Leveraging community financing for farm and farmland protection

Leveraging community financing for farm and farmland protection

Summary

This project will give 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) the option to use Installment Purchase Agreements (IPAs) to preserve agricultural land in New Hampshire. 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, benefits and drawbacks to towns and farmers; 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. To achieve these outcomes, the project will engage stakeholders in the exploring IPAs, discussing pros and cons, identifying and overcoming any regulatory barriers, and making comparisons to existing easement financing methods in place in New Hampshire. The project will develop consensus for IPA program development and administration including the design of a decision-making tool for farmers to weigh the IPA option per family circumstances and with other alternatives. This concept has not been used north of Pennsylvania. Since acquiring development rights is particularly expensive in this region and since the northern New England states have limited funds with which to purchase conservation easements, IPAs will provide a significant means of leveraging precious financial resources for farm and farmland protection for the mutual benefit of farmers and communities. The project will provide a model for the other New England states to adopt for their farm viability programs.

Objectives/Performance Targets

The project will assemble a ‘think tank’ of stakeholders: farmers, agricultural educators and service providers, farm and conservation organizations, legislators and community leaders to investigate the opportunities, benefits, drawbacks and barriers to adding IPAs to NH’s farmland conservation options.

Milestones
a. Stakeholders participate in IPA discussions to learn about the program, consider how it would impact them and express concerns and other feedback.
b. All issues associated with using zero coupon bonds to fund IPAs will be noted and solved.
c. Project collaborators develop an IPA program that fits NH needs, statutes and governance structures.
d. Collaborators share IPA program information through networks

Accomplishments/Milestones

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

Accomplishment:
Stakeholder Committee met in November 2008 and set research agenda.

Stakeholder Committee will review IPA research findings and proposed NH model in December 2009 and make recommendations.

Meetings with a broader group of stakeholders are scheduled for February and March 2010 to review the NH IPA proposal, provide feedback and commit to implementation.

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

Accomplishment:
A draft NH IPA approach was completed in September 2009 includes
-Excel spreadsheets from 5 to 30 years, with five year increments (IPA amortization schedules) for both landowner and government entity (whether state or town); determined that NGOs are essentially precluded from process, other than to partner with government.

-An IPA methodology for entitities with limited acquisition budgets, which to date precluded them from engaging in IPAs; this methodology is reflected in the aforementioned amortization schedules.

-A list of benefits (and drawbacks) derived from engaging in IPAs (with particular emphasis on how the NH IPA methodology improves upon the traditional IPA model, which in turn improves upon cash settlements).

-Preliminary of legal parameters for engaging in IPAs in New Hampshire, although much of this responsibility falls under the purview of Susan Slack.

A review draft for the Committee and legal partners will be completed by November 30th.

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

Scheduled to be completed by January 30, 2010

d. Collaborators share IPA program information through networks

Will begin after stakeholder meetings are completed in Feb and March 2010

Impacts and Contributions/Outcomes

Assuming that IPA’s can be a resource to NH farmers, land trusts and municipalities without need for institutional changes, at the conclusion of this project we expect at least one farmer and one town will be working together to implement NH’s first IPA. If there are legal or other issues that need to be addressed, we expect to have set in motion actions that would resolve those barriers. The project will provide a model for adoption of IPA’s by other New England states.

The research agenda will address these stakeholder concerns:

• IPAs allow easements to be secured at today’s prices, thereby counteracting land escalation, which is an impediment to protecting large contiguous blocks of farmland and forestland. The premise of IPAs is the mutually beneficial arrangement of landowners agreeing to defer receipt of principal in return for tax free interest payments from government agencies over a specified duration; agencies need not come up with the full purchase price at settlement (thereby securing the easement this year until waiting until the next when funds might become available), and landowners can consequently keep more of the easement proceeds rather than paying them back to the government in taxes.

• While IPAs can be secured by purchasing Treasury Bonds, the most cost effective methodology involves the purchase of Zero Coupon Bonds (formally called STRIPS for Separate Trading of Registered Interest and Principal Securities). Zeros are U.S. Government bonds bought by the easement buyer on behalf of the easement seller at a price lower than the bond’s face value (i.e. discounted). The bond does not generate periodic interest payments, called “coupons,” thus the term “Zero” Coupon Bond. Thus, the buyer of the bond (and the easement) must make semi-annual interest payments to the seller. The seller pays no taxes on the interest. The money to make these interest payments requires a dedicated funding source and can not come from bond proceeds. ZCBs are purchased for 5 – 30 year periods.

Without engaging in the purchase of Zeros, government agencies would be limited to cash on hand each fiscal year to make easement offers. In most instances, easement prices increase precipitously while budgeted dollars rarely do, resulting in less and less easement acres secured each year and more and more output of funds in the long run to reach specified easement acreage goals. In essence, Zeros allows agencies to dramatically shorten the time period needed to engage in easement acquisition, particularly in high growth areas where longer periods are fiscally and politically unfeasible.

• When does the easement transfer occur?
• Can IPA’s be securitized and sold or bequeathed?
• Interest payments to seller require a long term, dedicated funding source. Dedicated funding sources (not necessarily in conjunction with IPAs) include the City of Virginia Beach’s cell phone tax, Pennsylvania’s 2¢ cigarette tax per pack, and Maryland’s agricultural transfer tax and real estate transfer tax.
• Buyers need to develop long-term interest payment tables to assess interest commitments over time.
• What strategies can NH to reduce out-of-pocket costs to easement buyers while maximizing landowner value and benefits, including the use of Easement Valuation Systems in lieu of appraisals.
• What kind of state or municipal authorization would be required for New Hampshire to be able to use IPAs and ZCBs to purchase conservation easements (or fee title?)
• Do we need to change state statutes and if so in what way?
Municipalities can issue long term multi-year debt though needs to be clearly explained. Town’s can not use bond money for investment; needs to be spent. Can the funds be given to another entity? State statures need to be reviewed to see if Zero’s fit RSA 4129, RSA 33:2, RSA 36 A:4a and SB 381. Issues include: allowable uses of conservation funds; segregating the money (capital reserve?); how does the auditor look at the obligation; how to confirm there is enough money for the interest payment; what is the methodology for forecasting debt service over time; what about buying a life insurance policy
• Are IPAs best used at state and local levels, or at one or the other?
Need to list plusses and minuses of each level. What are the administration issues. What would changes in administration impact?
• Explain implication of IRS Section 453 which covers non-taxable interest from deferred principal payments.
• What if the landowner has other debt to pay off (and thus need access to principal)?
E.g. Some Maryland counties have a policy that buyer can pay up to 10% cash to the landowner so that existing mortgages can be paid down or if cash is needed for estate settlements, equipment purchases, etc.

• Who is party to these transactions? What are the roles and costs for each party involved?
E. g. In MD a Bond Counsel is involved to certify the transaction @ $4000 per transaction. Financial advisors. MD does not use appraisals, but rather uses an Easement Valuation System is to assign a price. If the landowner is going to claim a deduction, S/he must have an appraisal done (is that what happens in MD?). Buying Organization. Title insurance……..
• Where might the funds to pay the biannual interest payments come from in the NH situation?

Collaborators: