In Part 1, the idea of various land specific websites was discussed. This time let’s surf around the topic of social media. Not that long ago everything was e-business, e-commerce, e-books and now it is just normal day-to-day regular business to have a website, shop online and read digital books. The same thing is happening with social media. To re-phrase an old saying… what was once new is old again.

Social media began with an online place for your “stuff” (most notably the music crowd that adopted MySpace in droves when it debuted) then along came likes, tweets, posts, and now timelines. But now it’s not really social media as a “New” category anymore – it’s business. Nearly every brand has a Facebook page or Twitter account and although new tools show up like Klout and Google+… it really all is just forms of marketing.

New social networks like Chime.in are popping up like popcorn all the time. How could anyone let alone your land agent keep up with all these social profiles? They should be outside on the land and not face plowed into a computer screen, right? True enough maybe but the cold hard fact is that nearly everyone starts their real estate search online long before they contact an agent. The National Association of Realtors had a stat a couple of years ago that was nearly 87% of buyers start their searches online first before contacting anyone. That number has likely increased even more.

So how do you know if your land agent is marketing your land on the right social media sites? The short answer is you don’t! No magic silver bullet exists that puts your listing on every single place but as with most things there are some hot spots. The major players are Facebook, Twitter, LinkedIn and now Google+ might be added to that list. So should your land be listed in all these places? Probably not. However, agents that network aggressively will have profiles on these sites and keep them current. An agent flooding their news feeds with listing advertisements will be ignored lightning fast as users quickly hit the “Hide” button.

A quick and easy way to look up what profiles a person or brokerage has is to see if they have a Follr profile like this or an About Me profile. These sites or others like them list all the profiles in one place and make it easy to see at quick glance which networks they use. The number of profiles is not necessarily indicative of effective social media presence because sometimes profiles get setup at hundreds of places but they are never maintained so look for activity at least monthly or in some cases weekly depending on the network. So we’ll use the top websites as examples of how land might be marketed.

Facebook

First, Facebook. WHY? Well, because the whole universe is on there it seems. Facebook individual profiles are not the best place to market anything but likely the agent would have their job description and links to their websites or listings from their profile. The other option is a Facebook Business Page which is probably where most agents post information about new listings or they might even have a special tab setup just for listings. However, an overlooked source on Facebook is group interest pages like hunting pages where someone might be posting that they are looking for hunting land. This is a perfect opportunity for an agent to pop in and comment that they have a listing that might work. A word of caution though… Social media is time consuming and not everyone is going to be active on all sites so just because an agent is not posting and commenting all over the place does not mean they are not marketing your land.

LinkedIn

Next up, LinkedIn. This is definitely not a place to advertise listings but it is one of the best places for agents to network and connect. The profile should be current with links to their listings or website but again posting listings in the news feed will not be useful. However, there are several groups where listings can be promoted and discussed. We have used some of the cattle and beef networks where we keep up on hay and alfalfa topics and have posted links to our pasture listings when appropriate. LinkedIn also has several real estate groups where listings are allowed but moderation is key or the listings will just get lost in all the noise.

Twitter

Finally, we have Twitter. Basically a shortened bullet point version of other sites like Google+ or Facebook. You have to talk concise and fast on twitter and the news feeds move so fast that just like the commercial – it will be so… 47 seconds ago. Twitter users hate automatic tweets from other sites so if a twitter account is linked to Facebook and the comments are being automatically posted – they are cut off after 140 characters and then the person has to go click on the Facebook link which defeats the purpose of being on Twitter. The 3 best advantages of Twitter are lists, hashtags and chats. Lists are one way to group users together so you can read news feeds from specific followers. Hashtags are the number pound (#) sign before words on Twitter and they make it easier to find tweets on topics you are interested in. For example, by searching for #LandThink you can pull up only tweets with those hashtags. Hashtags get very popular during breaking news like #Egypt or #Japan and of course Charlie Sheen’s antics can be followed via hashtags. Hashtags go hand in hand with chats as well. You can follow a topic of discussion by following that particular hashtag. #haytalk is only about hay but they also have specific chat times where in real time they discuss issues like livestock feeding and forage management. There are hundreds of chats going on each week and finding new places to connect on any topic is very easy on Twitter.

