What is Escrow – and Why is it Important in Your Poultry Loan?

First Financial Bank
The term escrow has multiple meanings. Learn more about what it means to you, especially if you are considering buying a poultry farm.

“Escrow” is a legal concept where a third party holds money or assets on behalf of two parties who are in the process of a transaction. This protects both parties. You may encounter this concept in a few ways during a real estate deal.

Escrow Meaning in Real Estate

If you’ve purchased a home, you’ve already encountered the concept of an escrow deposit. To show your commitment to the buying process, you provided a certain percentage of the purchase price as a good faith deposit to an escrow agent.

However, there are other uses for escrow in a real estate transaction. Once the purchase is completed, an escrow account may also be used to help provide assurances to you and your lender that key elements, like insurance, continue to be kept up-to-date. When you are a first-time home buyer, you will typically be required to have your home insurance payments paid from an escrow account to assure your lender that if something happens to the home, the lender can still recoup their investment.

Buying a Poultry Farm

When you buy a commercial poultry farm, you are working with an integrator in addition to a lender. Your earning opportunities and loan payment schedule are aligned as a poultry farmer. Typically, you’ll have approximately five flocks per year; when they are sold, you earn revenue, and the loan payment is due. In addition to paying your other business costs, you’ll also have to pay your annual farm insurance, property taxes, and potentially life insurance. Sure, you could save something from each flock payment towards your loan, taxes, insurance, and other bills, but what happens if something goes wrong with a flock and you don’t have the money? A better way to do this is to use an escrow account for your poultry farm.

Using Escrow as Security for You and Lender

At First Financial Bank, we have been a leading poultry lender since 1993, and we have a deep understanding of the commercial poultry farming industry and want to make it easier for you to be successful. In addition to aligning your loan payments with the payments for each flock, we help you protect your assets through the use of escrow.

Smiling man.

Allen Ginn, trusted advisor of our Poultry Lending Division: “When working with a new poultry loan applicant, we project the annual costs for farm insurance, property taxes, and if needed, life insurance into our cash flows.  We use the premiums of current poultry customers with similar farm setups to project farm insurance and property taxes.  If our new applicant is escrowing these annual expenses, we collect these premium amounts over the course of the year through flock assignments with the poultry integrator.  The calculation is as follows:

We take the annual premiums to be escrowed and divide by the # of flocks that the poultry integrator projects the farm will produce annually.  Depending on the size of the bird raised, these flock assignments may be based on 4, 5, or 6 annual flocks.

As escrow funds are received from flock assignments, they are held in an escrow account.  When premiums come due for farm insurance, property taxes, or life insurance, we pay them directly on their behalf, so they don’t have to worry about due dates or having the available funds to pay them.  Our customer stays current and in good standing which offers a peace of mind for both the customer and the lender.”

Property taxes and insurance can be expensive. What if you need those first few flock payments to have enough money to cover them? Talk to a lender here at FFB about options for covering that first year – it’s a service we are able to provide.

 “When we meet with a first-time applicant, we explain how escrow works and how having the essential funds already in escrow when making those payments makes everything so much easier. We can include the first year’s farm insurance, property taxes, and life insurance premiums in the use of proceeds so that they do not have to come out of pocket with what could be a very large expense at start-up.  They understand the benefits of having an escrow account and are grateful it is one less thing on their list to worry about. – Allen Ginn, Agriculture Lending Officer/SVP, First Financial Bank”

What Happens if Insurance Costs Go Up?

Over the last few years, we’ve seen significant jumps in the cost of farm insurance. Once we get a renewal policy and see an increase, we reevaluate the escrow amount to see how much will need to be set aside. We send a new assignment for the money from the integrator. We don’t ask you to make it up – we just add enough over the next year from the flock sales to get your escrow account back to positive.

Can I Opt Out?

Some poultry farmers have asked us if they can opt out of having these tax and insurance payments in escrow. The answer is “it depends”. If this is not your first real estate purchase and you have a solid history of staying in good standing on your loans, taxes, and insurance, you may be eligible to sign an escrow waiver to opt out of this service. If you do, you are responsible for keeping these payments up-to-date and managing any increases in premiums – regardless of the success or failure of your flocks. According to Allen Ginn, “Even those who are eligible to opt out find having these essential payments in escrow can be a lifesaver when something unexpected comes up. It can mean the difference between an inconvenience – and a disaster.”

Streamlining the Process

By incorporating an escrow account into your loan process, we help you streamline the process. As a poultry farmer, you already have a lot to manage. By including your property taxes, farm insurance, and even life insurance payments into escrow, we can help ensure that these are paid automatically and on time, regardless of the success of a flock or policy cost increases. It gets set up, and you can forget it – and focus on making your new poultry farm a success.

We offer free consultations with our experienced Poultry Lenders to discuss your plans. Sign up here, and we’ll get it scheduled.

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