Land Smart Resources

By Curtis Seltzer

BLUE GRASS, Va.—Many years ago, I had no money. I did not think of myself as a land buyer. But I was intrigued with idea of buying land.

With pennies dug out of the couch, I came up with 25 cents for a used book at my local library book sale, George Bockl’s, How to Use Leverage to Make Money in Local Real Estate, 1965.  How wrong could I go, considering that it came in hardcover with a dust jacket.

This was my first real-estate book. Bockl described commercial real-estate deals he had done in Milwaukee.

Financing, he showed, was not the hard part; thinking out the elements and tactics of the deal was.

While I knew nothing about commercial and industrial buildings, I understood that if you kept turning a problem over, sooner or later you would probably find an angle of solution that would work.

About that time, a 430-acre farm was coming on the market. The seller was using a sealed-bid system with a $350,000 minimum. (This was a long time ago.)

How could I buy this farm with no money? My wife, Melissa, a lawyer, said simply: “You’re NUTS!”

Given her encouragement, I smoked a cheap cigar and started to think.

I would have to get money from somewhere other than my own pocket. That was simple enough.

The first pocket I looked into was the farm itself. I divided the entirety into core assets and severable assets, that is, pieces I wanted to keep and pieces I was willing to give up in order to keep what I wanted. I would part with the farmhouse and 30 acres, some or all of the merchantable hardwood timber 16” in diameter and larger and 100 acres on one side that we came to call the Secret Valley.

I figured I could get $100,000 for the farmhouse and the same for the Valley. That would leave me with about 300 acres — half good pasture, half woods — and the need for about $150,000.

A consulting forester cruised the woodland to determine the volume and value of the merchantable timber. If I cut it hard, I could find about $125,000. The value was in hardwood sawtimber—sugar maple, oaks and cherry. The low-value species — hickory, black birch, hemlock — might have a little pulp value.

I learned two lessons.

First, buyers should value a potential acquisition of rural property in light of its
component parts, both as to what they can be sold for immediately and what they can generate in
yearly income.

Assets — timber, improvements, spare houses, lots, minerals, wind rights, water rights, leaseholds, future rights, etc. — that the buyer sees as marginal to the core property that is to be kept can be sold or rented to help finance the acquisition. To avoid extra taxes and transaction fees, sale of marginal land assets can be arranged during escrow and scheduled as a simultaneous closing.

In some cases, it is to the buyer’s advantage to wait a year from the date of acquisition to effect the sale of a land asset so as to get capital-gains treatment on the gain realized over adjusted basis. But it depends, of course, on the amount of taxable gain involved. If the merchantable timber is sold for the value of its original  basis as determined in a pre-acquisition cruise, there’s no taxable gain at that time on its sale.

The companion tactic to selling merchantable timber to finance an acquisition is to sell some of the land. Smaller parcels always bring a higher per-acre price than what was just paid for the entirety.

Second, I started to learn how to use timber as an acquisition tool. A good consulting forester provides the critical valuation and management information a buyer needs before the buyer submits an offer. Stumpage are always local and changing. Different timber buyers will value the same timber differently according to their individual inventories and needs. The buyer’s consulting forester will be able to properly value the timber and assign a basis for tax purposes at the time of the buyer’s acquisition.

Woodland brings other financial benefits. Many states offer property-tax breaks for timberland enrolled in their managed-timber programs. The requirements are usually minimal, and the reduction can cut annual property tax in half. Some states tax standing timber or timber sales.

Enrollment in a state’s managed-timber program helps to establish that a taxpayer is engaged in the business of timberland management and production. A business is afforded more favorable federal tax treatment than an individual owner who is not organized as a profit-seeking business.

For woodland (or open land) with environmental value, a landowner can donate a development-limiting easement without affecting timber production. Such conservation easements can bring the taxpayer substantial federal, state and local tax savings.

One of George Bockl’s sentences that I underlined many years ago was this: “Ideas create wealth.”

Not one idea, several ideas harnessed toward a single objective. Ideas that are based on experience and coupled with tools and technique. The formula is always the same, whether it’s science, literature, real estate or production of lollipops.

It even worked for me.

