what was initially proposed. The outreach campaign started with a publicity campaign, including press releases as soon as the guide was published online on two websites: The UVM Extension New Farmer Project:
and the UVM Center for Sustainable Agriculture:
From March 21, 2012 to May 31, 2012 the UVM Extension Center for Sustainable Agriculture recorded 599 unique visits to the webpage for the guide. Between March 21, 2012 and May 31, 2012 480 people visited The Guide to Financing the Community Supported Farm webpage at the UVM Extension New Farmer Project. Visitors to the site spent over 4 min 16 seconds on the site, this is 3.15 times longer than the average length of the site visit (1 min 21 sec). We are unable to document the exact number of site visitors that downloaded the guide in PDF format.
Notification was sent to at least six agricultural service providers and farmer-subscribed email list serves and newsletters. In the small state of Vermont where the farming community is closely linked, word about the project spread fast.
The outreach phase included four arranged speaking engagements, attended by 50 farmers and 70 non-farmers interested in supporting the local food system. Mention of the guide made its way into four widely circulated e-newsletters, three blog articles including one written by one of our farmer partners, and one article published recently in the Burlington Free Press. At the time of this report writing, a public TV show, Across the Fence was in the process of producing a segment featuring one of the project farmer partners and the guide work. The show is scheduled to be aired on WCAX sometime in July 2012. Over 80 printed copies of this guide have been distributed to farmers, potential community investors and agricultural development specialists.
The Northeast Beginning Farmers Learning Network, including over 60 collaborating agricultural service provider organizations throughout the Northeast, has also scheduled a webinar on the guide subject matter for July 23, 2012. The webinar announcement reads, “Ben Waterman, VT New Farmer Project. This is the second part of the land access webinar, and focuses on emerging financing strategies, including alternative financing for land access as well as topics covered in the new book, Guide to Financing the Community Supported Farm, such as legal/accounting considerations, promissory notes, and multi-year CSAs.”
Despite the formal end to this SARE-funded project, the outreach to farmers and interested community farm supporters continues. The farm business management team at UVM Extension intends to continue offering follow up education on the subject matter to meet demand from farmers in years to come.
Verified analysis of the impact of adopting the strategies presented in this guide is well outside the scope of this project through NE SARE. There are, however, significant economic impacts surrounding these innovative funding instruments that are worth discussing. These economic topics can be put in broad categories that include: reduced legal fees, risk reduction and capital flow through communities. This project was conceived on the principal that if we consolidated legal information in a resource for the public then we will have reduced the future burden of legal fees for individual producers to pursue fee-for-service legal support for every step of a community finance project. It would be presumptuous to project future savings without farm adoption being known. But judging by the fact that lawyers had to conduct new research for themselves to contribute to this guide, we are well aware that future case-by-case legal consult will already be streamlined.
There are tangible financial costs associated with tax penalties or illegal use of securities in this country. This guide serves as a baseline risk management tool to raise the awareness in the farm community that there is a regulatory structure in place for these innovative transactions. Compliance with this structure will prevent cash penalties in the future.
The third broad economic topic that this project indirectly addresses is the diversification of the flow of capital into agricultural communities. For better or worse, the strategies presented in this guide document legal and feasible instruments for individuals to provide capital directly into their own community. In the case of crowdfunding, ones definition of community must adapt to the social networks facilitated by online communication. Regardless of ones opinion about the stability, risk or appropriateness of these unique sources of capital it is clear that they have the potential to support initiatives that reflect the values of community members. A recent roundtable meeting in Washington DC on June 12th organized by the CS Mott Food Group for Sustainable Food Systems revealed the challenges for new lending institutions seeking to underwrite agricultural loans. During the time it takes for these institutions to prepare a cohesive or policy guided flow of capital into agricultural communities, it is clear that community based investment will shape local communities in a way that is as unique as it members.
The Guide to Financing the Community Supported Farm describes eight specific strategies that farms may adopt to secure financing for their farm business. We expect that this guide will support future adoption of these strategies, but not necessarily within the funded scope of this project with NE SARE. Our project cycle with NE SARE supported the development of this guide. At the current time project contributors are now engaged in the outreach with established farm business management programs to enhance the dissemination of this critical research. Due to the private and confidential nature of business investments and financing, we are yet to learn if farmer adoption of these practices will be feasible to survey in coming years.
Areas needing additional study
Our project had strong representation from attorneys well versed in farm, finance and securities law. Despite these resources, we ran into some rather complex accounting issues that even our legal experts had trouble addressing. Additional study and activity should include convening a core team of accountants to follow up on research on tax implications of the financing mechanisms. Our project provides an excellent foundation for the research questions and issues that are pertinent to farmers engaged in improving the sustainability of their operations and forging capital partnerships with community members. It would be easy for several interested accountants or attorneys specializing in tax law to dive deeper into the issues we’ve identified. This core group of tax specialists could then share findings with a broader team of accountants during continuing education seminars or other professional development forums.
As mentioned previously, more and more farmers are exploring or using crowdfunding to capitalize operations. Currently in Vermont, a brand new online platform called “3revolutions.co” is being launched to enable crowdfunding specifically for farm and food businesses. According to recent conversations with the website’s founder, over 20 early stage farm and food-businesses have signed up to be featured for requests for funding. Many other farmers have very successfully raised money via kickstarter.com. Crowdfunding could become commonplace with the recent passage of the federal JOBS act. The legal issues, tax accounting issues, costs and benefits of crowdfunding have hardly been explored. It is an exciting time for farmers hoping to acquire capital through non-traditional means, but the topic warrants additional study. By June 2012, multiple contributors on this project have been asked questions about the tax status of crowdfunded contributions. Within our own team there has been confusion whether these contributions are defined as gifts, donations, discounted sales or loans. In order to provide sound educational resources to farmers our team has already identified the need to convene tax and accounting professionals to discuss this innovative model in the summer of 2012. Farming is already a highly risky business to operate and invest in. Research and education will need to advance to ensure that innovative financing can be sustained without placing any undue risks upon these businesses and their community investors.