Posts

buying land

5 Mistakes to Avoid When Buying Land

Buying land forces you to make a lot of choices. Unfortunately, people who don’t have much experience buying land rarely know how to avoid common mistakes. And even experienced buyers can make mistakes.

Check out these pitfalls to avoid so you can make informed decisions the next time you are in the market buying land.

1. Choosing the Wrong Type of Funding Source

You have several funding options when buying land. If you have exceptional credit, then you might find that a conventional bank or credit union will lend you money.

Another option is going through the Farm Credit System. “The Farm Credit System (FCS) in the United States is a nationwide network of borrower-owned lending institutions and specialized service organizations. The Farm Credit System provides more than $304 billion in loans, leases, and related services to farmers, ranchers, rural homeowners, aquatic producers, timber harvesters, agribusinesses, and agricultural and rural utility cooperatives.

Congress established the Farm Credit System in 1916 to provide a reliable source of credit for farmers and ranchers. Today, the Farm Credit System provides more than one-third of the credit needed by those who live and work in rural America.”

Don’t assume that you have to rely on a bank and a loan, though. Crowdfunding has become a popular alternative to traditional investing.

Explore as many options as possible to make sure your funding best meets your needs.

buying land

2. Accepting High Interest Rates That Increase the Land’s Price

If you decide to get a loan for buying land, look for a lender that will give you a low interest rate. The more interest you have to pay, the higher the land’s overall price becomes.

Putting in extra effort to find a low-interest loan can help you save a lot of money. Even a couple of percentage points will affect how much you spend.

Land loans usually have short repayment schedules, so you will need to repay the lender within five years. Let’s say you borrow $100,000 at 3% interest. At the end of five years, you will have spent about $7,812 on interest.

At 6%, the total interest comes to nearly $16,000. The extra 3% more than doubles your interest payments.

Fight for a lower interest rate when buying land. Otherwise, you will find it much more difficult to repay the loan or earn a profit from the property.

3. Not Inspecting A Property Before Buying Land

Never purchase land before you have it inspected by a professional. The features that you look for will depend on how you plan to use the land. For example, you need to test the soil before you can turn the property into a farm.

Other essential factors to inspect before buying land include:

  • Access to the property
  • The area’s topography
  • How the neighbors use their land
  • Whether the land is in a flood plain

Additionally, you need to hire a surveyor who can show you the property lines. Don’t rely on an old map that shows where one property ends and a different one begins. An inaccuracy could eventually cost you a lot of money, so don’t take any risks.

4. Failing to Get the Right Insurance Policies

Don’t start buying land without getting insurance policies that will protect your investment. Talk to your land consultant to determine what policies you’ll need. Then, determine whether you need additional policies designed for specific uses of land. Below are a few common types of policies landowners can take out.

Title Insurance

Ideally, your property has an accurate history showing who owns the land. Mistakes happen, though. With title insurance, you get protection from:

  • Delinquent tax bills from former owners
  • Unpaid mortgages from former owners
  • Forged documents
  • Hidden mortgages
  • Clerical errors
  • Easement problems
  • Claims from the children or spouses of previous owners

Buying land without getting title insurance is a big gamble. You could lose ownership without getting anything in return.

General Liability Insurance

Anyone who gets hurt on your property can sue you for damages. It’s a problem that all landowners face. The possibility of injury becomes even more significant when you buy land for hunting or agricultural uses.

General liability will pay for your legal protection. Instead of paying a high-priced lawyer, you give your insurance company a relatively small amount of money to avoid court.

Property Insurance

If you plan to build structures or store equipment on your land, then you should property insurance. Property insurance can help cover structures and equipment like barns, vehicles, and tractors.

Crop Insurance

Investing in agriculture can lead to exceptional long-term profits. Unfortunately, you can’t predict how the weather several years from now will affect your crops. Crop insurance can help protect you from significant financial loss caused by unforeseen conditions.

Talk to crop insurance providers about Revenue Protection and Revenue Protection – Harvest Price Exclusion policies to help you decide which option works best for you.

5. Working With the Wrong Type of Agent When Buying Land

Don’t make the mistake of thinking that all real estate agents have the same level of experience in doing land transactions – in fact, most have never done a land transaction. Land transactions are different from buying a home. When buying land, you need to find a land consultant in your area with experience working in your market doing the type of land transactions that are similar to the type of land you are trying to buy.

You can easily ensure that you get help from a qualified land professional by using an agent with the elite Accredited Land Consultant (ALC) Designation.

dynamic duo

Dynamic Duos: Cost Segregation and Section 453

The old west is known for its dynamic duos. Buffalo Bill and Anne Oakley. Frank and Jesse James. Earp and Holliday. John Wayne and Anyone. And of course, the most famous dynamic duo… cattle drives and beans. But there is one Dynamic Duo that is here today and can help ranchers and farmers in an amazing way.

