Farmland easements are legal agreements that grant specific usage rights over a portion of land to an individual or entity that does not own the land. These easements are a critical component in agricultural financing, as they can significantly impact the usability, value, and management of agricultural properties. For farmers and landowners, understanding the nuances of easements and their implications on financing is essential to ensure smooth operations and safeguard the investment in their land.
“Easements come in many forms. Generally, easements are a recorded legal document(s) that allow someone else (other than the owner of the property) to use your land for another feature,” shares Luke Schultz, Conterra relationship manager for the Great Plains. “In reverse, you yourself might have an easement to legally use someone else’s land for your benefit.”
Common easements seen on agricultural properties include:
- Utility: The ability for utility companies to use your land for gas and water lines or power lines, etc.
- Oil/Gas/Solar/Wind Company: The ability for companies to travel on and off your property to mine, drill, or install equipment.
- Ingress/Egress: The ability for someone to pass through your property to access theirs, or vice versa.
- Conservation: These farmland easements are more in depth, as to the owner ‘selling off’ their bundle of rights in exchange for giving something away such as no development, no mining or drilling, no solar, no wind turbines, etc.
The Importance of Farmland Easements in Agricultural Financing
Easements are particularly relevant during the sale and purchase of agricultural acres. They can determine access routes, water rights, utility corridors, and conservation efforts, each of which can influence a property’s value and operational capacity. For lenders, the presence and terms of farmland easements can affect the appraisal value of the land and consequently the loan-to-value ratio. An easement that restricts usage or provides public access could lower the land’s value, while one that guarantees access to essential resources like water or roads might enhance it.
“Easements can and do serve good purposes (i.e., added income to the property, ingress/egress simplification),” Schultz continued. “However, once the owners’ bundle of rights is pierced, a lender needs to evaluate these easements, in good faith, to determine the impact the easement has on the lenders’ security.”
Common Issues with Farmland Easements and Their Mitigation
Several issues might arise with farmland easements, impacting both current operations and future land transactions:
- Ambiguous Terms: Once the bundle of rights is changed, vague or poorly defined easement agreements can lead to disputes over the extent and use of the easement. To mitigate this, ensure that all easement terms are clearly documented, specifying the exact rights granted, responsibilities of each party, and any limitations.
- Access Problems: Easements that fail to provide adequate access to essential parts of the property can hinder operations. Farmers should work with surveyors and real estate attorneys to establish clear and practical access routes.
- Conflicting Uses: When easements allow for land use that conflicts with farming activities, such as public access for recreational purposes, it can disrupt operations. Mediation or renegotiation of terms might be necessary, ideally facilitated by professionals like mediators or negotiators.
- Environmental Concerns: Easements might involve land with environmental restrictions, impacting agricultural practices. Consulting with environmental consultants can help identify these issues and find compliant solutions.
- Impact on Property Value: Easements can either positively or negatively impact property value. Financial advisors can provide insights into the long-term financial implications, helping landowners make informed decisions.
- Additional issues: Will the existing easements affect who would want to buy the property the next time it is up for sale? Have utility companies abandoned any projects and passed the cleanup expense to someone else?
How can Easement Issues Hold Up Your Loan Closing?
Many easements on record require ag lenders to get subordination from the easement holder. This can add time to the closing process as additional third parties become involved. Sometimes, when current access is limited or not allowed, lenders will need the prospective client to obtain an ingress/egress easement to ensure the lender knows the second property can be accessed legally. Conservation easements require an abundance of added time to the closing process as the specifics of the easement and how it affects the property being pledged as collateral.
“To mitigate these concerns, a borrower should talk with their lender up front about all of the pros and cons of easements on their property,” advises Schultz. “Landowners should also consider the next generation of the next business transaction before placing an easement on their property.”
Why and Who to Consult Regarding Land Easements
Given the complexities involved, consulting with various professionals ensures that farmland easement agreements are legally sound, practically useful, and financially viable:
- Real Estate Attorneys: They provide legal expertise, ensuring that easements comply with all relevant laws and protect the landowner’s rights.
- Surveyors: Essential for providing precise property surveys and legal descriptions, helping to avoid future disputes.
- Mediators/Negotiators: These professionals are invaluable in resolving conflicts and ensuring that easement terms are fair and equitable.
- Land Use Planners: Planners help ensure compliance with zoning and land use regulations, which are crucial for avoiding legal issues.
- Financial Advisors: They assess the fiscal impact of farmland easements, guiding decisions that optimize financial benefits.
- Environmental Consultants: Consultants provide insights into minimizing the environmental impact of easements.
- Agricultural Consultants: These experts can tailor easement agreements to fit the specific needs of farming operations.
- Estate Planners: For long-term planning, ensuring that easement arrangements align with succession plans and future goals.
- Agricultural Extension Agents: They offer extensive networks and resources, connecting landowners to additional expertise as needed.
Farmland easements play a crucial role in agricultural financing, influencing land value, operational efficiency, and overall financial health. By understanding the potential issues and consulting with the right professionals, farmers and landowners can navigate the complexities of easements effectively.
Clear documentation, practical access routes, conflict resolution, compliance with regulations, and strategic financial planning are all essential components in managing easements. Ultimately, these efforts ensure that easements support rather than hinder the long-term success and sustainability of agricultural operations.
Conterra Ag Capital is dedicated to financing American agriculture, offering specialized agricultural loan products tailored to meet the specific needs of farmers and ranchers nationwide. With a team of experienced relationship managers like Luke Schultz strategically located across the country, we provide regional expertise and personalized service to our clients. Whether you’re a seasoned producer or new to the industry, Conterra is committed to supporting your agricultural endeavors. Our people, products, and process-driven approach to lending makes us unique.
Disclaimer: Please note that the information provided in this article is for educational and informational purposes only, and should not be construed as financial or investment advice. While we have made every effort to ensure the accuracy and reliability of the information presented, Conterra Ag Capital and its affiliates make no representation or warranty as to the completeness, correctness, timeliness, suitability, or validity of any information contained in this article. You should always consult a qualified financial advisor, tax professional, or other qualified professional for advice on your specific financial situation.