- -   AGRICULTURAL CORE CURRICULUM  - -


(CLF1000)  Advanced Core Cluster:  AGRICULTURAL BUSINESS MANAGEMENT

  (CLF1750)   Unit Title: AGRICULTURAL BUSINESS MANAGEMENT

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  (CLF1754)   Topic: AGRICULTURAL                Time             Year(s) 
                     PROPERTY RIGHTS             2 hours            3 / 4     
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         Topic Objectives:  Upon completion of this lesson the student will 
         be able to:

         Learning Outcome #:

           (P-4) - Describe the property rights of agricultural landowners.

           (P-3) - List the characteristics of liability laws as they relate
                   to agriculture.

         Special Materials and Equipment: 

         References: Max A. Mickelsen, Attorney at Law (Agricultural Law),
                       P.O. Box 750487, Petaluma, CA  94975-0487.

                     Luening, R. A., Klemme, R. M., & Mortenson, W. P. (1991).
                       THE FARM MANAGEMENT HANDBOOK (7th ed.).  Danville, IL:
                       Interstate Publishers.

         Evaluation: Participation in Activity


TOPIC PRESENTATION: AGRICULTURAL PROPERTY RIGHTS

To most farmers, owning the land they farm is the ultimate goal.  It would
seem that "owning" agricultural land means that the land belongs to the owner
and he/she is free to use it as he/she sees fit, that other people cannot tell
the owner what to do.  That is NOT the case.  Real property (land) ownership
is not absolute but is instead a "bundle of rights"; it can be compared to a 
cable with several strands, with each strand representing a distinct interest
or right and the total cable representing complete ownership.  The complete or
"fee simple" owner has the right to possess the property, use it, sell it,
give it away, will it to heirs, mortgage it, grant easements on it, enter into
contracts regarding its use or disposition, and lease some of the rights to
others.  However, the owner's rights are limited by government through
taxation, police power, eminent domain, and zoning laws.  Thus, there are
already many restrictions on the "owners" of agricultural property, and in the
years to come it is most likely that restrictions on the use of agricultural
property will become more and more complicated.

Laws affecting agricultural property are important to anyone in the business
of farming, and it is important to know why the laws are being passed.

Agricultural property is, in the eyes of many, the ultimate natural resource. 
Each year, thousands upon thousands of acres are withdrawn from agricultural
production and used for commercial and housing developments.  If a housing
development becomes no longer useful and is torn up, the land can be used for
another purpose (such as a new or different housing project or for commercial
or industrial use).  However, when agricultural land is taken out of
production, it is, for all practical purposes, lost forever.  Although farmers
make up a very small percentage of the U.S. population, farmland is very
visible.  Legislatures--local, state, national--see this transition taking
place and even though they are not involved in agriculture, they know what it
does for the country.  Often they try to pass laws and regulations which
restrict the conversion of agricultural land to other uses, or--for the
benefit of the "general public"--to put what many farmers believe are more and
more restrictions on how the property can be used.

OWNERSHIP IN FEE -  Outright ownership of property is called Ownership in Fee,
sometimes referred to as "fee simple."  If two or more people own the
property, they are referred to as "co-tenants."

Sometimes people choose to own property in joint tenancy.  The full term for
joint tenancy is "joint tenancy with right of survivorship."  This means that
if one of the "joint tenants" dies, the property automatically goes to the
other joint tenants.

This is a very, very important concept.  Joint tenancy happens by right of law
and is NOT influenced by provisions in people's wills.  For instance, suppose
two brothers acquired property and held it in joint tenancy form.  The
brothers both had families and wished that, upon their death, the property
would go to their families.  In order to provide for this, they both
designated in their wills that, in the event of their death, that is what
would happen to their half of the property.  The provisions in their wills do
NOT make any difference.

The fact that the property was held in joint tenancy with right of
survivorship meant that when one brother died, the property automatically went
to the other brother, regardless of what was provided in their wills.  If the
joint tenancy is between a husband and wife, this might be exactly what the
parties want.  It is highly unlikely, however, that that would be the
intention if there is no such family relationship.  Therefore, when acquiring
property, one should be very careful about the exact legal form of the
property ownership.

Suppose a person wants to hold property jointly, but wants to designate what
can be done with his half (or whatever portion of the property he has).  In
that case, the property should be held as a tenant-in-common.  Now the owner
has a joint interest in the property, but has his own interest to do with as
he sees fit, including designating in his will where his property interest
will go in the event of his death.

It may not be enough to simply own property as tenants-in-common.  Suppose a
brother and sister want to own a piece of property, but one of them has no
desire whatsoever to suddenly find him or herself in "partners" with nephews,
nieces, or brothers-in-law.  To provide for that situation, if two or more
people own property as tenants-in-common, they should have an agreement among
themselves that provides what will happen to the property in the event that
one of them dies.  This is referred to as a tenancy-in-common agreement.