The latest Dynamic Duo is cost segregation (CS) and Section 453, and it provides farmers and ranchers with an amazing opportunity to accumulate more wealth. Here is how the Dynamic Duo works.

Cost Segregation and Land Real Estate

Depreciation is a huge opportunity when owning income producing real estate. Depreciation can be used to shelter income from cattle or farming operations. What if there was a way to increase depreciation and shelter more income. That’s a good thing, right? Absolutely and that’s exactly what CS does.

So what is the first half of the Dynamic Duo, cost segregation? A cost segregation study (CS case study on Vermont family farm) is an engineered based study approved by Congress on each of the assets in a real estate transaction. This could be an irrigation system in a farm or a structure in a cattle operation to wiring in a building.  The purpose of CS is to bring more accelerated depreciation to the property which will result in higher deductions in the early years of the business, keeping more money in the business owner’s pocket because of reduced taxes.

A cost segregation study can increase the rate of return which could help a farmer or rancher sell a property or make the property more attractive to buyers.  At the same time, a CS study can help a seller because the study may be able to shelter more income which would increase the rate of return when that’s a main concern to a buyer. A good CS program can also lessen taxes because more depreciation shelters more income so there is less income to pay taxes on.

That’s the good news but now there is also some not so good news. When using cost segregation to accelerate depreciation, that depreciation must be brought back in for tax purposes when selling. Having said that, you can transact a 1031 exchange and defer the accelerated depreciation, but the accelerated depreciation will count against the replacement property that you buy so there will be less available depreciation. But don’t worry – there is still good news. If there wasn’t, there wouldn’t be a good reason to write this article.

cowboys sunset

Section 453 and Land Real Estate

The seller still has opportunities to defer the accelerated depreciation and that’s why Section 453 is the second half of the Dynamic Duo. Just call me Buffalo Bill…or John Wayne. Either works. What if you could use cost segregation to shelter income and reduce taxes and then defer the accelerated depreciation recapture tax for as long as the property owner would like.

Section 453 can be a great opportunity when the farmer or rancher wants to sell and retire or wants more real estate. If he wants to retire, our Section 453 tax deferral strategies can defer the capital gains tax, state tax, depreciation and accelerated depreciation recapture and the Obamacare tax on the gains on his sales proceeds for as long as he would like and the tax deferrals and the income generated from the deferred taxes can be passed on to his heirs. Also, by deferring taxes, the seller can generate a much larger lifetime retirement income than if he paid taxes first. Seller wins.

Let’s change gears and now the property owner wants to sell and buy another property. Our Section 453 tax deferral strategies can often work better than a 1031 exchange. Here’s why. When selling and using a 1031 exchange, you do not get a new depreciation schedule but rather, the non-depreciated portion of the original property plus the increase in the new property. For example, say the original property that is bought for $1 million is depreciated at 80% and sells for $4 million and using a 1031, a $5 million property is bought. The depreciation on the new property will be the 20% of the original property and $1 million on the new property. You can use a Cost Segregation Study, but the benefits will be limited because of the limited depreciation of the new property.

However, using our Section 453 proprietary trust, you can sell your property and then at any time in the future, buy another property of any kind for any price. Whether the new property is more than $4 million or less doesn’t matter. The property owner can defer the accelerated depreciation in addition to the capital gains tax, state tax, and the Obamacare tax on the sale of the old property and complete a new cost segregation study to shelter more income from the new property. Sheltering more income also reduces taxes and accumulates wealth. Another win for the seller, Buffalo Bill and John Wayne.

The bottom line is that the Dynamic Duo can be a great opportunity for brokers to help their clients keep more of their hard-earned money in their pockets and provides opportunities to reduce taxes and make properties more attractive when buying or selling. So, get to know the Dynamic Duo. Let’s call Groot to make us some beans but preferably without all the cattle. Best wishes and Happy Selling!

About the Author: David Fisher is the managing partner for Creative Real Estate Strategies, a national firm that can defer taxes on highly appreciated real estate when a 1031 isn’t appropriate or can’t be completed. He has been an RLI sponsor since 2006 and has sponsored over various RLI events nationwide. He can be reached at 713-702-6401 or david@cresknowsrealestate.com.

sunset oil land

Getting It Right: Mineral, Oil, and Property Rights

When you buy land, you might assume that your property rights give you ownership of everything below your feet. That’s not always the case, though. While you have surface rights, someone else may have mineral rights to its metals, oil, natural gas, and other commodities.

If you currently own land, then you may need to have someone research its previous ownership rights to determine whether you own the mineral rights or not. Ideally, though, you will know your surface rights and mineral rights before you buy land.

Owning Land Doesn’t Always Mean You Own What is in the Land

When surface and mineral rights get separated, you need to know it affects your property and ownership.

