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MARBIDCO Land Preservation and Next Gen Programs

MARBIDCO Installment Purchase Agreements (IPAs)

Tax-advantaged Financial Agreement for Conservation Easement Sellers

Working in conjunction with State or county farmland preservation agencies, this program enables the purchasing of easements on agricultural properties using tax-advantaged financial arrangements structured to benefit both landowners and the participating units of government. Please note that MARBIDCO no longer offers IPAs.


What is an Installment Purchase Agreement (IPA)?

In an Installment Purchase Agreement (IPA), the buyer of a land conservation easement pays the seller the easement value in installments over a period of time. At the time of the agreement, the property is immediately restricted from future development and the buyer takes immediate possession of the conservation easement. However, the seller retains the legal security until the buyer pays for the easement in full.

There are several potential benefits of an IPA for the seller, including the deferment of capital gains taxes, charitable contributions, and estate planning. Any potential tax benefits should be explored with a legal and/or financial professional. 

Overview

MARBIDCO’s IPA program has been used in the past in cooperation with the Maryland Agricultural Land Preservation Foundation (MALPF). The Foundation purchases agricultural land preservation easements that forever restrict development on prime farmland and woodland. MALPF settled on its first purchased easement in 1980. As of June 30, 2017, MALPF has permanently preserved 304,858 acres of farmland across all of Maryland’s 23 counties farmland.

MALPF has historically offered sellers of agricultural land easements three payment options:

  • A lump-sum payment at closing;
  • Equal installment payments from two to ten years; or
  • An installment purchase agreement (IPA)

However, since the onset of the "Great Recession" MALPF has not had the resources to pay for IPA transaction expense (beyond the easement purchase cost). Therefore, persons wishing to have an easement purchase facilitated through an IPA will have to cover the transaction costs themselves. Some counties are able to purchase easements, and may offer similar or different payment options than MALPF. In addition, several County govenrments also have programs to purchase conservation easements.

Installment Purchase Agreements

A MALPF (or county) IPA is a contract between MARBIDCO, the conduit partner, and the seller of an easement. The IPA is comprised of two parts:

  • First, the easement seller will receive the payment of the principal (the amount of the offer or the unpaid balance left at settlement) at the end of the period of the agreement.
  • Second, the easement seller will receive tax-exempt semi-annual interest payments during the period of the agreement.

When using MARBIDCO, IPAs have been offered in $100,000+ denominations (as desired by the easement seller) at increments of five years from 10 to 30 years. In other words, each $100,000+ IPA could be for a period of 10, 15, 20, 25 or 30 years.

Potential Benefits to Sellers of IPAs

  • Capital Gains Tax Deferral. IPAs are structured under Section 453 of the Internal Revenue Code to defer capital gains, and capital gains taxes, until the principal payment is made at the end of the IPA term (up to 30 years later).
  • Tax-Exempt Interest Payments. In the opinion of bond counsel, the semi-annual interest payments received under an IPA will be exempt from federal income taxes. These payments can provide sellers with tax-exempt income over the term of the IPA on the full value of the easement, not just the portion remaining after paying capital gains taxes.
  • Charitable Contributions. If a “qualified farmer”, one who derives more than 50% of their income from farming, sells an easement for less than appraised value, he/she may be able to deduct the discount up to 100% of income in the year of sale, and use any remaining deduction over the following 15 years.
  • Flexibility for Estate Planning. IPAs can provide an attractive financial instrument to help in estate planning. If the IPAs pass through an estate, the estate taxes can reduce the ultimate capital gains. Farmers with multiple heirs can divide the sale price of the easement into as many IPAs (greater than $100,000) as desired.

Interest Payments for an IPA

Interest rate for each IPA are based on market rates at the time of closing and remain the same for the entirety of the IPA. Payments are made by MARBIDCO directly to the easement seller through a paying agent bank or with MARBIDCO acting as the paying agent.

Cost of an IPA

All program costs, aside from the easement purchase cost, are borne by the applicant. MARBIDCO strongly urges each seller to hire and consult with an accountant, tax attorney or financial advisor who can assist in assessing how an IPA affects his/her financial situation.

Selling an IPA

Each IPA contains a restriction on transfers of the IPA, except to settle an estate. However, after one year, an IPA can be freely transferred to heirs or sold to investors. In the past, sellers of IPAs in the secondary market have assigned the right to receive IPA payments to a trustee bank, which issued certificates of participation that are sold to investors. Sellers must make all arrangements and pay all costs connected with such a sale.

Selling the Land

The IPA has no effect on property ownership. The deed-restricted property can be sold at any time, subject to the terms of the deed of the easement. If the property is sold, the seller will continue to receive interest on and principal of the IPA until the purchase price is paid.

Questions to Consider:

A landowner considering to sell an easement through an IPA should consider the following questions:

  • whose name (personal, joint, trust, partnership, corporation) is the property held?
  • How much was paid for the land, or how much was it worth when it was inherited?
  • How much debt does the land secure, and will the lender subordinate its mortgage to the deed of easement?
  • How much of the basis in the land should be allocated to the easement?
  • In what tax bracket are you, and what bracket will you be when you receive payments for the easement?
  • If you are selling your easement for less than its fair market value and you are a qualified farmer, what is the value of the charitable contribution over the next 15 years?
  • What will the estate tax liability of your heirs be, and how will they pay it?
IMPORTANT NOTICE
About Financial Advice

Each person considering selling development rights under this program must rely on advice from his or her own tax or financial advisor to evaluate the possible financial benefits of this transaction in light of individual circumstances, and to advise on IRS treatment of IPAs.

Additional Information

Applications and additional information regarding MALPF’s acquisitions of easements may be obtained from your county’s farmland preservation program administrator. For more information, see: http://mda.maryland.gov/malpf/Pages/Program-Administrators.aspx