So how do you navigate the maze of social media and know which places are best? You don’t. Maintaining a few good profiles and making meaningful and helpful posts about relevant topics is a general rule of thumb. Keep in mind that this is just a discussion about one aspect of marketing and that each property will have unique marketing requirements due to its attributes and location. Each agent is also different and has tools that work for him or her the best. Not one social media platform or one website is the best or the only place a property should be posted. Social media is just another tool in the box and in the end that really is all you need… a good toolbox.

The answer to the question in this title is pretty straightforward – not only are large acreage recreational property values lower than they have been in almost ten years, an abundance of quality tracts are also currently on the market. The first thought that this response most likely evokes from a prospective buyer is, given the current uncertainty with the economy, the smart play is to wait, let prices continue to drop, then pull the trigger on that dream property. This scenario sounds simple enough – why would anyone want to buy right now?

Although the odds of finding that perfect property at a very reasonable price are high right now, this window of opportunity will not last forever. Land prices will eventually bottom out and start the recovery process. Even more important than the recovery of land prices to a potential buyer is the inevitable reduction of quality tracts on the market.  Once land prices stabilize, the first tracts to go are sure to be the best ones. By waiting for land prices to continue falling, a buyer is risking an opportunity to purchase a quality tract at a great price that probably has not been on the market for a long time and most likely will not be on the market again anytime soon.

The purchase of a large acreage recreational tract is typically a substantial long-term investment which requires much deliberation. The main objective for a majority of buyers is getting a great deal on a tract that meets all of their requirements. Many buyers are currently hesitant to move forward in the purchasing process and this hesitancy is justified by the uncertainty of land prices recovering. For those considering the purchase of a recreational property take a look at the following statistics from the United States Department of Agriculture during the Great Depression:

“Agricultural land values saw the largest percentage declines of the century in the early 1930′s, the beginning of the Great Depression. Agricultural land values dropped 37 percent over a period of 3 years and remained between $30 and $33 per acre throughout the 1930′s. Following the Great Depression, land values were revitalized and began a climb that continued until the early 1980′s.”

Over the last three years the majority of large tracts of recreational property in upstate South Carolina have been losing value. Overall, these properties are currently pushing a 30 percent loss in value since land prices started declining. An increasing number of recreational properties currently on the market have experienced major price reductions that reflect this 30 percent loss in value. A legitimate argument is the current recession has lasted longer than anyone anticipated and we are close to a recovery but it will be a slow one. If this argument proves true a valid assessment of current land values is that although they have bottomed out, the time frame for recovering value will be significant. As the slow recovery reveals itself the transactions on quality recreational tracts will increase in frequency as buyers gain more certainty that land values are increasing. Therefore, the best time to get serious about purchasing a large acreage recreational tract is now. The substantial inventory of nice recreational properties with values 30 percent below pre-recession values will not last long and continuing to wait could very well result in missing out on the chance to purchase that ideal tract at a great price.

[This is Part One of a two-part series investigating the economic potential for investing in the management of land, wildlife, biodiversity, and water resources. Part One covers economic incentives from government programs for establishing conservation practices. Part Two will address private sources of revenue that can be generated from establishing creative and multi-use land use practices and programming.]

On March 1, 1872, Congress signed into law an act that established Yellowstone National Park, the first of 58 protected areas to eventually be designated as national parks. Thus signaled the start of an era in national policy characterized by heavy public investment in conservation and land management.

As of 2010, 138 years later, the Bureau of Land Management held nearly 248 million acres of public land. However, this represents a decrease of two million acres from 2009 and a decrease of 5.5 million acres from 2008. This reduction reflects an effort on the part of public officials who would prefer to see the federal government take a more limited role in conservation efforts while also using the revenue from sales of public lands to pay down the national debt. It also demonstrates a shifting priority away from direct public investment in conservation through outright land purchases and toward providing incentives to individuals and organizations to purchase and manage the land themselves.

While some see this shift as troubling because it means conservation efforts are more haphazard and subject to the varying goals of individual landowners, others see it as an incredibly lucrative opportunity to invest in conservation. Take T. Boone Pickens, for example. Recognizing the economic potential of Texas ranches, he has made a name for himself (and a lot of money) by buying working livestock ranches, improving them with wildlife enhancement programs, and then reselling them. As he recently told The Land Report, “We always made a profit from the ranch sales. But what I really feel good about is knowing that we left the land in better shape than we found it.”