Surface Property Rights

Surface rights only apply to the surface of the land. When you purchase a piece of property, you always get surface rights for the plot of land. Surface rights do not apply to anything below the surface of the property.

Mineral and Oil Rights

Mineral rights apply to ownership of anything below a property’s surface. It often refers to more materials than minerals like copper, gold, and silver. It can also refer to oil and gas rights.

When someone owns mineral rights, they get to access and harvest commodities below the land’s surface. Drilling, mining, and other harvesting options often disrupt the surface. That may not seem fair to the person who buys property. Still, the owner of mineral rights can, within reason, make changes to the surface while accessing sub-surface minerals.

In some cases, companies can access commodities without disturbing the surface. For example, a company may use horizontal drilling to extract oil and gas from the land.

property rights

Leasing and Selling Mineral Rights on Your Land

It’s possible to earn money by leasing or selling your land’s mineral rights. In 2013, landowners made about $22 billion from their mineral rights.

When selling mineral rights, you give someone or a company absolute ownership of the commodities in your land. Unless you have the opportunity to repurchase the rights, your property rights will never include ownership of oil, coal, and natural gas. Depending on the terms of your sale, you may get a lump sum from the buyer or receive a percentage of the money earned when the owner sells the oil, natural gas, or other commodity.

Some people assume that leasing their mineral rights gives them more advantages than selling the rights. The benefits and disadvantages depend on the terms that you and the other party reach.

After you lease mineral rights, the new owner may extract everything of value. If that happens, then you may lose future opportunities to make money from the mineral rights. Leasing can also mean that you don’t get any money unless the new owner finds and makes money from commodities in your land.

By leasing, you get your mineral rights back after a determined amount of time. You also run the risk of making less money and losing the opportunity to earn money from the land in the future.

Things to consider before selling or leasing mineral rights include:

  • How it will affect your taxes.
  • How accessing the minerals, oil, or natural gas will affect your land.
  • Whether removing the commodities will make your land’s surface sink.
  • Whether drilling or digging will affect wildlife or water near your property.
  • Clauses that define things like where drilling can occur and who will pay to repair any damage caused to the land’s surface.

Before you agree to lease or sell rights, make sure to work with a qualified land consultant in your market who can refer you to a lawyer with plenty of experience in these areas. You will need an expert to explain the details and help guide your decision.

Ideally, You Should Know Your Property Rights Before You Buy Land

When you buy land, earlier property rights agreements still apply. If a previous owner sold the mineral rights, you are stuck with the conditions of that deal.

You can learn more about your rights before buying property by performing a title search or Mineral Rights Search. Plenty of title companies offer services that will help you understand your property rights.

It’s important to remember that title searches don’t always find all of the information relevant to your land. Some experts recommend assuming that you don’t own mineral rights when you buy property. If anyone has sold the rights in the past, then you will not own the mineral, oil, gas, and other commodities beneath your feet. When land gets sold to dozens or even hundreds of different people, it’s easy to miss an instance when one of those owners sold the rights.

If you want to buy a piece of land, start by finding a land consultant in your area who can give you accurate information about surface and mineral rights in your state. The rules in one area aren’t always the same as those in other places.

flooded field

The Realtors® Land Institute Applauds The New WOTUS Rule

January 23, 2020 (Chicago) – The REALTORS® Land Institute applauds the U.S. Environmental Protection Agency and the U.S. Army Corps of Engineers for replacing the 2015 Clean Water Act, also known as Waters of The U.S. (WOTUS), with a new Clean Water/WOTUS rule that provides much-needed and long-awaited regulatory certainty for landowners nationwide.

The new rule brings clarity to which level of government – federal or state – oversees land that is usually dry but may take on water depending on weather. The new rule does not change who oversees permanent waterways, such as lakes, rivers, streams and other bodies that always or usually contain water. However, it does make clear that usually dry areas, like Prior Converted Crop (PCC) land, should not be considered federal waters and will remain excluded from their jurisdiction.

The 2020 National President of the REALTORS® Land Institute Kyle Hansen, ALC, responded to the news with the following comment, “The REALTORS® Land Institute and National Association of REALTORS® have long been strong supporters of the review and repeal of the WOTUS rule so that clarifications like this could be made to ensure that both private property rights and clean waterways are protected. This is a big win for landowners across the country, and a perfect reminder of the importance of using a qualified agent to help you navigate both the local and federal regulations that can come with conducting a land transaction.”

About the Realtors® Land Institute
The Realtors® Land Institute, The Voice of Land, continually strives to maintain its status as the acknowledged leader for all matters pertaining to the land real estate profession. The Realtors® Land Institute provides the expertise, camaraderie, and valuable resources that are the foundation for all land real estate professionals to become the best in the business. For more information, visit rliland.com or call 800.441.5263.

