Land for Love and Money

by Reid Lance Rosenthal

  It serves no purpose to do a schedule or chart because these matters are fluid in all states and localities. But the general trends, the corporate culture of the state, can be pretty much relied on for the short, intermediate and (unfortunately for some states), long-term. Some states are more protective of private property rights than others. The Western states have huge quantities of federal and state lands—in some cases comprising 60% or more of the total square miles within state boundaries. This creates other opportunities and pressures, and—as discussed later in this book—dangers.

  Current statistics, employment, population trends, new business formations, tax rates, annual budget surplus/deficit, debt and future pension/social program liabilities for various states and localities can easily be found online. Don’t just look at “the now,” study the trend for the past ten years. It’s a fair indicator for the next ten years. Even if states wayward in their fiscal policy completely changed their attitude and operations tomorrow morning, it would take years to see meaningful results. Their tremendous debt overhang, on which interest and principle must eventually be repaid one way or the other, will not vanish. Remember that governments have only one source of revenue. You. And your assets—particularly your land and property because they know, just as you do, that these are fixed assets.

  Pay attention to political trends in states and local areas too. While some may think this is a political comment, it is nonetheless true. Liberal or liberal trending governments tend to spend more, have higher debt, higher taxes and believe in more regulation. More conservative governments tend to believe in lower taxation, less regulation and have balance sheets that are in the black, or at least salvageable. Then there are states that are in flux. The front range of Colorado, which comprises most of the state’s growing population, has become more liberal. The western part of the state remains conservative. Colorado is now at the point where liberal trends from the East Slope dictate policy for the entire state, sometimes with calamitous results for small communities west of the Denver metropolitan area. The upheaval in Wisconsin is well publicized. New Jersey, Ohio and Indiana having become more conservative, enjoy the opposite trends. Tax rates have been cut, employment is growing, state expenditures are declining, the budget is on its way to being balanced and long-term debt is being tackled.

  There is more to your land than just the land. Remember the “PPPPP” rule, and one of the five universal truths (see Chapter 5), your land is not immune—macro events including government policies and taxation will affect the financial viability of your land and property, and therefore the amount of joy you derive from your real estate.

  About fifteen years ago I helped some clients purchase a rural property. The forty acres had a small creek and.a great little one-hundred-year-old house. Randy and his wife, Nancy, had some terrific plans to restore the home in historical context and improve the land. It was their first real estate purchase, a huge dream and a big jump from the urban apartments that had always been their home. This was one of my rare engagements as a “realtor.” Normally, I use my realty license for deals or transactions for partners, or in conjunction with lands or properties in which I’m personally involved. But I liked this couple, and they were truly novices at land and real estate ownership. I found exactly what they were looking for. The forty acres was the perfect place Their smiles and excitement at the closing table were far better reward than the commission check.

  We walked back out to their Ford Explorer after the closing, talking.

  “Congratulations. I know you folks will enjoy fixing up that property, developing that little pond you want and making a home for yourselves.”

  Nancy hugged me, “Oh thank you, Reid. We would not have known where to begin!”

  Randy nodded in agreement, stuck out a beefy paw and shook my hand enthusiastically.

  It was late afternoon and I asked, “I presume you’re headed out to the acreage?” Both heads bobbed up and down.

  “We want to get started right away,” Randy grinned. “With so many things to do I don’t even know where to begin.”

  “As many things as you do, believe me there will be that many more you’ll see to do, and which will need to be completed.” I laughed. “What type of equipment have you bought?”

  They looked at each other, their eyes wide. “How about tools?” I asked. The two of them exchanged glances.

  I chuckled, “I know you’re excited to get out to the homestead, but if I was you I’d swing by the hardware store first, pick up a shovel or two, some big toothed metal rakes, a pitchfork, axe, sledge, wedge, and tomorrow, I would look in the Mini Nickel and see what’s out there in the way of a small used tractor with a loading bucket, and a PTO on the back so you can use it with other attachments as your work gears up. You might want to think about a lawnmower too.”

  Randy looked embarrassed. “We never thought of that.” He cleared his throat, “Where is the hardware store?”

  I laughed and shook my head, “Follow me. I’ll come down with you and help you get outfitted.”

  Contractors or Fools—Your Only Two Choices

  People who have never purchased land, or a home with land are accustomed to “The Homeowner’s Association will do it for you,” of condominiums, apartments and urban settings many times don’t know to think about basic equipment. Even a third of an acre can require an investment of $500 to $600 in tools. The alternative, of course, is to pay that amount or more every several months to have the work done for you by contractors. Far better to be self-sufficient.