Now it should be noted that Pickens benefitted from a particularly generous set of public incentives with which to offset the costs of his land management programs. You see, Texas implemented a program in 1995 that allows landowners who implement specific land and wildlife management practices to have their land appraised as agricultural land, thereby greatly decreasing their annual tax burden. For those who live in states that do not provide such generous incentives to invest in wildlife management, however, there is an array of state and federal programs that provide payments to landowners for engaging in other various conservation-oriented practices.

While these include such obvious options as securing a conservation easement, landowners also have the option of enrolling in less-permanent programs like the Wildlife Habitat Incentive Program (WHIP), the Conservation Reserve Program (CRP), and the Conservation Reserve Enhancement Program (CREP). In each, government agencies provide cost-sharing and annual payments to landowners that agree to set aside their lands for five- to ten-year periods and commit to protecting and improving wildlife areas, in the case of WHIP, or taking agricultural lands out of production, in the case of CRP and CREP. Case studies abound of landowners who have used these, and other, public programs to help establish and fund conservation efforts and then benefitted greatly from the increased property values when they eventually sold the property.

One of the best examples is that of Robert Macdonald of Triple Chance Farm in Cambridge, Maryland. After recognizing that he could not generate sufficient income from growing cash crops on his land Mr. Macdonald decided to take his land out of production and instead establish an “outdoorsman’s paradise.” With financial incentives from the CRP, CREP, and WHIP programs, Mr. Macdonald developed and instituted a maintenance plan geared toward planting native species that would provide habitat for quail, woodcock, and other bird species. After improving his land over the course of 30 years, Mr. Macdonald fielded bids from five families all vying for his property when he sold in 2009 in the worst real estate market since the Great Depression.

In this era of economic uncertainty, investors are looking for safe bets in the market. Since the housing bubble burst, real estate investment trusts have outperformed the broader market by considerable margins. And best of all, they’re set to continue that trend this year. With help from state and federal programs, landowners can promote greater biodiversity, healthier wildlife populations, and improved water quality, all while earning a strong return on their investment. As T. Boone Pickens put it, what better feeling than to know you’ve improved the land around you and walked away with a few more dollars in your pocket as a result?

Remember several years ago when gasoline skyrocketed to $4.00 per gallon? Of course you do, but did you quit driving, or even change your driving habits much? Probably not.

Now, what if the price had gone to $41.60 per gallon? Think you might have changed your driving, or even stopped driving at all.

In the North Carolina mountains, that’s exactly what happened in April of 2009 when asking prices for 100 acres or more of mountain land shot up to $42,211 per acre. At that same time, the average selling price was a mere $4,017 per acre.

Can you guess what happened next? Yes – that’s correct – land buyers simply said “I don’t think so!” – and promptly disappeared from the land market. That unbelievable level of asking prices was the single most destructive move to hit the land market in North Carolina.

So… How did asking prices manage to climb to such oxygen-deprived levels back in 2009? Better yet, was there already in place something that might have prevented the destructive rise in asking prices?

Most land brokers, also being REALTORS®, subscribe to the REALTOR® Code of Ethics – right?  Take a look at the very first Article in that Code:

Article 1

When representing a buyer, seller, landlord, tenant, or other client as an agent, REALTORS® pledge themselves to protect and promote the interests of their client.

Better yet, look at how the following clarifies that first Article:

Standard of Practice 1-3

REALTORS®, in attempting to secure a listing, shall not deliberately mislead the owner as to market value.  

Nevertheless, in a market where actual selling prices averaged $4,107 per acre for 100+ acre parcels, brokers were taking listings with asking prices that AVERAGED $42,211 per acre. Is that what is called “protecting and promoting the interests of their client”?

In defense of those brokers, property owners wishing to sell were, at the same time, succumbing to plain old human greed. Reacting to false, unfounded rumors of huge sale prices, they were making unreasonable demands on their brokers to list at ever-higher prices. Brokers, under the onslaught of demands from sellers, capitulated and took the listings at unwinnable prices – and the land market collapsed under the weight.

Now – we all know we are not in control of mankind’s greed for affluence. Brokers do have one powerful tool at their disposal however. On the grounds of the U.S. Air Force Academy in Colorado Springs sits the ‘‘Eagle and Fledglings Statue’‘ – given as a gift to the Academy in 1958 by the personnel of Air Training Command. This statue contains the following inscription by Austin Dusty Miller:

“Man’s flight through life is sustained by the power of his knowledge.”

Very simply, there’s power in knowledge! Therein lies the broker’s solution to accepting grossly overpriced listings – KNOWLEDGE.