For additional information, please contact:
Jessa Friedrich, MBA, Marketing Manager
800-441-5263 | jfriedrich@realtors.org

land evaluation checklist

A Checklist For Evaluating Land To Purchase

I was recently reading an article about tasks to perform after buying a tract of land. I decided to develop a list of topics to consider for those evaluating land to purchase before buying any land to help when comparing properties to ensure you buy the best property. We have all heard about buyer’s remorse, so it is important to consider the following before you make that important purchase.

1. Access – How is the property accessed? You may have road frontage or an easement. Is the easement prescriptive or deeded? I would not be comfortable buying a tract with a prescriptive easement and long term verbal agreements are often forgotten about by inheriting heirs.  These prescriptive easements can be converted to a legal or deeded easement, but be prepared for a court battle and legal fees.

I work in a county where there are a lot of transitional properties, so access is key. The county requires that each parcel of land have at least 50 feet of road frontage on a county road or state highway. If you are buying for investment purposes and are planning to subdivide the property, lots of road frontage is important. Check with the local county planning and zoning folks beforehand.

flood plain

2. Flood Plain – These are soils that typically flood after a huge rain event and it affects the utility of the property. I used to manage 85,000 acres of land for a timber company. We categorized property by inoperable and operable acres. The inoperable property was generally Streamside Management Zones and Flood Plains. The utility of the property affects the value. This information is readily available and your real estate agent should provide this information.

Also these areas will not support a conventional septic system. If you are buying land to build a house or cabin, know where these flood prone areas are prior to your purchase.

3. Topography – I have written a blog post about Topographic Maps. Like flood plains, topography can affect the utility of the property. Very steep property is not conducive to farming and logging. Be sure to look at topo maps of the property and nothing can substitute walking the property. Take a close look before you make that important purchase.

4.  Neighbors – With all the technology out there, it is pretty easy to determine who your neighbors are. I can access this information from the tax assessor website. You might be interested to know if they live on the property or if they are absentee landowners. Could you imagine buying a tract of land to learn later that a waste management company owns the property next door? A little work up front can save you lots of heart ache later on.

5. Property lines – I have written a blog post about maintaining your property lines. All landowners should mark and walk your property lines on a regular basis. It is a good idea to know where they are, especially before you buy. If a neighbor is encroaching on the property you need to alleviate the problem. Property lines that are maintained and painted provide a visual aid to your neighbors so everyone is on the same page and knows where the property lines are!

soil type

6.  Soils – In certain areas of the country, soils and soil productivity drive price. Farming (tillable acres) land is evaluated on the productivity of the soils. Most of the property in West Central Georgia is timberland and this can be evaluated based on Site Index. When buying timberland, operable acres and site index should be considered.

7.  Survey – This is huge! I will tell you about two tracts of land I have been involved with recently. These are real life stories. I was contacted by a landowner who had property in Harris County, GA. They solicited my help on a timber sale and later contacted me to sell the property. The tax assessor showed 170 acres and I told them they had more and suggested having the property surveyed before selling. The survey yielded 213 acres…advantage Seller!

In another situation, I was contacted by a Family Limited Partnership. The property had been in the family for 3 generations. The property was beautiful and the timber was over 60 years old. The family had an old plat from the 1920s from Columbus Power and Electric who built Lake Harding. The lake is now owned by Georgia Power and they own up to the 525 foot elevation. They were paying taxes on 236 acres. I estimated about 185 acres and arranged to have the property surveyed. The survey yielded 176.6 acres.

If you buy or inherit property, have a survey, you need to know what you own. These are both also a great examples of why it is important to work with a real estate agent that specializes in land transactions in your area.

8.  Timber Cruise – Timber cruises are important when buying timberland. First of all the amount and type of timber helps when valuing the property. Secondly, the timber cruise will help when conducting cost allocation on the property. This is the process where you assign value to the timber and the dirt. Cost allocation will save you lots of money when the time comes to thin or harvest your trees. You will pay taxes on the capital gain (revenue less depletion).

Interested in purchasing a land property? Land transactions require specialized expertise from an agent, like an Accredited Land Consultant (ALC), with experience and education in the industry! Find A Land Consultant near you for expert advice.

This post was originally published on The Dirt Blog.

Kent Morris, ALC, is a Registered Forester and Associate Broker who has experience in fields such as timber appraisals, harvesting, thinnings, and timber sales.

Land Investment

Growing Green: An Investor’s Guide To Investing In Land Real Estate

We believe investing in land real estate starts with the why. For a broker to serve a client well, they need to understand why a client wants to start investing in land real estate. Often, the why has little to do with financial issues. Why do they want to invest? What is important to an investor? Are there are financial, emotional, and recreational benefits to investing in land for them?