  The size of the piece of land that you are purchasing, and the types and nature of any improvements, will dictate the amount, type and power of the equipment you’ll need to improve and maintain your asset. Anything over ten acres definitely needs a small tractor—and tractors are sexy! As you get up into the twenty to forty acre range, equipment for fences is a must. A PTO (Power Take-off) unit on the rear of that tractor will allow attachments such as a post pounder or augers. There are even mini backhoes which attach to the rear of the tractor, work off the PTO and are truly handy tools. An assortment of interior and exterior hand tools are also necessities. Hammers, wrenches, screwdrivers, pruning shears, axes, hatchets—the list is long but only needs common sense to compile.

  If you have done your homework—”PPPPP”—you’ll know your end goals for your property, have them prioritized, scheduled and budgeted. Make sure that budget includes the tools and equipment necessary to accomplish the objective. If you have livestock, the list multiplies exponentially.

  There’s nothing more frustrating (and this is the voice of experience), than awakening, raring to go, in the coolness of the early morning, the day’s project a welcome task you have been looking forward to, only to find that the implements critical to getting it done are on the “forgotten item list.” Nothing breaks cadence or delays jobs more than not having the tools, equipment or supplies on hand to complete work.

  For places in excess of forty acres, I would give serious consideration to buying a small bobcat. These are some of handiest pieces of machinery ever devised, and most are rigged for every type of specialized attachment you can imagine, and then some. Some type of trailer is a must for hauling supplies from town, moving fence or carting the remnants of remodeling to the dump.

  I am frequently asked by clients and partners who are making the jump from city sidewalk to land what equipment I recommend. My answer is always the same: “The smartest landowner, rancher or farmer on the planet is one that owns nothing that can break, and nothing that can die.” That always gets a grin.

  Don’t go overboard on your equipment or tool purchase. Buy only what you need. Used equipment, especially in a smaller rural area—has typically been well maintained. It is the rare instance in a small community that anybody will pass off a piece of junk to you.

  In more populated settings inquire as to a reputable dealer. Make sure there’s a warranty. If you buy from a private party, have the equipment checked out
thoroughly by a qualified mechanic familiar with that brand, make and model.

  Buy only what you need. That’s the second time I said that! I often see people on a newly acquired acreage literally have to build an adjunct garage or barn to house all the toys they rushed out and purchased. This equipment sits around, barely used, costing unnecessary expense. I am not recommending specific brands or models. These change, particularly with used equipment. Who the owner is, and how the machinery was cared for, is as important as the manufacturer, age and model.

  However, I would recommend you stick to known brand names. If your machinery does have to be serviced it will be far easier to find a mechanic—particularly true the more remote you are. The availability of parts is another consideration. You might wait a very long time to get a “wing for the Dodo brand” and, when it comes time to sell equipment, your potential buyers may not be as foolish as you were. Each of the manufacturers has their color. Caterpillar is yellow, John Deere is green and Ford is blue. My recommendation is stick with one of the rainbow. And don’t forget the shovel!

  Land is one of few, and possibly the only asset that affords an owner the opportunity to contribute to the overall environmental good of the planet via restoration, enhancement and preservation, while simultaneously generating not only a deep sense of spiritual satisfaction but also tax savings and gain through the exponential added value of the improvements.

  Whether you’re buying a third of an acre lot in an exurban setting, a twenty acre horse set up with twenty acres in the hills of California or a ranch of thousands of acres in the Rockies, there’s always a way to add value to your land. I’ve noticed many folks get fixated on the structures and building improvements. These would include the house on that small residential acreage building lot, barn and corrals on the California horse farm or a ranch compound and ancillary structures in the Rocky Mountain example.

  Residential acreage is of course a unique class. In those cases, the home is obviously a key asset and generally the largest single component of value. However, under all lies the land. Just like big pieces of the earth, small tract value is dictated by location, area and “amenities.” What you do with the land around the structure plays a key role in value. In larger acreages, the improvements to the land—whether they are agricultural, resource, aesthetic or recreational—become the single largest driver of value. Ironically, lavish structure improvements can thwart sales interest. Folks buying the large multi-million dollar tracts generally can afford to build what they wish. Your idea of a lavish rural home may not coincide with theirs!

  Conservation Easements Lower Tax and Death Tax—A Good Thing for the Land, Maybe a Great Thing for Your Family

  Because many people think linearly and fixate on the project or improvement at hand, they lose sight of the big picture definition of value. The value to your soul can’t be quantified. It is priceless. Financial value is realized primarily through capital gains (long term profit, currently taxed at 15%) at some point in the future, if and when you sell the property. At least in the current tax climate, this is your lowest tax, and therefore your least expensive income and most lucrative form of gross profit. Tracts that are large enough (five acres or more), which have Real Conservation Value and can grant a conservation easement1, can realize value on the tax side from an ecological donation not only in the immediate tax year, but donations are also likely to lower federal tax in a number of future taxable years via Federal deductions (and in some states, additional tax credits). The big bonus is that a conservation easement also fixes value for inheritance and estate purposes, diminishing the effect of the highest tax rate paid on any transaction under current tax law in the United States.

