The Agricultural Development Bond Program, more commonly known as Minnesota's Aggie Bond Beginning Farmer Loan Program (the "Program"), is a tax exempt bond program designed to assist Beginning Farmers in the state of Minnesota to acquire agricultural property at lower interest rates.
The Program enables Lenders and Sellers (if financed by a contract for deed) to receive interest that is exempt from Federal and, in some cases, Minnesota income taxation on loans made to Beginning Farmers. The Lender will make the loan by purchasing from the Rural Finance Authority (the "Authority") a federally tax-exempt Private Activity Bond (PAB) in the amount of the loan. The proceeds of that bond will be lent to the Beginning Farmer by the Authority, and that loan and its collateral will be assigned to the Lender as security for the tax exempt bond.
Eligible activities (only for persons who are First-Time Farmers) consist of financing purchases of the following:
The Internal Revenue Service has promulgated many rules and regulations governing the use and sale of tax-exempt bonds, some of which apply to the Authority's Program. The rules that will affect the Program most are those stating that tax-exempt bond proceeds cannot be used to:
The Beginning Farmer, or any related person, shall not make any expenditures with respect to the acquisition or construction of any part of the Project prior to 60 days of the date the Authority board approves the Application. To do so runs a risk that the IRS would deem the bond transaction an ineligible reimbursement; tax-exempt bond proceeds may not be used for the purpose of an ineligible reimbursement.
Notwithstanding the foregoing, approval of an Application does not constitute final bond approval. The Authority reserves the right to cease bond processing at any time or to reduce the permitted bond amount if, prior to bond closing, it is discovered that the Beginning Farmer is refinancing an existing loan, or if due to the implementation of or changes in federal or State law or regulations, it is determined that the Project is ineligible.
The basic eligibility requirements for the Program are as follows:
A. Signing a Purchase Agreement
The Beginning Farmer, or any family member, shall not commence acquisition or construction of any part of the Project prior to the date on which the Authority approves the Program Application. To do so runs a risk that the IRS would deem the bond transaction an ineligible reimbursement. Tax-exempt bond proceeds may not be used for the purpose of an ineligible reimbursement. This means that neither the Beginning Farmer nor any family member can enter into any contract or purchase agreement, installment or otherwise, in connection with the project or any part thereof prior to the Authority's approval of the Application.
Therefore, the Beginning Farmer should make application to and obtain Authority approval before signing a purchase offer or an offer to buy. However, the Beginning Farmer may sign a purchase offer or other contract prior to obtaining Authority approval, if the following three conditions are met:
B. Loan Risk / Credit Evaluation
THE LENDER OR CONTRACT FOR DEED SELLER MUST MAKE THE CREDIT EVALUATION OF THE LOAN, THE BEGINNING FARMER'S NET WORTH AND ABILITY TO REPAY PRINCIPAL AND INTEREST AND THE SUFFICIENCY OF THE SECURITY FOR THE LOAN.
THE AUTHORITY WILL NOT MAKE AN INDEPENDENT EVALUATION OF THE BEGINNING FARMER'S ABILITY TO REPAY THE LOAN, OR DETERMINE THE BEGINNING FARMER'S NET WORTH. THE AUTHORITY AND ITS COUNSEL WILL NOT REVIEW AND WILL MAKE NO WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE LEGAL SUFFICIENCY OR VALIDITY OF THE LOAN.
Lenders/bondholders should use their own financial statement and other forms deemed necessary to document the eligibility of the Beginning Farmer and his or her ability to repay principal and interest payments.
C. Submitting an Application
A Beginning Farmer and Lender/Bondholder must jointly prepare and submit an Application to the Authority. (Spouse must sign, if appropriate).
Aggie Bond Application Form -- Application forms are available from the Authority. The Application should be completed by the Beginning Farmer and Lender/Bondholder and submitted to the Authority. Applicants and Lenders are encouraged to contact the Authority if they have questions in completing the Application.
Financial Statement -- A copy of the Beginning Farmer's signed financial statement (taken within sixty days preceding Application submission). If a loan is sought with respect to a partnership, separate Applications and financial statements must be submitted by each partner, and an aggregated financial statement covering the partnership and all partners must also be submitted.
NOTE: If the Beginning Farmer and/or spouse is involved in a business, partnership, corporation, etc., either related or unrelated to his/her farming operation, a financial statement from this entity must also be submitted with the Application.
Personal History Letter -- A personal history letter signed by the applicant/s explaining the Beginning Farmer's background with respect to his or her education and experience in the type of farming operation for which a loan is sought. The letter should also outline the Beginning Farmer's access to machinery, if the loan is for land; or his or her access to land, if the loan is for Agricultural Improvements or Depreciable Agricultural Property. The letter should also state where the Beginning Farmer will obtain operating capital, if needed.
Fees -- The Beginning Farmer or Lender/Bondholder must include the following fees:
A non-refundable $50 Application fee. Plus a bond allocation fee:
In addition, a loan origination fee equal to 1 1/2% of the amount of the loan, but not less than $200, must be paid at loan closing. The loan origination fee may be paid by either party or may be financed with the bond proceeds. Call the RFA to determine if this is feasible.