It is possible to provide that in the event one of the parties wishes to sell,
or dies, that the other will have the right to buy out that person's interest;
or it can be provided that the property will go to the children or spouse
(husband or wife), but not to a stranger.  Any combination is possible as long
as it is been provided for in an agreement.  Because these agreements affect
real property and may not be resolved in less than one year, they MUST be in
writing.

Generally, all agreements affecting real property (land) must be in writing. 
Even in the rare exceptions when an agreement is not required to be in
writing, it SHOULD be in writing because memories are short and disagreements
and changes of mind are common.

LIFE ESTATES AND TRUSTS - Suppose that a husband and wife acquire a farm and
want to provide that ultimately it will go to their children; at the same
time, they want to make sure that if something happens to one of them, the
other will continue to have the use of the property during his/her lifetime
before it goes to the children.

The way this was handled in the "old days" was to provide that the property be
given at death to the surviving husband or wife in a "life estate"; this meant
that the survivor could use the property during his/her lifetime and it would
then go to the children.  However, if no specific provision is made for this
disposition of the property, and if the husband or wife simply gives the
property to the other at death, the surviving spouse can change his/her Will
and give the property to a new husband or wife, or to some other person or
organization, and the children can be left with nothing.  Having a life estate
protects both the surviving spouse and the children by assuring that the
property will ultimately go to them.

The problem with life estates is that they are difficult to manage and they
can cause some major problems in selling or financing the property if all of
the possible heirs cannot be located.  One way to deal with these problems is
by the use of a trust.  In this case, the owners hold the property "in trust,"
allowing the surviving spouse to use it during his/her lifetime; upon the
second spouse's death, the property goes to the designated heirs.  In this
case, a "trustee" is named; this person can be the surviving spouse, a child,
a bank, or any other person who has authority to act on behalf of the property
while the trust is in existence.

ZONING - All real property is covered by zoning regulations regardless of
whether the land is in the city or in the country.  A high-rise office
building cannot be built in the middle of a residential district, and similar
zoning restrictions apply to agricultural property.

Whenever one buys agricultural property, care must be taken to determine from
the county what kind of zoning restrictions, if any, affect the type of
agricultural operation planned.  For instance, a farm someone wishes to buy
may be perfectly acceptable for its existing farming operation, but zoning
restrictions may not permit a new owner to build a packing plant or some other
operation on the property.  In most cases, zoning restrictions allow other
activities on the property which are directly related to the farming
operation, but this depends on the location of the property.

Some agricultural operations require permits.  For example, a permit may be
required to operate a Grade A dairy.  What becomes frustrating is that
sometimes a permitted use becomes a "non-conforming use" if the property is
sold to a new owner.  For instance, if an operation was a poultry ranch for
many years and the local zoning laws changed so that the property could no
longer be used for that type activity, the zoning law change wouldn't prohibit
the poultry farm from continuing.  The zoning change might restrict the
poultry farm's ability to expand, but it probably wouldn't stop its operation. 
On the other hand, if the poultry farm is sold, the new owner may be subject
to entirely different rules and regulations.  This can also apply to
situations where the operation of a dairy farm, for instance, was perfectly
acceptable by the existing owner, but if he sells it, it might have to be
brought up to new code requirements because of the change in ownership.  These
new code requirements might be so severe as to make continuing operation
uneconomical.  Thus, it is important for a propspective buyer of agricultural
land to investigate with the local planning department whether there are any
restrictions regarding the use of the land.

BUY PROPERTY SUBJECT TO EXISTING LIENS AND ENCUMBRANCES - Real property has a
very technical series of recording laws that might be summarized as "first
recorded, first in right."  For instance, any person who lends money on
property takes back a mortgage or deed of trust on the money that was lent. 
To "secure" this loan, a deed of trust is put on the property.  This deed of
trust is recorded in the county where the property is located.  It becomes "of
record" and anybody who acquires an interest in the property after that
acquires the property subject to that lien or deed of trust.

Consider the following situation: A farm has a value of $500,000 and there is
a loan on it, properly secured by a deed of trust, for $200,000.  Someone buys
the property and pays the farm's owner $500,000.  Unless proper arrangements
have been made, there is no guarantee that the seller will actually "pay off"
the $200,000 loan.  Even though the full price of $500,000 was paid, the
property still has a "lien" and the buyer would still be liable for payment of
the lien, even though he had already paid the full purchase price.

Loans against property are easy to comprehend, but restrictions can be far
more complicated.  It is possible that a utility company has obtained an
"easement," which is a right to use a part of the property for such things as
gas lines or electric poles.  Perhaps a neighbor has acquired a similar
easement to drive across the farm to get to his property.  Perhaps a water
district has a right to run an irrigation canal through the property, or a
neighbor has acquired the right to use water from the well.

All of these are possible restrictions against the use of the property.  If
they were properly "recorded," they are liens or encumbrances which a new
owner would be subject to; in other words, the already existing rights take
priority over a new owner's rights.

