Structures for Condominium Storage
Phil Kenkel
Bill Fitzwater Cooperative Chair
There are at least three alternative structures for condominium grain storage. The annual operation is similar across the alternatives.
In the direct ownership structure, producers form a LLC or closed cooperative that owns a storage structure. The condo entity creates a governing board that makes decisions in regard to the storage assets and establishes the rules for use and for transfer of ownership. The participating cooperative manages the grain and the structure on a long term contract with the condo entity. The condo entity may have a defined life or may be structured to operate until its governing board decides to disband (for example at the point that major repairs or re-investment). The participating cooperative may have the right of first refusal on purchase of the facility and a pre-specified salvage price. One advantage to having the condo entity own the structure from the producer’s standpoint, is that the condo entity has the depreciation. This may have some tax advantage, particularly if the condo entity is structured as a LLC and can successful pass through the depreciation. It should be noted that the tax issues are complicated by whether the storage investment can be considered a part of the farm operation or a passive investment.
A major disadvantage of direct ownership of the structure by the condo entity is that the participating cooperative has to locate a storage structure owned by another entity on, or near its properties. This is often unacceptable to the participating cooperative. An alternative is for the participating cooperative to own and depreciate the storage and operate it on a long term lease agreement for the condo entity (either LLC or closed cooperative). The condo is still a separate entity with its own governing body. However, it doesn’t own any assets and simply managing the rules for use and transfer and the lease agreement.
A third structure is for the cooperative to construct and manage storage and enter into long term (for example 10-15 years) lease agreements directly with producers. The producer pays an upfront fee or an annual payment sufficient to recapture construction costs in 4-5 years. After that period the producers pay only a fee to cover the variable cost of storage. All of the rules for the condo storage are managed by the participating cooperative. Under this structure, there is no separate entity or governing body for the condo storage.
3-17-2011