A farm sale may be the traditional sale of a family farm, a corporate agribusiness, a hobby farm or farmland for new development. The buyers may be starry-eyed city slickers seeking the idyllic peace and tranquility of the country or a sophisticated agribusiness corporation. Regardless of the buyer’s experience, myriad farm-related conditions and factors may need to be addressed in the transaction.

Use-value disclosures critical 

The use-value system for assessing farmland gives farmers a tax break. Rather than assessing the property based on its fair market value, farmland is assessed based on its agricultural use. Owners can farm without paying the significantly higher property tax that would result if the assessment were based upon the highest and best use — the potential development value of the land. However, the county treasurer assesses a penalty to the person who owns the property when a non-agricultural use is begun. In a sale transaction, this is often the buyer, not the seller.
What disclosures are required?

REALTORS^® should advise sellers of agricultural land to include the disclosures required by Wis. Stat. § 74.485(7) in the property condition report whenever the property being sold is assessed under the use-value system. The current versions of the Wisconsin REALTORS^® Association’s (WRA) property condition report forms contain the three mandatory disclosure requirements:

• That the land has been assessed as agricultural land under the use value law — Wis. Stat.§70.32(2r)
• Whether the seller has been assessed a penalty — Wis. Stat. §74.485(2)
• Whether land has been assessed a penalty which has been deferred – Wis. Stat. §74.485(4)
• That buyers who purchase and change the use of agricultural property assessed under the use-value system may be subject to a potentially substantial penalty, given that such a penalty would likely be considered a material adverse fact. Sellers and REALTORS^® may wish to disclose this although it is not specifically required by use-value law.

If a buyer intends to develop or otherwise change the use of agricultural land used in farming, the buyer’s offer to purchase should include an investigation contingency so the buyer may confer with local taxing authorities to determine the amount of any use-value penalty.

How is the penalty determined? 

The number of acres changed to non-agricultural use is multiplied by a percentage of the difference between the average fair market value of agricultural land in the county and the average equalized value of agricultural land (the use value). These figures are calculated each year, and are available online at www.revenue.wi.gov/faqs/slf/useassmt.html. Additional use-value information may be found at www.revenue.wi.gov/faqs/slf/usevalue.html.

Water contamination 

Fourteen types of pesticides and herbicides have been found in Wisconsin water supplies. Given the potential for groundwater contamination associated with livestock waste and the application of fertilizers, herbicides and pesticides, it is especially critical that well water be tested. The water should be tested for coliform as well as nitrates, atrazine, and other pesticides. On a farm, nitrates (a danger for infants) can originate from fertilizer infiltration and animal feedlots.

Atrazine (used to control weeds in corn) is by far the most frequently detected pesticide and is considered a possible cancer-causing substance. In areas where corn has been planted, any wells contaminated with pesticides almost always contain some level of atrazine, making the test for atrazine the best indicator of possible pesticide contamination. Wells near underground gas tanks and old landfills should also be tested for volatile organic chemicals (VOC), which can harm the various organs and cause cancer and reproductive system problems.

Conservation Reserve Program (CRP) 

The CRP encourages farmers, through contracts with the U.S. Department of Agriculture, to stop growing crops on highly erodible or environmentally sensitive land and instead to plant a protective cover of grass or trees. CRP contracts run for 10 to 15 years, and owners receive an annual rent plus one-half of the cost of establishing permanent ground cover. Removing lands from a CRP in breach of a contract can be quite costly.

Wisconsin Farmland Preservation Program

The Wisconsin Farmland Preservation Program protects against unplanned development, promotes conservation and provides tax credits to participating farmers. A qualifying owner must own a minimum of 35 acres of land with Exclusive Ag zoning that produces $6,000 of gross farm profits for the tax year the credit is claimed, or at least a total of $18,000 in gross farm profits for the last three years. If the farmland is rezoned, the owner may be required to pay back all or part of the farmland preservation tax credits received in the last 10 years.

Crops 

Perennial crops such as raspberries or apples, as well as trees, bushes, and grass that do not require annual planting and cultivation are considered part of the real estate — that is, fixtures. Annual crops that have to be planted each year, such as wheat and corn, are generally considered personal property and must be specifically listed in the offer if they are to be included in the sale.

Farm leases 

Almost all farm leases begin and end in the spring, typically on March 1 or April 1, and many are verbal “handshake” agreements. Farm leases vary widely in nature, depending on what the landlord and tenant, respectively, are furnishing to the farm enterprise (livestock, equipment, seed, fertilizer, etc.). If the seller or the seller’s tenants will occupy the property after closing or retain ownership of crops, a special agreement for occupancy, insurance, utilities, maintenance, rights to crops, farm operations and government programs should be considered. If there is a tenant with a crop lease or if the seller will retain crops and the closing will occur before harvest, arrangements need to be made for caring for and harvesting the corn after the sale of the farm so that the respective rights of the seller, crop tenant and buyer can be protected.

Business records 

The sale of an operating farm is the sale of a business. Surveys, soil analysis, acreage calculations, government program contracts and records concerning the use of pesticides and herbicides are generally material to the buyer, so a contingency for the review of these records may be advisable. A farmer’s practices with respect to animal feedlots; livestock waste storage; land spreading of livestock waste; fertilizer application, handling and storage; pesticide application, handling and storage; and irrigation may have significant impacts on groundwater and soil quality. Other business records of interest to a buyer may include:

• Inventory of equipment, appliances, fixtures, supplies, tools, or any other business personal property — include whether they have defects, if they are in good working order, and a UCC search for liens and security agreements;
• Inventory and bulk sales;
• Accounts payable and receivable;
• Profit and loss statements and balance sheets;
• Contracts and leases for equipment and supplies, and for production and marketing;
• Permits and licenses, distributorships and franchises;
• Authority to sell;
• Tax returns and unpaid business taxes such as income, sales, payroll, unemployment, or Social Security taxes which are due and payable or which have accrued.

Other farm issues to consider 

• Boundary, lot line and fence issues
• Hazardous and toxic substances disposed of in rural dumpsites
• Crop damage and disease
• Livestock disease
• Odors, noise, flooding, water or soils pollution and other irritants emanating from neighboring properties
• Extent of municipal services like snowplowing
• Insect, wildlife or weed problems
• Floodplains
• Government payments/subsidies
• Zoning: Exclusive Ag zoning
• Auctions

Provisions from the Department of Regulation and Licensing (DRL)-approved business offer to purchase may appropriately be included in such a farm transaction. REALTORS^® may be wise to prepare specialized checklists and addenda for farm transactions until the DRL updates the farm forms to incorporate additional provisions. Those with suggestions for farm form revisions should contact Debbi Conrad at dconrad@wra.org.

Additional resources 

NAR Field Guide to Agricultural/Farm Land: www.realtor.org/libweb.nsf/pages/fg814 and Legal Update 99.07, “Form Revisions,” online at www.wra.org/LU9907.

Debbi Conrad is Director of Legal Affairs for the WRA.

 Editor’s note: The DRL became the DSPS in 2011. Information above may not be current.