Once we understand the why, then it’s a matter of figuring out the financial entry parameters for the investment – total dollars to be spent, desired geography, the target rate of return, etc. After we learn the big picture parameters, we can help shape expectations. Setting expectations at this stage is critical. In all areas of land investing, so much of the long-term financial success hinges on how well we do in helping a client achieve realistic expectations to purchase an asset. Buy low, sell high isn’t a complicated idea, but it’s very hard to execute (especially on the buy side).

investing in land real estate

It is important for the broker to discuss this and help the client consider the liquidity of the land investment. This discussion will help the client keep in view the ‘long-game’ with the prospective sale of the asset, which may be years down the line. As brokers and trusted advisors to our clients, having that exit strategy/discussion is important. Take notes, and make sure the client knows and remembers how and why they chose to do what they did.

Investing in land real estate is one of the oldest investments in the world. The significant wealth of the world originated with land ownership. Land is also traditionally one of the most conservative investments, with land held by families for generations. Institutional investors have named land as a new asset class.

Changes in technology, world demographics, and government policies have caused land income and land prices to increase. The financial performance of land as an investment has offered financial stability, steady earnings, and diversification from other investments. Land earns well compared to other assets.

Our team of farmland professionals helps individuals, families, and organizations buy, sell, and own income-producing land – primarily for those who do not provide their own labor or machinery. We professionally manage 2,400 farms with 550,000 acres for our clients.

asset return characteristics chart for investing in land real estate

Land is a stable investment. However, there is risk to managing it. An investor manages risk through the selection lease or operating arrangement, farm location, soils, crops, water quality, and quantity. Each of these factors is predicated on geography. Buying land in the corn-belt has a different risk profile than buying land in the West, Delta, or Southeast.

Our team of farmland professionals helps individuals, families, and organizations buy, sell, and own income-producing land – primarily for those who do not provide their own labor or machinery. We professionally manage 2,400 farms with 550,000 acres for our clients.

Land has unique characteristics, compared to other real estate and securities:

  • Land has the potential for perpetual income. If owners are good stewards of the land and maintain and improve the land, the land will produce income
  • Land produces tangible production – something Whether the land grows commodity crops, veggies, livestock, or timber, it is real production.
  • Quality land builds and maintains value through a combination of soil, location, water, climate, logistics, and community. Selecting land for investment allows the investor to hand pick the location and characteristics that help maintain value and position for future growth in income and

Government policies shape and influence the land use, ownership, and potential future uses. Land ownership offers stability with changing government policies. Many of our governments have difficulty managing their economies and lack the fiscal discipline to balance their budgets. There are few investments which offer financial performance based on producing food and tangible commodities that adjust for inflation and economic changes.

The technology revolution is impacting land efficiency, water management, genetics, cultural practices, and food safety – all which impact land values. Land production and income is a result of improving yields, quality of production, production efficiencies, and demand for food, fuel, and fiber for a growing world population. Examples include average corn yields increasing by 400% from the 1930s to today, and productivity improvements with labor content today for an acre of corn or soybean production of less than one hour per acre per year. One American farmer now feeds an average of 116 people.

Land values are directly correlated with the benefits received from the land. As productivity, yields, and prices have increased, so have land values.

Finally, investing in land real estate can provide additional benefits beyond pure financial rewards. In addition to producing something for the world, you have an environmental benefit and the recreational components of hiking, hunting, fishing, and pride of ownership.

How do you participate in land ownership? You do not need to live on the land and operate and manage it yourself. There is professional assistance and an active land rental market. Professional management of your land investment is available. There are thousands of little decisions to make while managing and improving the value of your land, all of which can make a larger difference among land investment results than people would imagine. The relationship between an owner and their manager/operator is special. They share a connection to the land and a relationship to making the world a better place.

This article was originally published in the Summer 2019 Terra Firma magazine.

Randy Hertz, ALCAbout the author: Randy Hertz, ALC, is CEO, broker, and farmland professional with Hertz Farm Management and Hertz Real Estate Services, specializing in land brokerage and management. He is a senior instructor for the REALTORS® Land Institute’s LANDU Education Program who has a bachelor degree from Iowa State and an MBA from Harvard Business School.

flooded field

Thoughts on Flood Recovery for Farmers

With record floods receding all along the Missouri river valley, producers are facing a daunting clean up. With sand up to five feet deep deposited over thousands of acres of land, when it comes to flood recovery, how do you clean it all up?

Before we discuss how to clean it up, you may be asking “Why do I need to worry?” After the 1993 floods, many producers attempted to just plant in their field as they always had. Some areas didn’t produce, and most that did dropped from 75 bushels per acre to about 15 bushels. No one was happy about that and we started looking for ways to get our fertility back.