If a broker specializes in land (another powerful concept), he or she can list only properties priced to sell instead of wallowing through months and years without showings and buyers. This is accomplished by acquiring a complete knowledge set of actual sale prices over a period of years for land – and only land.

The first step is to acquire from the county tax office a database of all property owners owning over 100 acres. These records can often be acquired over the Internet (Google the “GIS” for your county), or by requesting a CD with the information from the tax office. These records general include the last sale date, and some reference as to the last sale price.

With that information, a fruitful database of actual sales can be compiled showing acreage, last sale price, sale price per acre, Parcel ID #, and name and address of the owner. Once you have 5 or 10 years of actual sales, and can present that data in a friendly, readable form to sellers, you will have ½ of the necessary knowledge needed to list property at fair market value. Notice that I said only ½ of the knowledge.

“What’s the other ½” – you ask? Property for sale now by all other brokers in the area will complete your knowledge base.

If a broker belongs to MLS, listing information can be researched through the MLS land listings. The database of property for sale now should include a Parcel ID number, the asking price, the acreage, and the asking price per acre. Convert that data into a table that is easy for property owners to view and decipher. Be sure to use some identifying information such as owners name, Deed Book and Page, or Parcel ID number. This gives your table added credibility to the person reviewing it.

When reviewing your tables with potential listing property owners, begin with past sales first. Explain that all information was taken directly from the local tax office – not your personal files. By presenting past sales in an objective manner, you reduce the raw emotion likely when they find prices  not as high as they thought.

Next, move on to properties currently listed for sale. These properties will be the competition faced by the property owner once they list. They are normally higher – being asking prices – and are likely to be more pleasing to the prospective listing individuals.

Be wary of listing property at the same level as others for sale now. Being higher than what past buyers have been willing to pay, these asking prices are the “wished for” prices of present owners – and not necessarily indicative of present value.

In summary, many properties in today’s land market are flat out overpriced – well above what any respectable buyer will pay. The broker who educates prospective sellers about the realities of today’s land marketplace will come away with attractive properties – at fair prices. What’s more – buyers are always waiting!

When you decide to sell your land – whether it be farmland, timberland, ranchland or hunting land, be sure to ask the agent about the websites where your land will be listed. After you ask about websites then ask about social media websites. We’ll do a two-part series and cover social media next time so let’s start with websites.

For residential properties the big three are Realtor.com, Zillow.com and Trulia.com. Although some may include Yahoo, it is really just a Zillow feed. For all practical purposes these websites are useless when it comes to the land market. They are not setup for easy searching for rural properties. They require “Actual Addresses” and for the most part they are just cumbersome and difficult to navigate for any type of vacant land properties.

For land the big three are LANDFLIP.com, LandsofAmerica.com and LandWatch.com. We all have our favorites, but for the most part these websites list more land than all other smaller land targeted websites combined. There are others that feed off or have merged with other sites but these are the main ones that buyers will find first in any search.

So, if your agent is focusing all efforts on MLS advertising which mostly only reciprocates out to residential websites to sell your land then you are likely not getting the full marketing you need. Land buyers search out specific land terms and visit land websites often. Most buyers will tell you that they have had a search setup at a land specific website for months or some cases even years in a specific county or even several counties. Recently, a buyer lead contacted us and told us that they found a land listing that they were very interested in but that the listing agent was from out of state and sold houses at their website. They wanted someone who was actually from our state that specialized in land to help them. They did not even call the listing agent on this property. Instead, they searched out the words “land” and the specific area. So, if your agent is not even getting calls about their listing then you have a major marketing problem.

Another issue with listings is IDX, MLS feeds, and syndication. Unh? What is all that mumbo jumbo and why should you care? Most folks do not care about these terms nor do they even need to know the technical details but your agent should know exactly what they are and whether they use them or not.  If an agent chooses to list land on the Multiple Listing Service (MLS) then agreements can be made and those listings can be shared via IDX at other agent websites with specific rules. Syndication is where the listing feeds out (or syndicates) to other websites. For example, most MLS’s will syndicate their listings to Realtor.com meaning that the agent does not have to go to Realtor.com and re-enter the listing. This all sounds great but the problem is that not all websites bring in the same data nor do they all present it the same way. Some will only list the brokerage name and no agent contact information, some will only import one photo, etc. and the list goes on. It can become a nightmare for an agent because when the listing sells they find it nearly impossible to get it off all the syndicated websites.

