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Does anyone have experience with turning a farm owned my multiple family members into an LLC? We spoke with a real estate attorney yesterday and we were not happy with the suggestions. For example, if you want to sell your piece it would be set up where the other members would have 10 years, or even 20 years, to buy you out. I would prefer if some other member wanted to buy my piece they have to come up with all the cash now and I was told it is not done that way. Any suggestions to where I could go to educate myself on what options there are?

 

TIA,

 

Mike

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That sounds weird to me, I would check with someone else.  I guess maybe if he was trying to knock the marketability down to shite for valuation purposes it could make sense. 

 

You can basically have whatever terms in a buy-sell you agree to.  I would maybe look for an estate planning attorney who does some business/corporate work, preferably with a tax LL.M. from NYU or Florida (or maybe a lawyer with a CPA license if you can't find someone with the advanced law degree; just as an easy screening signal).  Sometimes a dirt lawyer or "generalist" can quickly fk some stuff up.

Edited by CorpRaider
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Sure thing.  It's been a long while since I did any of that kind of work, but I recall that the buy-sell obligations sometimes could be funded with life insurance or something, so you've got the liquidity there when you need it (i.e., a partner "withdraws from the mortal coil").   I guess you could do it the way he proposed if you were really worried about an interest getting sold outside the family/members and didn't think the remaining members would be willing to borrow against the property to buy out the withdrawing member or buy life insurance to fund the sale or something; just kind of build in some seller financing on super favorable terms.

Edited by CorpRaider
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We have a family farm (corn & soybeans out by Noblesville, IN, farmed by a tenant/partner) in a 3 member LLC.  I will read the documents and see if there is anything in there about this but I don't recall any language at all laying out how members buy each others out in advance.  Over 10 years, the value of the farm can change a decent amount - I wouldn't want to lock in a sell price today and end up getting the last of my money 10 years from now.  My Uncle handles the administration and K-1s with our small farm - I'll see if he has any advice.

 

If you are just setting up the LLC for the first time, seems like you all can write the "rules" however you want.  If I were to buy out my cousins, I would assume there would be an appraisal by a 3rd party and a closing with payment in full.  Farmland isn't too tricky to value.

 

Our farm is debt free so I suppose if someone wanted out the remaining members could decide to have the LLC repurchase the interest with borrowed funds, increasing remaining members ownership in exchange for lower distributions while the debt was being paid off.

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I have indirect experience two ways, being part of some of the succession work (mom and dad leaving the family farm to their kids) as well as know multiple people that have tenant in common interests with other family members.  Everyone is in the corn belt for reference.

 

A lot depends on the set up of how ownership came to be (was it inherited directly, or 3rd, 4th+ generations of inheritance), family dynamics (does everyone get along, do any of the owners farm it, or helped mom and dad with farming), state laws (potentially limiting the number of acres per entity), etc.

 

That said, I've seen a few people that try to get out of the ownership interest, either selling to the other owners, or to outsiders.  Either way, you are probably going to take a good haircut, due to being a minority owner and lack of liquidity and control.  

 

For the real estate attorney, do they do estate work?  Are they in farm country?  Or was it just someone random in your network (or found) that does RE transactions?  For resources, you can google, or try looking to some of the farmer specific magazines (as I swear Farm Journal used to have a column about inheritances).

 

As I've not seen that sort of provision before, but I can understand where it is coming from, with potential family dynamics as well as limited income potential (as most crop ground in my state is doing a 2-3% cash yield, which really doesn't support much debt; and with the price of crop ground, even a smaller piece of land would represent a fairly large chunk of cash).  

 

Usually the provisions I've seen are: some sort of buy sell agreement (limiting who can buy); a set amount of time before it can be sold, and number of votes as to major events, like selling; if it goes into an entity, that one of the members can buy it at a discount (as they farmed with the parents when the other kids went and did other off farm things; as a potentially reward to helping to grow the equity and value of the holdings).

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So I read our operating agreement.  The way it is written in ours, if a member wants to leave/sell their units the Company has right of first refusal to buy their interest.  There is an appraisal of the farm net of any cash or debts and the way it is written the Company can pay the departing member in any combination of cash and a promissory note that it chooses.  The buy-out period for that promissory note can be extended for up to 10 years.  Interest is at the "Applicable Federal Rate" whatever that is.  I assume 10yr. treasury rate for a 10yr promissory note.

 

There is also a restriction on transfer of units - all members must agree before any member can transfer/assign/sell/convey/pledge/encumber their interest.  The only exception to this required unanimous consent is that children and grandchildren of a member who dies are automatically allowed in.  If you violate the agreement and transfer your interest to someone else without approval, the new member has no right to participate in the management of the business and is only entitled to their share of distributions.