Federal disaster grants are available to help with cost, but they are capped at 75% of the fair market value of the land before the flood.

flood recover farmland

First, you must remember that the U.S. Army Corps of Engineers prohibits dumping it back into the river channel. They consider it contaminated, preventing its introduction back into the river. For areas with less than a foot of sand deposits, deep disking is usually the most cost-effective way of dealing with it. This will turn up some organic material for our soil.

Now. to address areas with sand from one to ten feet we turn to a track hoe. With a 180-degree swing, and bucket widths up to 5 feet wide, you can reach down and get the good black dirt. Once you start, a large machine can turn over nearly an acre per day.

This works out to about $2,500 per acre for the rehab cost but, at 70 bushel beans vs 15 bushels per acre, it seems like the only approach that works. If the land is now only worth $2,000 per acre, but you bought it for $5,000 per acre years back, it must be productive enough to cover the loan. So, we continue to rehab section by section to restore the value to this once fertile delta.

About the Author: Tim Hadley, ALC, is an agent with Keller Williams Realty in Gladstone, MO. He joined the REALTORS® Land Institute in 2017, serving on the 2019 Future Leaders Committee.

waterfront river land listing

Listen to the Land: Listing Advice

This article on land listing advice was originally published in the Summer 2016 Terra Firma Magazine.

Some years back, a long walk in a fallow field changed my career path forever. Peanut hulls, gobbler tracks, and flint flakes dotted the river-silt loam around my boots. It was March, right when Eastern North Carolina starts to warm. The soft dirt slowed me down, and I accepted it as a vehicle to better observation — of crows raising cane in the hardwoods, of deer crashing through a cypress slough, of wood duck squeals, of the muddy Roanoke River hissing along cut banks.

This property was four-hundred acres of fields and hardwoods set to be developed into twenty acre strips, river to road, like someone cutting tenderloin into steaks with their eyes shut. I was working for the developer, fresh from a long jaunt as equal parts boat captain, writer, rod and reel wholesaler, and boat salesman. I was young and ready to make some money. The rush was on for waterfront land, and this developer found a niche cutting up river and marsh-front farms in off-radar towns. But surely not this farm, I thought, bending over to pick up the base of a quartz spear point.

As luck would have it, the marketing plan didn’t work. The grand opening had few attendees. Only one of the twenty lots was reserved. Several of the migratory investors cited dissatisfaction that the only place to buy a snack was a Red Apple gas station thirty miles away. The developer, who had picked up on my outdoor affliction and who did not often put on boots, called me into his office.

“What should we do?” He asked me, having never sold fewer than all his lots in a single day. He was on seriously foreign turf.

“I could sell the whole thing to someone for a hunting place,” I said.

“Hunting? Would they pay me enough?” He asked, chewing on a giant cigar. “I need to get one point two out.”

“Yes sir,” I said, crossing both sets of fingers in my pockets.

“Well, then, you got your first listing,” he said.

carolina river

It’s a good story for me, one that hits home because it finally turned my avocation into a vocation that could put food on the table. The “listing” moment and the drive home from closing were like lightning bolts hitting pine bark – burning out all the job doubts I’d had until then. But many years later, looking back, I see new things –so many other critical lessons learned from that one sale that had very little to do with me.

I sold the farm to a sporting investor who had a mind for everything from deer, to dirt, to conservation, to equity-share sporting clubs. You could say that we “rescued” or changed the life course of that four-hundred-acre farm forever, but I believe that the farm did the work. Location, habitat, proximity to water and wildlife corridors, soil, floodplain, and agriculture – all of these things played specific roles in scratching plan A and trading off for the ultimate end user. Each element saw its higher and better use by keeping the property intact as a joint equity hunting property.

Strangely enough, the real credit goes to the developer. Instead of banging his head against the wall, he was willing to take a new approach. He listened to me and he really listened to the land and let it guide him toward a better solution. Here was a guy in a Tommy Bahama shirt, with his loafers on the desk, making a quick decision based on a very sophisticated hybrid of economics and land stewardship.

In that sense, a huge part of land listing and marketing is letting the property be what it is rather than forcing it into a box or flaunting it for something it’s not—which means that someone, most likely a land owner, may have to concede their original vision. It sounds corny, but it’s critical as a good broker to “feel” the land and how it fits with wildlife and the surrounding neighborhood.

If you have a good sense of the land and surroundings, you’re ahead of the game with the seller. I think it’s important to stick with what you believe when you meet with a listing client – whether you’re discussing price, preservation, the property’s long term potential, or lack thereof. Not sugarcoating things with the listing client or the end user always yields more solid footing, and in my experience, more closings.