The completed Application will be reviewed and considered by the Authority at the first board meeting after is received. After the application has been approved by the Authority, documents will be prepared by the Authority staff for signatures of the Beginning Farmer and Lender.
D. Additional Procedures
The documents also provide for prepayment at the option of the Beginning Farmer under terms and conditions which are to be agreed upon between the Beginning Farmer and the Lender. The documents setting forth optional prepayment contain blanks which need to be completed by the Beginning Farmer and the Lender.
It should be noted that the bond documents may be prepared to provide for a prepayment at the option of the Lender. The terms of this type of prepayment will need to be agreed upon by the Beginning Farmer and the Lender. This prepayment option should be used where a Lender may be willing to extend the initial term of a loan, but wants the ability to review the situation at various points in time and to end the loan if the Beginning Farmer's progress is unsatisfactory (call option).
Generally, these public hearings will be conducted by members of the Authority's staff. A hearing need not be held prior to an Application being approved, but it must be held before the bond documents are approved.
The Governor of Minnesota, after receiving a report on the results of the public hearing, may than approve or disapprove the bond. An allocation of the State's bonding authority must then be received for the bond. Once the final approval from the Governor and the bonding allocation are received, the loan may proceed to closing.
In the case of a sales contract (contract for deed): in a simultaneous transaction, the Lender seller will enter into a sales contract with the Authority, the Authority will deliver its Bond to the Lender to evidence the Authority's obligation under the sales contract and the Beginning Farmer will assume the Authority's obligations under the sales contract.
A loan made under the program is funded solely from the bond sold to the Lender. The Authority has no funds to fund a loan. Therefore, a Beginning Farmer must submit an application with a Lender who is able to purchase the Authority's bond to fund the Beginning Farmer's loan. The Authority shall not be liable or responsible for the failure of a Lender to purchase a bond or otherwise perform the functions of a Lender. Nor shall the Authority be liable or responsible for the failure of a Beginning Farmer to locate an alternate Lender in the event of a failure of performance by the Beginning Farmer's initial Lender.
The principal and interest on the bond are limited obligations, payable solely out of the revenue derived from the debt obligation, collateral, or other security furnished by or on behalf of the Beginning Farmer. A guarantor, letter of credit or alternative credit enhancement on the debt is permissible. A guarantor may be a Related Person. The Bond, which is issued by the Authority and purchased by the Lender, is a non-recourse obligation. The principal and interest on the Bonds ARE NOT secured by a pledge of the credit or the taxing power of the state of Minnesota of the Authority. It should also be noted that any recording or filing fees or transfer taxes associated with the loan will be paid by the Beginning Farmer or Lender and not the Authority. Additionally, the Authority will have no responsibility with respect to the preparation, execution, or filing of any Declaration of Value or Groundwater Hazard Statements.
Under the current rules, the period of time during which bond proceeds may be invested in an unrestricted yield has been effectively shortened to six months. Unless all "Gross Proceeds" of a tax-exempt bond are spent on the project being financed within six months after the date the bond is issued, the parties to the bond issue will be subject to some very onerous Federal reporting requirements and will be required to pay any profits earned on bond proceeds to the Federal government.
To avoid subjecting any of the Authority's bonds to these reporting and payment requirements, it is the policy of the Authority not to issue a bond for a Project until the Authority can be assured that all bond proceeds will be expended on the Project within six months of the date of the bond issuance. In the closing documents the Beginning Farmer and Lender are required to certify that the use of the proceeds will comply with this policy.
LENDERS PLEASE NOTE: IT IS THE LENDER'S RESPONSIBILITY TO INSURE THAT ANY SECURITY AGREEMENTS, MORTGAGES, GUARANTEES OR OTHER SECURITY DOCUMENTS WHICH THE LENDER REQUIRES IN A TRANSACTION HAVE BEEN COMPLETED AND SIGNED; AND THAT ANY FINANCING STATEMENTS HAVE BEEN FILED, MORTGAGES RECORDED OR ANY OTHER NECESSARY STEPS TAKEN TO PROTECT THE BOND PURCHASER'S INTERESTS. THE AUTHORITY MAKES NO WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE EFFECTIVENESS, VALIDITY OR PRIORITY OF ANY LIENS OR SECURITY INTERESTS, WHICH A LENDER HAS, OR BELIEVES HE/SHE MAY HAVE, WITH RESPECT TO A PARTICULAR PROJECT.
NOTE: Beginning Farmers should contact their tax consultant regarding the specific effect this change in the MACRS will have on their operations or Project.
"Agricultural Improvements" means improvements, buildings, structures or fixtures suitable for use in farming located on Agricultural Land. Agricultural Improvements as defined in Minnesota Statutes, Section 41C.02 include a single family dwelling located on Agricultural Land that is or will be occupied by the Beginning Farmer and structures attached to or incidental to the use of the dwelling.