The bottom line is that you need an agent that understands and knows exactly where their listings are posted. Also, they need to be able to edit or delete those listings at each and every site. Nothing is worse than having an old listing that a buyer calls on and they are told it already sold. It frustrates the buyer to no end especially now that most of the major websites offer agent advertising by zip code. A buyer will click on a listing and then see three buyer agents that have paid to be there. The buyer contacts one of them and usually the advertiser has no clue about the listing. Buyer frustration cycle starts all over again. Buyers give up and start searching out the listings and specific companies that sell land and contact the listing agents directly about the property.

A major real estate firm recently announced it will stop sending listings to Realtor.com and Trulia.com. This is not a small specialized local company it is a huge brokerage covering multiple markets. You can read all the details about the specifics but the major point is that it is a residential firm not a land brokerage. They recognize the importance of their listing posts and they want their agents to actually get the inquiries and leads for their own listings. Each area will be different and no blanket statements can be made about which site or which listing strategy is best. However, one thing is certain your listing agent should have a plan for the marketing and know exactly where the listing has been posted.

Websites that focus on certain keywords for search engine optimization (SEO) are one of the best tools a land agent can use. LANDFLIP just announced a new specialized search for land listings this week called RANCHFLIP.com. These are exactly the types of tools that you should be looking for your agent to have in their marketing plan.

Marketing includes more than just websites. In Part 2 we will cover social media marketing.

Early in my investing career, I bought shares of Crown Pacific Partners, a timberland-owning firm headquartered in Portland, Oregon. During market declines in the late 1990s, the firm subsidized its shareholder distributions through borrowing and cash generated from non-organic business activities. In other words, the firm ate its seed corn. Crown Pacific filed for bankruptcy in 2003.

My shareholding experience with Crown Pacific influences my research to this day; it provided valuable lessons on the available (and unavailable) levers for cash generation and risk mitigation with timberland investment vehicles. At the end of the day, timberland owning firms – such as public REITs Plum Creek (PCL), Potlatch (PCH), Rayonier (RYN) and Weyerhaeuser (WY) – must embrace situations imposed by external markets and optimize firm performance for shareholders. How did timber REITs fare in 2011?

Big Decision in Tough Markets

Potlatch leadership dug deep in late 2011 to make the sector’s “stone cold decision of the year” to reduce dividends and harvest levels. These decisions by the PCH Board and senior management (1) placed long-term asset values and maximization over short-term yields and (2) embraced the realities of knowable, quantifiable impacts on wood markets relative to speculative forecasts of key demand drivers. Cheers.

Equity markets embraced the resulting 39% reduction in Potlatch’s yield. While share volume spiked on the day of the announcement, PCH’s share price declined 2.2% after two days of “post announcement” trading. This left its dividend yield at 4.1%, in line with the other public timberland-owning REITs. According to the FTR Index, the timber REIT sector now has a 4.0% dividend yield.

Timber REITs and Timberlands Outperform US Treasuries Long-Term

U.S. Treasuries remain a common benchmark for private timberland investments. Why? Relative safety and low risk over long time frames. However, U.S. Treasuries, thanks to a robust secondary market, are more liquid than private timberlands, making them convenient benchmarks for publicly-traded timber REITs, as well.

We also care about Treasury yields because when they increase, so do interest rates on fixed-rate mortgages. This increases the cost of buying homes and decreases the demand, and prices, of those homes, which can slow the economy. This coincides with another reason why timberland investors take such a strong interest in Treasuries:  they affect the costs of building and buying homes, which influence the supply and demand of forest products such as lumber, OSB and plywood.

On an annualized basis and year-to-date, how have timberland investment yields benchmarked to 10-year US Treasuries? For the ten year period from 2001 through 2010, both private (less liquid timberlands) and public (more volatile timber REIT stocks) investment vehicles outperformed US Treasuries: timber REITs returned 6.65% annually, private timberlands according to NCREIF returned 6.82% per year, and US 10-year Treasuries returned 3.99% per year on average.

Conclusion: Timber REIT Kudos for 2011

In 2011, timberland-owning REITs, as a sector and led by Rayonier’s 27% gain, outperformed the S&P 500. As measured by the Forisk Timber REIT (FTR) Index, publicly-traded timber REITs returned 5.69% versus 0.00% for the S&P. The FTR Total Returns Index, which accounts for dividend distributions, earned 9.62% in 2011.