A good friend of mine came to Charleston yesterday, and we rode my skiff out to a newly listed property in the Santee River called Cane Island. Mottled ducks traded across the river in the late light, and all sorts of birds moved before roost – roseate spoonbill, least bittern, glossy ibis. It was a bird and fish paradise, and we clinked bottles to that, talking about the value of Cane Island as a fish and waterfowl haven and a no-brainer conservation easement play.

river land

Riding back upriver, my friend talked about his own properties in North Carolina, one of which he was beginning to develop. “You know those old hay fields north of town,” he said, “I’m about to ruin them, I guess.”

“Nah,” I said, “That farm is naturally on the residential path.”

His other properties include big managed pine tracts south of his town, ones further from the progress stream. Outside the ducks and fish, his passion is quail, and he follows his setter around in the open longleaf on his days off. In a sense, he epitomizes the point by taking one tract to market based on location and timing, and preserving the other for its life in recreation.

Three listing and marketing suggestions stand out that all have to do with “listening” to the property and refusing to compromise:

  • List properties that match you and your skill set, passions, and beliefs rather than taking everything that comes along.
  • Market those listings according to what they are by using platforms that mirror and properly display the property.
  • Recognize when the buyer and property don’t match, and concede.

As luck would have it, my first listing both fit and shaped me. I learned from the experience, and finding a great steward for wild land became my ultimate goal – the model for the listings and buyers that I would pursue. At the time, I just used a simple hunting network via email and phone to locate the buyer.

Today, I would use a marketing venue that fit the property – whether that was the local newspaper or a sophisticated digital platform.

In any real estate niche, the goal should be the same – Find the right buyer for the property and the right property for the buyer. I believe that an honest evaluation of the land is critical to that match.

About the author: Douglas Cutting is the Vice President of Garden & Gun Land and BIC of Cutting Land & Consulting, LLC based in Charleston, SC. Cutting is an experienced outdoors-man and land broker with a diverse background in the woods and on the water.

Where are the Opportunities in Opportunity Zones?

What is an Opportunity Zone?

By now, most of you have probably heard about opportunity zones. For those that have not, the program was created by the Tax Cuts and Jobs Act on December 22, 2017, to incentivize investment in economically distressed parts of the country through tax benefits. The mechanism provides reductions in capital gains tax liability for investors who make long-term investments into census tracts designated as opportunity zones. Opportunity zones will likely favor shovel-ready development projects, as well as capital intensive renovations of assets under certain conditions.

How it Works

There are several primary considerations for opportunity zone investment regarding timing, product type, and implementation. Below is a summary of what we believe will have the most impact on our clients:

  1. Capital gains realized after December 22, 2017 must

be invested into one or more Qualified Opportunity Funds (QOF) within 180 days of realizing gain through sale of appreciated assets.

  1. QOFs are required to have a minimum of 90% of their funds invested into designated opportunity zones. QOFs can invest directly into qualifying real estate and/or make equity investments into qualifying
  2. A QOF investment may be sold and the tax benefits protected so long as the funds are reinvested into a new QOF investment within 180 This is only for purposes of deferring initial capital gains. The holding period for purposes of deferred tax liability reduction and step-up in basis of opportunity zone investments restarts upon reinvestment.
  3. Unlike a 1031 Exchange, this program applies to gains from any investment and is not limited to gains from real estate investments. Additionally, this program only requires reinvestment of the gain from the original investment, which leaves the investor free to use the basis as they
  4. Property investment needs to meet one of two criteria: (1) real estate needs to be put to “original use” with the QOF, or (2) the fund needs to “substantially improve” the “Original use” means that the building was put into service for the first time at commencement of the QOF investment. Certificate of occupancy is assumed to be a reasonable measure for this determination. “Substantially improve” means that the QOF needs to more than double its basis in the property within 30 months of acquisition. These requirements only apply to the improvements and not to the land on which they are sited. Recently proposed regulation indicates that a QOF may be treated as the “original user” of a property that has been unused or vacant for at least five years.
  5. Land generally qualifies as opportunity zone business property when used in an active trade or business, excluding situations that are viewed as abusive (e.g. land banking strategies). This applies to both improved and unimproved
  6. Leased property may qualify as business property without substantially improving the property or the tenant being the original The tenant may also be a related party subject to additional restrictions.
  7. Certain debt-financed distributions to investors may be tax free and working capital held by a QOF may, in some cases, be allowed to extend beyond 30 months when the fund is awaiting approval of
  8. A partnership or corporation may self-identify as a QOF by filing Form 8996 with their tax
  9. The gain on the original investment shall be assessed no later than December 31, 2026, regardless of whether or not the QOF investment has been sold.

The Benefits

  • If the QOF investment is sold during the first 0 to 5 years – The original gain and any incremental gain on the QOF investment become taxable at that time.
  • If the QOF investment is sold during years 5 to 7 – The original gain is reduced by 10%. Not available for first QOF investments made after December 31, 2021.
  • If the QOF investment is sold during years 7 to 10 – The original gain is reduced by an additional 5% (15% in total). Not available for first QOF investments made after December 31, 2019.
  • If the QOF investment is sold after Year 10 – No gains are incurred on the QOF investment.