 

One thing I will recommend, if you like your family members and like vacationing with them, is to hold the "annual meeting" at a vacation destination you all want to go be together at anyway and have the LLC reimburse all members for their costs of traveling to and attending the annual meeting.  This is an expense of the LLC and can cover travel costs, vacation rentals, even a few dinners - with pretax money.

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One more thing - I do not understand the "value per acre" of midwest farmland at all.  Every time they tell me what the ground is worth per acre I'm like, "Why???" - Farmland as an investment always seems way overvalued to me based on its yield.  They say the return comes from appreciation of the ground and it looks ok backward looking but I just can't imagine why someone would want to pay the price for farmland they tell me it is worth.  I would never buy an apartment building with those economics.  🤷‍♂️

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gfp, Grafter, CorpRaider,

 

Thanks for all your comments, very helpful.

 

This farm is just east of Crawfordsville, IN, so less than 50 miles from GFP’s!

 

It has been in my wife’s family for around 150 years. It was jointly owned by my wife’s mother and her brother. Now owned by my wife’s mother and aunt after her uncle died.

 

My wife will own 1/4, as will her sister. There are 6 cousins on the other side with each owning 1/12. One of the cousins is pushing for this LLC.

 

My wife went into the LLC meeting with the farm attorney and accountant thinking the goal was to keep it as a family farm even though no one in the family has farmed it since 1954. She felt that this one cousin was turning it into two sides, the sisters versus the cousins and he did not want the sisters to ever be able to get control. If one of the cousins decided to sell only the other five cousins would be allowed to buy, 10 year purchase at Fed Funds rate (he actually was pushing for 20 years), voting for anything required >67% to pass, etc. I’m not sure what the rule is if my wife wanted to sell and none of the other partners wanted to buy. I will find out more when we get the draft document.

 

I’m thinking we should just leave it as is rather than rush into this LLC.

 

Thanks,

 

Mike

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1/12th!  What a mess.  Yes for our farm we are trying to limit how many ways it gets sliced.  My uncle with a third will try to only pass his interest to just one of his sons instead of all 3.  Just make up the difference with more other assets to those other heirs (my cousins).  Hoping another uncle does the same to his son and it basically always stays a 3 member LLC or the farm is sold.  Also been in the family for over 100 years but I have no spiritual connection to it or anything.  I learned to drive stick there and I learned to ride a motorcycle there but that's the extent of my fond feelings towards the farmland...  It is finally distributing some nice profits lately though!  "Beans in the Teens!" woohoo!

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Yeah TICs can be a mess.  One thing to consider if that in many states (all?) a owner of the interest of a tenancy in common can force a sale through legal petition for partition and appraisal (or something like that), where the court basically supervises the auction of the property and everyone takes there $$$.  It has historically been a big "problem" resulting in the acquisition of coastal property from less sophisticated family holders over here in my neck of the woods (developer basically buys one of the TIC interests and then forces a judicial sale and they're the only one with cash/sophistication).  The LLC operating agreement could at least try to deal with some of those issues, but of course everyone has to agree.  I wouldn't like the set up for accepting terms where the attorney (apparently) is already proposing terms without asking what the goals of the 1/4 interest holders were or previously communicating the reason for the meeting.  

Edited by CorpRaider
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The last year the farm contract was for $265 per acre and there was a $20 per acre bonus received because of the yield/price obtained for the crops. The farm manager says the land is worth $10k per acre. Yield is only 2.85%, but over the last 30 years the land appreciation had been 6% per year. Not great, but not bad, as an investment. If that was all there was too it I would suggest selling and get rid of the headache of those six 1/12 owners. But the land is along Interstate 70 right by an exit. Industry has been going in in the area, like Nucor, and it is less than 50 miles to downtown Indianapolis. In fact some of the land was annexed to put in a road for Nucor. So we will probably hold on when inherited. We also could buy out all the other tenants to prevent a judicial sale.

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Sounds about right.  I still can't believe 10k an acre.  And apparently they are actually putting solar farms in Indiana, which doesn't sound like the best spot to put them but they are leasing farms if you are situated by the right power infrastructure.  We have a different sort of deal with the farmer, where we split the cost of the seed and there is a split on the proceeds so we take a lot more price risk on the actual commodity and we get to decide on the timing of sale / forward sale / storage.

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Yes $10k per acre sounds high. I guess if you were the actual farmer you would be making a higher yield. You probably do better taking on more of the risk.

 

I have a colleague who is doing research on photovoltaics mixed into crop fields.

 

https://www.purdue.edu/newsroom/releases/2019/Q4/local-sunshine-meets-local-needs-with-global-impact-key-is-cogenerating-electricity-alongside-farming.html

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