Texas AG exemption affects loan

[Restrain]

If you are an appraiser in Texas, and you are appraising acreage, here is an issue you may not be aware of. In 2007, the state constitution was changed so that a homestead encumbered by an AG exemption for property taxes cannot have a lien "except if the land is used for milk production".

What does this mean in practical terms? In Texas, if you have a 5 acre lot as an example, 1 acre is set aside on taxes for the homestead, 4 acres for AG. No deeded separation, just an accounting method by the Appraisal District. So you want to refinance the loan, and the loan covers all 5 acres. Whoops! Sorry. Can't do that. Can only refinance the 1 acre.

Lender says, OK. Proceed with the 1 acre. Then you have to deal with a survey, improvements on the 1 acre vs the 5 acres, access to the road, and if the 1 acre can be legally cut out of the 5 acres.

A simple appraisal just became a PITA.

My recommendation is that if you hit this issue, stop and call the lender and discuss the issues.

 

[Amy Perkins]

What this means for the lender is that they will now become a partial interest with the homeowner. As a partial interest, they could not foreclose because each owner within a partial interest as an equal right to occupy the property. Something makes me think that the bank won't be moving in. Also, we cannot value something separate if it is not legally permissable. The bank will likely come after your E&O. So what if they get a loan by having a dairy, then change to a vineyard. Does this mean the loan is no longer valid? I guess the just enact stupid laws in Texas and no one checks to see what the impact is. My thought is that attorneys wrote it to generate more work.

 

[Terrel L. Shields]

"except if the land is used for milk production". ..In Texas, if you have a 5 acre lot as an example, 1 acre is set aside on taxes for the homestead, 4 acres for AG. No deeded separation, just an accounting method by the Appraisal District. So you want to refinance the loan, and the loan covers all 5 acres. Whoops! Sorry. Can't do that. Can only refinance the 1 acre.

Buy a plastic cow like the one on the square in Stephensville and place in the background...

 

[TxArmadillo]

Restrain, do you have the legal source document for this restriction? This makes a huge difference if this law is still on the books.

We (and many appraiser friends of mine) do rural home and land appraisals all the time that potentially have this separation of res and AG exempt on the same survey and with these parcels being encumbered by the loan.

Probably something to post on the ATA website as well.

 

[Restrain]

This thing just recently raised its head regarding a foreclosure and we had to do some research to find out exactly what they were citing. It is Article 16, Section 50(a)(6), regarding equity loans. We as appraisers, when doing a refinance, don't always know if it is a refinance of the existing loan or technically an equity loan. The slightest increase in loan amount, say to cover closing costs, creates an equity loan. So we have to be aware of the issue. We are developing a Disclosure Statement to go on all acreage appraisals citing this issue.

 

[Restrain]

Here is the language. Subsection (I) as pertaining equity loans was amended to read "is not secured by homestead property that on the date of closing is designated for agricultural use as provided by statues governing property tax, unless such homestead property is used primarily for the production of milk".

Given that "hobby farms" routinely get ag exemptions but are often defined subdivision lots, and the borrower wants to refinance the loan, rolling in the closing costs, this can create an equity loan, and this revision goes into effect, screwing up the lending process.

 

[Terrel L. Shields]

Looks like this would screw up your ag exemption instead of the loan.

 

[Restrain]

Yes and no. If the lender misses the Ag exemption and makes the loan, the loan is voidable with no recourse to the lender. Big plus to the borrower. However, the lender can move to get the case transferred to Federal Court and the arguments begin. What is happening is that the lenders are missing this and making loans for equity loans on properties where part of the land is under an Ag exemption, and the lenders are trying to protect their liens when the borrower fails to make the payments and the loan goes into foreclosure.

 

[farmguy]

you can refi, make improvements, pay taxes, and a few other purposes but you can't do an equity loan (cash out).
Most often I see it when somebody wants to remodel house or build a barn and they have a lot of equity and they just want to get the money then go build what they want. Can't do that. But if you provide plans, specs, etc so lender can do a construction loan and can show where money went as improvement it can be done. Or at least that is how I understand. In our part of world it is pretty well known and while it creates a road block from time to time it seldom surprises.

 

[Restrain]

Yep but it jumps up and bites the big boys here. Not used to it especially with small acreages.