Bottom Line

According to David Bitner, Americas Head of Capital Markets Research for Cushman & Wakefield, analysis indicates that this program could add as much as 150-300 basis points to a project’s after- tax Internal Rate of Return.

Agriculture opportunity zone

Opportunity Zones and Agriculture

Many of our clients are interested to learn if this program applies to agricultural land. The most recent IRS guidance seemed to indicate it may be possible, while also providing an example of when an agricultural investment would NOT qualify. The proposed regulation states that, “a QOF’s acquisition of a parcel of land currently utilized entirely by a business for the production of an agricultural crop, whether active or fallow at that time, potentially could be treated as qualified opportunity zone business property without the QOF investing any new capital investment in, or increasing any economic activity or output of, that parcel [emphasis added]. In such instances, the Treasury Department and the IRS have determined that the purposes of section 1400Z-2 would not be realized, and therefore the tax incentives otherwise provided under section 1400Z-2 should not be available.”

We are optimistic that if the property is substantially improved, as described earlier, it may be possible to justify an investment in farmland as a qualified investment. For example, if the land purchased is unimproved, the basis would be zero dollars, and any substantial investment into the property that increases its economic activity or output (such as converting it from row crops to permanent plantings) would seem to qualify. This could have significant impact on regions with farmland suitable for development to permanent crops, such as fruit or tree nut orchards, or vineyards. Given the potential for the tax implications associated with this strategy, it is recommended that you consult with your tax attorney prior to making a QOF investment into farmland.

Finding Value Beyond a Qualified Opportunity Fund

According to data recently released by Zillow, homes sold within an opportunity zone saw an average increase in value of over 20% year over year, while values for homes not within an opportunity zone saw comparably modest increases. It is possible that this trend is a result of those properties selling at a premium to a QOF for redevelopment or renovation. However, it is more likely that buyers believe these economically distressed communities will see outsized capital investment due to this program and, therefore, will see positive change and generate greater value appreciation over time.

So what does this mean? Even if no qualifying projects are realized as part of this program, a community could see a substantial benefit through an increase in investment dollars from non-QOF investors hoping to take advantage of the community benefits the program may generate. This speculation and influx of capital is likely to be somewhat self- fulfilling, creating exactly the kind of investment and benefits the program was designed to foster. In some areas, these benefits aren’t likely to stop at the census tract boundary and it is easy to see how they could spill over into neighboring communities despite them not being within an opportunity zone.

Key Takeaways

 

  • Time is of the essence – The structure of the program is such that the earlier funds are invested and the longer they are held in a QOF, the greater the benefit. The table below summarizes how these benefits are impacted by time.

Opportunity Zones Chart

  • Engage professionals early on – Talk to your tax attorney to ensure you don’t inadvertently make a mistake that will disqualify you from taking advantage of these benefits in full.
  • Not all opportunity zones  are created equal – Like all investments, some will perform better than others. Engage a knowledgeable real estate team to ensure you fully understand the fundamentals of the specific market. Look for markets with strong employment, income, and population growth, as well as those already seeing signs of economic
  • No substitute for quality underwriting – The program will likely make a good investment better but is unlikely to salvage a poor
  • Time will tell – We won’t know if the program will yield the desired results for many years. If Zillow’s data is an early indicator, the program could be a value driver that generates above average returns for savvy investors and positive externalities for the communities.
  • Ongoing questions – The second round of proposed regulations has removed much of the uncertainty from the program and we should start to see increased transaction activity as a result. The most recent round of guidance is generally viewed as being favorable to the taxpayer, which should increase confidence that the ultimate implementation of this program will not be unnecessarily punitive. However, as is the case any regulation of this scale and impact, there are likely to be changes and growing pains as the final details are worked out and ultimately approved.

This article was originally published in the Summer 2019 Terra Firma magazine.

Matt DavisAbout the author: Matt Davis is a real estate broker with Cushman & Wakefield. He is based in San Diego, CA, and assists clients with the disposition and acquisition of investment grade agricultural and transitional land assets. He is also founding member of the company’s Land Advisory Group and Agribusiness Solutions Team. Matt is a member of RLI and serves the 2019 Future Leaders Committee.

 

Learn More About Opportunity Zones

REALTORS® Land Institute Past President Bob Turner, ALC, NAR Commercial & Business Specialties Committee liaison, shares how agents can make money by taking advantage of Opportunity Zones in the NAR Commercial Theater at the 2019 REALTOR® Conference & Expo in San Francisco, CA. Check out the full video of his session below.

Qualified Opportunity Zones

Qualified Opportunity Zones