I bought the farm with no money in the deal, sold what I had to and kept a good chunk of it.

Now, when I return from the annual library book sale, Melissa asks if I’ve bought another 25-cent real-estate book.

A Curtis Seltzer is a land consultant who works with buyers and helps sellers with marketing plans.  He is author of How To Be a DIRT-SMART Buyer of Country Property at www.curtis-seltzer.com. He does commentaries on public radio.

An interview with Tom Brickman
owner, South40 Partners

Question: You say timber prices are up. But don’t a lot of people say timber prices are down?

Brickman: Well, prices are down for some kinds of timber. But in the last month or two we’ve seen huge price increases for other kinds of timber.

Question: What are you seeing that leads you to believe this?

Brickman: We market timber for our clients year-in and year-out. So, we’re constantly in touch with the timber markets. For the past year we’ve encouraged our clients to delay selling if possible because prices were low. But, by late September we knew prices for some kinds of timber were starting to creep up. So, in December we put two tracts of timber on the market. When we opened the bids, the sales brought 50% to 100% more than our appraisals! We were surprised by the strength of the market.

Question: So, you would advise anyone with timber that now is a good time to sell?

Brickman: No, we would not give that advice. And the reason is that it depends on what kind of timber the landowner has to sell.

Question: What do you mean by ‘kind’ of timber?

Brickman: In general there are four ‘kinds’ of trees in the woods: A – pine pulpwood used for making paper; B – hardwood pulpwood used for making paper; C – pine sawtimber used for making lumber; and D – hardwood sawtimber used for making lumber. The price for pulpwood trees, especially hardwood, is up 300% to 400% in the last 2 months.

Question: So, on a particular tract of land, a landowner can sell one ‘kind’ of trees but not the
other?

Brickman: Usually not, though there are exceptions. Typically the four types of trees occur in a mix of ‘natural’ (meaning unplanted) timber that grew back after the last harvest. But, for the first 25 years or so, the trees are predominantly pulpwood. By selling a tract of timber that is predominantly pulpwood now, you capture these high prices. The four types usually can’t be sold separately until they are much older.

Question: What about planted pine stands?

Brickman: Well, this is an exception. If the trees are at least 14 years of age and have never been thinned, it’s a great time for a first-thin. However, if the trees have been thinned, even if the remaining trees are still pulpwood sized, then a landowner will make more money in the long run by growing them to sawtimber size and waiting for better prices.

Question: So you’re saying pine sawtimber prices are low?

Brickman: That’s right. The price today is about 60% of what it brought 2 years ago due to a 70% drop in housing construction. So, we still encourage our clients to avoid selling timber if pine sawtimber makes up the majority of the total value of all trees on the property (or if it’s a thinned plantation). As for hardwood, high grade sawtimber prices are still OK, like they have been for several years.

Question: So, you believe pine sawtimber prices will rise in the future?

Brickman: Yes, we do, though we hear lots of discussion on this. For example, a just-thinned pine plantation has 20 years of growth left, and 80% of the trees there today will grow to sawtimber. It’s hard for me to think that in 20 years we won’t see housing demand return, and it’s hard to imagine something cheaper than a pine board to build them with. Keep in mind that over the last 20 years pine sawtimber prices have averaged 400% to 800% higher than pine pulpwood.

Question: What is causing the high pulpwood prices today?

Brickman: It’s mostly weather related supply issues. The large amount of rain we’ve had this year makes it difficult to harvest many tracts of timber. So pulp mills are short of supply. Hardwood, especially when it grows on dry ground that can be logged now, is bringing big premiums. Also, landowners should realize that these high pulpwood prices are probably a short-term situation and that prices will probably go back down once things dry up in a few months. It’s important to act quickly to take advantage of these prices.

Question: It all sounds complicated. Boil it down for us – who should sell timber today?

Brickman: It’s pretty simple. Any landowner with natural timber at least 18 to 20 years of age that isn’t growing in a bottom and where pine sawtimber is a minority of the total value; or, a landowner with planted pines at least 14 years of age that have never been thinned. In these two cases, now is a very good time to sell. But we’re also recommending that planted pines not be clear-cut just because pine pulpwood prices are up and pine sawtimber prices are down. My Dad would call that “eating the milk-cow”. We’ve worked in these markets for 35 years and have seen lots of ups and downs. We believe pine sawtimber prices will return.