In order to protect against buying a farm without knowing about already
existing restrictions, a new owner should make sure that any restrictions are
"cleared" from the property.  This is done when an escrow is opened.  A title
company runs a title report on the property which lists all properly recorded
exceptions.  A prospective buyer can then decide whether or not to go ahead
with the purchase of the property.  If there are loans or other liens against
the property that need to be paid off, they can be paid off through the escrow
and the new buyer is thereby assured of their payment.

WATER - The lifeblood of all farming operations is water.  There are two basic
kinds of water rights: riparian and appropriative.  Riparian water rights
refer to water that is under property or that flows through property.
Generally, a farmer has a right to use water from a stream flowing through his
property.  Obviously, there are other farmers above and below who also have
similar rights.  These rights are generally proportional, meaning that each
has similar rights to the use of the property.  Thus, an upstream owner cannot
"dam off" the flow of water and divert it to his use to the exclusion of
downstream owners.

Each person along a stream has a right to the natural and reasonable use of
the water; however, preference is given to domestic use, (which is 
household-type use), and often livestock use has prioity over crop use.

Appropriative water rights are complicated.  They run absolutely contrary to
riparian rights.  In this case, a person appropriates or takes water away from
the property to another location.  In general, the principle is "first in time
is first in right."

Since water, in most cases, runs through a stream out eventually to an ocean,
there is "excess" water not used by riparian users.  This is the kind of
"excess" water that can be appropriated.  This principle permits water from
nothern California streams to be diverted to the Central Valley and southern
California.  Most kinds of appropriated water rights have to be filed with the
state and the amount and manner in which water can be appropriated is
controlled.  (Further details regarding appropriative water rights are beyond
the scope of this lesson.)

PROPERTY TAXES - Property taxes can have a very severe impact on the economics
of a farming operation.  Often farms are valued considerably higher than what
they are worth for farming operations.

California has two laws that help this.  The first is commonly referred to as
Proposition 13.  Essentially, Proposition 13 says that property will not be
taxed at its highest and best use but rather at its base value subject to a 2%
tax increase per year.  For example, a farm retained in a family has a Prop.
13 base valuation of $100,000.  Even though residential or other development
have increased the value of the property to more than $1,000,000, the property
taxes will be limited to the base value which can be increased no more than 2%
per year.  Thus, even though urban pressure may push the value of property far
beyond its agricultural worth, the property taxes remain at its "base" value.

This situation continues for as long as the property remains under the same
ownership or is transferred to the children of the original owner.  However,
if the property is purchased by a stranger, the value rises to its purchase
price; at this time, the property taxes may make it uneconomical to continue
agricultural uses.

An option available to most farming properties is to choose to put the
property into the "Williamson Act."  Whenever this is done, the property is
valued at its agricultural value and not according to any inflated values due
to urban pressures.  To qualify, the farmer enters into a "Land Conservation
Act Agreement" wherein he agrees that the property will remain in agricultural
production for ten years.  This is a rolling ten years, so that at the end of
each year, an additional year is added on; thus, at any given time there still
remains ten years remaining on the contract.  If a farmer enters into such an
agreement, and the property qualifies as being true agricultural property,
then it is valued at its agricultural value and not at some higher value.

This can often result in very significant property tax savings.  At the same
time, it does put a restriction on the use of the property.  Years ago people
thought they could simply cancel a contract at any time they wished and pay
off "penalties."  That is simply not true.  A Land Conservation Act Agreement
can be canceled only if a substantial public benefit is shown and that is
very, very difficult.  Williamson Act agreements are a recorded lien on the
property which show up in any title report.

HAZARDOUS WASTES - Substantial laws and regulations have been enacted covering
hazardous waste (which includes such things underground fuel tanks and garbage
dumps on property).  If something is determined to be a hazardous waste, it is
subject to federal and state regulations which are very, very severe.  The
cleanup costs can be astronomical.  Generally, these are strict liability.
Even if the hazardous waste was created by a previous owner, a current owner
might also be liable for the cleanup costs.

Although it is sometimes possible for a new owner to be reimbursed by a
previous owner, collecting the money can prove difficult.  Thus, in any
acquisition of agricultural property, a new owner should make sure that he is
not acquiring a significant liability for hazardous waste.

Unfortunately, many old farms have underground fuel tanks and/or garbage
disposal sites on the property.  In particular, those two items should be
investigated prior to acquiring the property.  If it appears that a
substantial risk exists, then either an adjustment in the purchase price or an
arrangement for protecting the new owner against cleanup costs should be made.

Most insurance policies now exclude liability for such cleanup of hazardous
waste.  A new owner could be liable for very significant damages without any
possibility of insurance recovery and the ability to collect from the prior
owner(s) may be extremely difficult.  Thus, it is wise and prudent to fully
investigate the issue of hazardous waste on agricultural land.

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            ACTIVITY:

            1.  Obtain from a local realtor a list of agricultural
                properties for sale in the area.  Identify the 
                strengths and weaknesses of the properties for
                various agricultural uses.
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12/16/91  MM/CH/EEZ/ch

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