  Some people will raise their arms in the air and shout at me for terming death, “a transaction.” It’s not. But the events that are triggered after the death of a loved one, a family member or yourself, are all transactions. Under current tax law, those transactions cost you up to 55% of the net value of an inheritance off the top. This tax, which you typically have less than a year to gather, can force you to subdivide your land, sell your land and in the worst cases—particularly in tough economic times—force you to greatly cut price on property to get it sold to pay the tax man—or lose it to the tax man.

  Basically, a grant of an easement fixes a value for estate purposes on which the easement is granted based on the after easement appraisal. Besides saving big tax dollars, this may allow you to add value through future land and resource improvements that will not be taxed at 55% rate. A grant can afford you the ability to leave a greater net inheritance to your heirs. This can make a sizable difference in their lives, and, although the government hasn’t figured it out, tax savings via these mechanisms are beneficial to employment, the economy, GDP, investment, and therefore, in the end, increases rather than decreases revenues to the government.2 A knowledgeable CPA and attorney should always be consulted when making major decisions of this nature.

  Think Ahead—Big Picture!

  When you acquire a piece of land, think about what you can do to add value to the property in addition to building, remodeling or rehabbing structures. There are special cases—historical rehabilitations, historical easements and historical façade easements—which deserve attention because they can add value and reward you with tax savings dividends on many different levels, while also preserving a portion of America’s history. These will be discussed, along with real personal experiences, in Land for Love and Money, Volume Two. While fortuitous, historical easement opportunities are not common.

  Prior to a closing, I sit down and put together a budget spread over time, based on anticipated and realistic cash flows and operations, or money available from partners if in a partnership type deal. I prioritize these potential enhancements on a number of different levels. I give equal weight to adding value to the land and creating operational income. I give secondary value to esthetic effect, and distant tertiary consideration to the “Gee, that would be fun to do” affect. Of course, all is driven by your projections of available cash, and return on an invested dollar of improvement funds.

  Let’s take, for instance, a one-thousand-acre ranch, Rock Point Ranch, having several miles of the Big Hole River in Montana. This spectacular ranch was owned by a partnership in a venture with others for a number of years in the 1990s and early 2000s. The western boundary of this beautiful piece of property rose to rolling high desert foothills along the horizon, framing the view of the craggy peaks of the Pioneer Mountains. A sizeable portion of the bottom lands were irrigated. The Big Hole River, one of the last undammed rivers in the United States, rushed its wild course in alluring braids for miles alongside the southern boundary of the ranch. It was secluded, but only seven miles from the nearest little town, and thirty miles from the nearest “big city” of over three thousand.

  One of the key considerations when making improvements in land, agricultural or resource, is achieving as many multiple value and operational goals with one improvement as possible. In the case of Rock Point Ranch, improvements which could benefit agriculture, recreation and livestock were painfully obvious. Riparian Area Protection Fences protect wet areas—rivers, springs, creeks, ponds and lakes. This one single improvement3 allows for pasture division, affording better control of livestock grazing and thus can increase weight gain. It protects fisheries because it stops riparian area overgrazing, which leads to sedimentation, stream bank trampling, sluff and other nasty environmental effects to waterways.

  Because these types of fences have very high conservation value, they are often eligible for up to 50% cost-sharing from the United State Department of Agriculture (USDA) through the Wildlife Habitat Incentive Program (WHIP), Environmental Quality Incentives Program (EQIP4) and other mechanisms. Because they improve and maintain water and streambed quality, they are a boon to fisheries, increasing the number of fish (population) and the size of fish (biomass per population unit). Additionally, because riparian areas generally include tre
es, shrubs, aquatic grasses and other flora and fauna, habitat for wildlife and water fowl is increased. More wild critters roaming your land and better hunting for hunting enthusiasts, adds value and is particularly fulfilling for sportsman owners.

  So, this relatively simple improvement affects value by enhancing wildlife and fisheries and improving agriculture and livestock operations. It simultaneously increases operational revenues because recreation (hunting, fishing, even “vacation” operations) can be converted to operational revenues. At the same time, increases in agricultural revenues via either increased numbers of AU (animal unit—one one-thousand-pound beef cow) or higher weight gain per AU, can be realized. These are key components to income. There are numerous studies that indicate healthy riparian areas increase the amount of water available for irrigation. This benefits crop yield, particularly in more arid areas. Again, you have increased both value and operational income. This is a multiple, many-tiered return of profit, income and value for your invested dollar. You’ve enhanced the natural qualities of the land, which also generates that deeper, spiritual satisfaction, and your further reward is financial gain.

  Water improvements can also result in many different beneficial income and value benefits via a single improvement. A well-planned pond will create or enhance fishery5, promote and increase overall population of wildlife and waterfowl, can result in better pasture utilization if it is an upland improvement (cows like to hang out near water). A water improvement in a formerly dry upland area will keep livestock in that area and result in better forage utilization, beneficially affecting your entire livestock operation. Obviously, the esthetics of water features are highly coveted by humans.