Question: But, not every situation falls neatly into these two categories. What can a landowner do to be sure they make a good decision?

Brickman: That’s right – there are exceptions. For example, some ‘natural’ stands should be thinned. And factors other than current prices should also be considered before making a decision to sell (especially the goals of land ownership). It’s always a good idea to chat with a consulting forester (one who doesn’t buy timber too) before making a decision. Sometimes just talking to someone with experience will give you a perspective you might not have considered. The Association of Consulting Foresters is a good place to start (www.acf-foresters.org).

Contact South40 Partners at 205-936-2160 for a copy of “7 Tips For Selling Timber” or for a free consult on your particular situation.

CLEAN WATER RESTORATION ACT S. 787

The end result of this legislation could result in significant loss
of landowner rights and abilities to manage their property.

The Alabama Forestry Commission strongly recommends owners and interested citizens become aware of current versions of Senate Bill S 787 that will dramatically increase regulatory oversight of Federal Agencies including the Corps of Engineers and the EPA over private lands. The AFC ask all interested citizens make their informed opinions known to their elected officials.

Provisions and highlights of S 787

1. The potential for the loss of protection as provided in the original Clean Water Act of 1972 and as amended by Section 404 in 1977, which exempts normal farming, silviculture, and ranching practices from discharges that may occur from these operations as well as any need to get a permit for such practices.Bill S 787 replaces the discharge provision with language that could allow governmental oversight (regulating and permitting) for “activities that threaten” the waters of the US.

   If “actual discharge” is no longer the trigger and “activities” is used, the potential for a total circumvention of the provisions found in Section 404 is quite possible

2. The introduction of regulatory oversight for “geographically separated waters“.This language re-establishes the federal jurisdiction over almost all waters and wetlands in the US

   Taken to an extreme, this could mean if any activity “might” threaten features such mudflats, bogs, sloughs, potholes, wet meadows, etc., even if there were no discharge, regulatory oversight would be allowed and again, protection from Section 404 would be rendered useless

3. The addition of “ephemeral streams” will greatly complicate land management activitiesEphemeral streams by definition are only temporary and often very hard to actually ascertain

   Inclusion of the feature will certainly put additional pressures on logging and silvicultural operations adding costs to a struggling industry

4. The substitution of the term “navigable waters” with “waters of the US” again simply broadens and expands federal regulatory oversight well beyond current ruleAt this time multiple Associations are openly opposed to S 787. Some of these are: the National Association of Counties, the National Rural Electric Cooperative Association, the American Farm Bureau Federation, the National Cattleman’s Beef Association, and the American Forest and Paper Association.

By Curtis Seltzer

I think the answer is, “Not likely.” At least in the future.

U.S. macro-economic conditions are generally aligned to help buyers.

First among these is the cost of money. Interest rates are about as low as they’ve been. Any long-term, fixed-rate financing will work better now than it will a year or two from now when rates are likely to be higher when the overall economy improves and the Federal Reserve shifts its concern to keeping inflation in check. The upside on interest rates is here; the downside is tomorrow.

Access to this cheap money is a connected consideration. Some lenders are sitting on their money like comatose hens on the one egg in their lifetimes. But other rural lenders are willing to make local land-related loans, though the borrower may have to do more work than in the past. Farm Credit coops, credit unions and small, local banks are still in the game. So are some mortgage brokers. The big regional and national banks are sitting on benches built by the taxpayers. Financing is available for large timberland acquisitions. Farm-state lenders are lending for farms.

Rates for land deals will go up. Lenders always charge higher interest rates on commercial deals and land-alone loans. These rates are said to be pegged to residential mortgage money. While any land buyer should grumble about being hit with a premium-burdened interest rate regardless of how collateralized and how sound the land purchase, the future will inevitably see these rates move up in line with residential mortgage money. The six percent, or so, offered today will seem cheap in tomorrow’s rear-view mirror.

