It is not unusual for today’s farming families to have worked for generations building their land holdings. Oftentimes, first generational land ownership can be traced as far back as the 1862 Homestead Act. Preserving this legacy asset can be of central importance to those who have toiled to build it.

Land ownership is a real asset and when managed properly it can provide value and cash flow for current and future generations. At Capitaline we understand land and we understand the importance of passing along a family legacy.

Capitaline utilizes Family Limited Partnerships as a structure to hold and manage family farmland. We also provide Farmland Management services for land held within the family partnership. The reality is as generational layers are added and family members disperse, complexities increase. Capitaline can help identify and manage these complexities.

UNDERSTANDING FAMILY LIMITED PARTNERSHIPS

At Capitaline, we understand the interest in taking over a family farm operation has drastically changed over the past several decades. As the modern generations find themselves leaving the homestead for college then moving to metropolitan areas for work, oftentimes there is no one left to farm the land. However, the value and the legacy remain. This is where Capitaline can help families continue land ownership while protecting the family farm legacy by establishing Family Limited Partnerships.

To do this, we believe the key to keeping land in the family for the benefit of current and future generations, is the recognition and management of human, economic, tax, and administrative complexities. We utilize Family Limited Partnerships to provide the framework of structure and governance necessary to administer this important asset in a way that considers the economic, human and tax components.

Human Complexities

Differing Financial Needs: Family members typically have differing needs and desires for cash from the land. Some want to build equity while others desire cash flow.

Differing Emotional Attachment to the Land: For some family members the land is a special place to them. For others it is simply an economic asset.

A Desire to Farm the Family Land: In some cases, one (or more) of the children or grandchildren may want to farm the family land. In these cases, it can be very important to have a professional manager represent the partnership in negotiating rental rates and general oversight of the land.

Economic Complexities

A Significant Family Asset: For many families, farmland can be the dominate assets in an estate. Parents and grandparents may have worked lifetimes to build up this land holding. If not properly structured, tension can mount relative to economics with the potential to tear a family apart.

Asset Valuation: Having a sound valuation methodology in place and professionally administrated is critical to preserve fairness as capital accounts balances may adjust over time to reflect differing cash needs of partners.

Below Market Rental Rates: In nearly every case when we take over the management of farmland, we have found the rent being charged is below market rate and oftentimes significantly less than market rate. This disparity of below market rental agreements can be a source of friction within a land-owning partnership.

Tax Complexities

Flow-through Taxation: A typical legal structure for land ownership is a partnership. Partnerships involve “flow-through taxation” where income and expenses are passed through to the partners on a Schedule K1 Tax Form.

Estate Taxes: Forward planning and a proper partnership structure can provide a significant opportunity to help reduce the burden of estate taxes.

Basis: Managing and tracking each partners tax basis is an important administrative function often overlooked.

Administrative Complexities

Partnership Accounting: Detailed and professional accounting records are a central part of managing all the complexities.

Capital Accounts: Keeping the partners’ capital account ledger of the partnership and allocating income and expenses can be tricky, especially as some partners need cash and correspondingly reduce their ownership percentage.

Annual Reports: A professional annual financial report is the cornerstone for the annual family meeting. Accurate and transparent financial reporting assist in effective decision-making amongst partners. Professional reports also instill trust and confidence amongst all stakeholders.

Partner Statements & Income Distribution Checks: At the annual family meeting each partner receives an updated statement showing their capital account along with a distribution check representing their share of the income. These are important components prepared by Capitaline for the mandatory annual meeting.

FARMLAND MANAGEMENT

Managing farmland is very different from managing portfolios of stocks and bonds. Every farm is different. Fields that comprise the farm are all different. The soils across a given field often vary with topography. Sometimes significantly.

Government programs are complex and ever changing. Understanding these programs and working with them can be an important component to the economics success of the farm and at the same time it can an overwhelming task.

Family ownership groups are all different as are the members within the groups. Managing the farm in a way that considers and balances sometimes divergent goals can be complex. Some family members may enjoy hunting on the land, others are interested in soil health and sustainability practices, some may want to farm the land, and for others, it may simply be an economic asset from which they would like to maximize cash flow.

Managing a farm is not something that can effectively and efficiently be done from behind a computer screen in a far-away place, it takes hands-on management. You need to walk on the land; get to know the farmer operating the land; understand the needs and goals of the family stakeholders; have a working knowledge of the available government programs. There is also technical agronomic data, soil maps, soil test results, soil heath indices, etc.

At Capitaline, we get to know your family and we get to know your land. We want to learn about your goals and family values. We are structured and disciplined and we leverage our experience to help you achieve those goals and preserve your family’s legacy.

WHY CAPITALINE?

We understand the dynamics of family land ownership. Our families own farmland.

We understand farmland management. It is a central part of what we do.

We understand partnership financial accounting and tax reporting. Our business is managing closely held assets within partnership structures.

As a private equity firm, Trust, Professionalism and Confidentiality are core to what we do and who we are.

Contact Capitaline to help with with your Family Land Transition

The next step is just a click away. We look forward to starting a conversation about investing in farmland with you.