NOTE: The ability to finance a personal residence with the Program is severely limited due to federal regulations governing the use of the Authority's bonds; therefore, except in certain circumstances (e.g., when the value of the residence is clearly less than 5% of the amount of the loan or the amount of contract financed), it will be necessary to finance a personal residence separately.
"Agricultural Land" means land suitable for use in farming.
"Application" means a completed instrument on a form approved by the Authority. Each application must include the following: Beginning Farmer's name, address, financial data, description of anticipated use of loan proceeds, amount of loan, down payment amount (if any), statement of Beginning Farmer's net worth determined in accordance with Authority rules, a summary of proposed loan terms and certifications of the Beginning Farmer.
"Beginning Farmer" means an individual or partnership with a low or moderate net worth who engages in farming or plans to engage in farming.
"Depreciable Agricultural Property" means personal property suitable for use in farming for which an income tax deduction for depreciation is allowable in computing federal income tax under the Internal Revenue Code of 1986, as amended.
"Farming" means the cultivation of land for the production of agricultural crops, the raising of poultry, the production of eggs, the production of milk, the production of fruit or other horticultural crops, grazing, the production of livestock, aquaculture, hydroponics, the production of forest products, or other activities designated by the Authority's rules.
"Lender" means a bank, credit union, savings and loan association, insurance company, or other financial institution that is authorized to do business in Minnesota, which the Authority determines has sufficient personnel and other resources to efficiently and properly originate and service qualified agricultural loans or an individual may be a Lender in the Program.
"Low or Moderate Net Worth" means:
"Net Worth" means total assets minus total liabilities as determined in accordance with generally accepted accounting principles with appropriate exceptions and exemptions reasonably related to an equitable determination of the Beginning Farmer's or partnership's net worth. Assets shall be valued at fair market value.
"Total Assets" shall include, but not be limited to, the following: cash crops or feed on hand; livestock held for sale; breeding stock; marketable bonds and securities; securities (not readily marketable); accounts receivable; notes receivable; cash invested in growing crops; net cash value of life insurance; machinery and equipment; cars and trucks; farm and other real estate including life estates and personal residence; value of a beneficial interest in a trust; government payments or grants; and other assets. Total assets shall not include items used for personal, family or household purposes by the applicant, but in no event shall such property be excluded to the extent a deduction for depreciation is allowable for Federal income tax purposes. All assets shall be valued at fair market value by the participating Lender. Such value shall be what a willing buyer would pay a willing seller in the locality. A deduction of ten percent may be made from fair market value of farm and other real estate.
"Total Liabilities" shall include, but not be limited to, the following: accounts payable, notes or other indebtedness owed to any source, taxes, rent, amount owed on a real estate contract or real estate mortgages, judgments, accrued interest payable, any other liabilities. Liabilities are to be determined on the basis of generally accepted accounting principals.
The Federal tax law contains definitions which affect the Program and Beginning Farmers. They are as follows:
"First-Time Farmer" (This is different than a Beginning Farmer) is a person who has never had any direct or indirect ownership interest in "Substantial Farmland" in the operation of which he or she has materially participated. An ownership interest or material participation by a person's spouse or minor child will be attributed to the person as well.
However, the Federal tax law also provides that a person's prior ownership interest in farmland will be disregarded if:
"Indirect Land Ownership" - If a person holds a minimal interest in a family farm corporation, a limited partnership, a trust, or any other type of entity which in turn owns farmland in an amount which is greater than 30 percent of the median size of a farm in the county in which the farm is located and the person materially participates in the operation of such farmland, then the person will not qualify as a First-Time Farmer.
"Related Person", according to the IRS, includes grandfather, grandmother, father, mother, brother or sister (whether whole or half blood), child, grandchild, or spouse. It also includes certain corporations and partnerships. Certain in-laws may be eligible. (See page 2)
"Substantial Farmland" - Any parcel of land is Substantial Farmland unless:
Notwithstanding the preceding paragraph, interest on the bonds is includable in taxable income of corporations and financial institutions for purposes of the Minnesota franchise tax, is an item of tax preference includable in alternative minimum taxable income for purposes of the federal alternative minimum tax applicable to all taxpayers and the Minnesota alternative minimum tax applicable to individuals, estates and trusts, and is includable in adjusted current earnings of corporations in determining alternative minimum taxable income for purposes of the federal alternative minimum tax imposed on corporations.
CONCLUDING NOTE: The Authority recognizes some of the provisions in this Program Summary may be confusing to the Beginning Farmer or Lender. The Authority will provide whatever assistance it can in answering questions or completing documents. Beginning Farmers and Lenders are encouraged to visit with the Authority staff early in the application process to make the entire transaction as simple as possible.
Lori.Schmidt@state.mn.us ~ 651-201-6556
Finance & Budget Division
Minnesota Department of Agriculture (MDA), 625 Robert Street N, St. Paul, MN 55155-2538, firstname.lastname@example.org