ARMs that start at the bottom go up over time, not down. Short-term deals of no more than seven years can get a low fixed rate now with a yearly adjustment for the rest of the term, or some variation of fixed and adjustable over time. That will work for a buyer if the deal is in and out within the fixed part, but I would be leery about riding the ARM up through the whole term. So a longer-term project that is ARM 7/1 financed over, say 15 to 30 years would not appeal to me.

Land prices may or may not be at bottom. No one can know, and it doesn’t matter in the final analysis to either buyer or seller. We’re around the bottom.

What does matter from the buyer’s perspective is the acquisition price (and terms) today as compared with his best guess as to acquisition price (and terms) at various future points in light of the property’s assets and liabilities and his resources and plans. A good buy price is what the property is worth to the buyer, all things considered.

The buyer should expect some reduction in asking price in most land markets. Some sellers and listing brokers will resist, owing to the memories of past expectations. Some properties may still be properly valued at 2007-2008 prices. But with certain exceptions — prime farmland, genuine HBU land in a market that’s moving such properties, certain second homes — those prices are bubbles. My guess is that it will take another ten years on average for those prices to be economically rational and justified, and I think prices will be under pressure for another year or even two.

What matters from the seller’s perspective is getting a sale done at an acceptable price, not getting it done at the bubble price of 2007-2008.

Land prices were run up by flipping, HBU pressures, generalized real-estate euphoria and easy credit until 2008. Energy production and commodity prices pushed up farm prices in parallel. Land sellers were sticky about coming off those inflated values from the second half of 2008 until the last couple of months.

But reality is setting in for those sellers whose circumstances require them to sell now. The 2007 prices were not related to intrinsic values—that’s the cold-water message that’s out there today.

I’ve seen some sellers lowering their asking prices, or lowering their bottom-line price even when they’ve held to the inflated asking price. My sense of this situation is that in most cases land sellers are not taking losses on price-lowered sales, but simply making less profit. Flippers who got in a couple of years ago are another matter.

Land prices trend up over time. They resist downward pressure in normal circumstances, but today’s circumstances are anything but that. Sellers should accept that buyers are for the most part not paying the prices of two years ago.

Where a seller can hold, he should; where he can’t, he should make a deal.

Curtis Seltzer is a land consultant who works with buyers and helps sellers with marketing plans.  He is author of How To Be a DIRT-SMART Buyer of Country Property at  www.curtis-seltzer.com. He does commentaries on public radio.

An Interview with Tom Brickman, September 29, 2009

Q: What are you seeing in the rural land markets right now?

A: We are moving some properties but it is slower than normal. The ones we’re selling are modestly priced – at the low end of what we called ‘reasonable’ last year. It’s definitely a different market than 8 to 12 months ago.

Q: Why do you think it’s slower?

A: From my perspective, the main factor affecting the rural land business is uncertainty from many points of view – interest rates, taxes, employment, expanding role of federal government. Buyers and sellers are both ‘sitting on their hands’ waiting for someone to ‘blink’.  Sellers looking backwards at the tremendous run-up in prices over the past 8 years and unwilling to budge off those peaks . . . buyers looking forward at pervasive uncertainty and unwilling to pretend things haven’t changed.  So transaction levels are declining – the ‘gears are locked up’.

Q: What will cause the ‘gears to unlock’?

A: Historically it is sellers that ‘blink’ because they are more subject to ‘external’ pressures than are buyers . . . education, health care needs, housing cost, decline in standard of living, etc. Unlike sellers, buyers are seldom ‘forced’ into a decision.  The longer this perception of uncertainty continues, the more likely it is the vagaries of life will catch up with sellers. More and more Sellers will be pressed into making a sell decision and prices will decline.

Q: So, you see the possibility of a price decline. How much?

A: Well, I think we’re already seeing declines. The only other time in my 34 year career I’ve seen land decline was just after the Carter years . . . the early 1980’s.  We saw land prices fall then, but, not too far, perhaps 15-20%, and not for too long – a couple of years.  If the uncertainty continues I expect to see something modest like this again.  But, as a land owner and land broker, I am optimistic!  Land is such a great, safe place to put money long-term – it really resist downward movement.  Buyers know this and my bet is they will re-enter the market to do their part to ‘unlock the gears’. It’s getting to be a good time to be a buyer.