We have found no statutory or regulatory limits for terms of loans secured by farm real estate. Having said that, a recent FDIC Financial Institution Letter (FIL) states that a “reasonable” loan term should be supported by a “projected cash flow analysis,” and 40 years may be too long a period, given the FDIC’s concern that a cash flow analysis must hold up through future economic cycles. In addition, your bank should consider whether longer term loans authorized in the bank’s loan policies may expose the bank to a greater concentration of credit to a particular borrower or segment of borrowers.  

Notably, the OCC Comptroller’s handbook states that a 30-year term is common for agricultural real estate loans, but much shorter terms are used for other farm-related capital loans, depending on the useful life of the asset being financed.  In our view, your bank could choose to rely on either the OCC Handbook or the FDIC FIL (assuming its cash flow analysis criteria are met) to justify a 30-year term for a loan secured by farm real estate, provided your other underwriting conditions are met and your loan concentration limits are not an issue.

For resources related to our guidance, please see:

• FDIC Financial Institution Letter, FIL-39-2014 — Prudent Management of Agricultural Credits Through Economic Cycles (July 16, 2014) (“Risk analysis should center on a borrower’s cash flow and repayment capacity and not rely unduly on collateral values. For most agricultural loans, primary repayment sources include cash flows from anticipated crop production and livestock operations. Therefore, credit analysis should assess the timing and level of projected cash flows over a reasonable period and ensure that cash flows match the purpose and terms of a loan.”)

• FDIC Financial Institution Letter, FIL-39-2014 — Prudent Management of Agricultural Credits Through Economic Cycles (July 16, 2014) (“Concentrations of credit to individual borrowers or segments of the agricultural industry should be identified and carefully managed. The FDIC expects institutions to effectively manage credit concentrations and comply with statutory lending limits; however, this does not mean lenders should automatically refuse credit to sound borrowers because of their particular business segment or geographic location. Instead, lenders should base loan decisions on the creditworthiness of individual borrowers, an institution’s risk appetite and tolerance, and the adequacy of risk management practices. These practices should include agricultural lending policies that detail the board’s risk tolerances and include appropriate procedures for identifying, monitoring, and controlling concentrations.”)

• OCC Comptroller’s Handbook, Agricultural Lending, printed page 14 (“Long-term Loans: More commonly referred to as term loans, this type of debt is normally associated with the purchase or development of capital assets, such as real estate, machinery and equipment, breeding herds, and orchards. Final maturities vary, depending on the useful life of the asset or collateral pledged. Breeding livestock (cattle) are normally amortized over three years, machinery and equipment over five to seven years, and real estate up to 30 years. The primary source of repayment normally is cash flow from operations, with liquidation of collateral viewed only as a contingent, secondary source.”)