With the recent increases in farmland values and drop in real estate prices, some smart landowners might consider selling their farm and purchasing a new home. What are the tax implications of these transactions? The answer depends upon such factors as whether the farm has been the taxpayer’s primary residence or not; and whether the taxpayer has intent to purchase new property of equal or greater value. The Internal Revenue Code provides multiple opportunities for taxpayers to maximize their benefits when selling their property including tax deductions on the sale of the primary residence and 1031 tax deferred exchanges.

Primary Residence

Internal Revenue Code Section 121 allows a taxpayer to exclude up to $250,000 ($500,000 for married persons filing jointly) of the gain on the sale of their principal residence given during the five-year period from the sale date, the home has been owned and used by the taxpayer as their primary residence for periods of two years or more. This exclusion is available no more than once every two years. Those taxpayers who don’t satisfy the two-year ownership and use requirements can exclude a prorated fraction of the $250,000/$500,000 deduction given the taxpayer has a change in health or place of employment. Realized gain is determined by the following two steps:

Step 1:  Original Purchase Price + Improvements = Adjusted Basis

Step 2:  Sales Price – Adjusted Basis – Selling Expenses = Realized Gain

If the realized gain is less than $250,000 (when filing individual federal return) or $500,000 (when filing a joint federal return) there is no tax. If the gain is higher and the taxpayer is in the 25, 28, 33 or 35 percent income bracket, the tax is 15 percent. If the taxpayer is in the 10 or 15 percent income bracket, the capital gain tax may be 5 percent. As always, check with your accountant to confirm the tax consequences.

A principal residence located on the farm can be sold and replaced with a primary residence. Seek guidance from a farm realtor to establish comparable selling prices for the home and farmland.

Tax Impact of Selling the Farm

When selling the farm, there are two types of properties being sold, the land and affixed buildings –real property and equipment or livestock– personal property. Internal Revenue Code Section 1031 allows the taxpayer to defer the capital gains and recaptured depreciation taxes when equal or greater, like-kind real and personal property are replaced within 180 calendar days of the sale.

1031 Exchange

If the intent is replace the real and personal property, replacement property is acquired of equal or greater value. The farmland being sold can be exchanged for any real property in the United States including rental properties, parking lots, oil and gas royalty interests and single tenant, triple net leases such as a CVS Pharmacy or similar tenant. To defer the tax on the personal property, like-kind or like-class personal property would need to be acquired. Each type of personal property falls into one of thirteen general asset classes or six digit North American Industry Classification Code.

1031 Alternative: Deferred Sales Trust

If only the home is to be replaced then the options are to pay the tax on the real (farmland and buildings) and personal property (equipment and livestock) or consider another tax deferral strategy that does not require the purchase of replacement property. A Deferred Sales Trust, similar to a Section 453 installment loan, allows the proceeds of the sale to be invested by the trust in marketable securities and annuities. Investments are determined by the taxpayer and executed by the trust.  Income from the investments is repatriated to the taxpayer on a schedule determined by the taxpayer. If the taxpayer wants a blend of income and gain from the sale, that can be scheduled. Taxes are paid on the income and capital gains received. Taxes on the capital gain are paid over whatever period of time determined by the taxpayer.

With the recent run-up in row-crop farmland prices, savvy investors should be looking to similar investments that offer many of the same benefits of crop land ownership, without the hefty price tag. Timberland is just such an asset. In fact, timber is a crop. It just has a much longer production cycle. And here’s a secret…when you look at the asset classes held by the ultra-wealthy, almost without fail, you will see a heavy timberland flavor. Institutional investors, and high net worth individuals have already begun to take advantage of this opportunity. If you have not recognized this opportunity until now, it’s time to educate yourself on the benefits of timberland ownership.

Now I’ve mentioned the wealthy a couple of times here, but that does not mean you need 10 million dollars socked away to buy into a timberland asset. Those wealthy individuals had to start somewhere, and for the most part, they did not start out with millions to invest either. They started by making smart investments in assets that appreciated in value, or brought them income in some manner. Timberland will do both. It will work for the guy that can buy 40 acres, just like it will work for the investment group that owns 400 thousand acres. YOU have to start somewhere. As investors begin to substitute away from the higher priced good (Crop Land), the substitute good (Timberland) will appreciate in value. There’s no magic formula or fuzzy math here, it’s straightforward, basic level economics. When the value of a good goes up, so does the value of substitute goods. Timberland is a good substitute for crop land.

Why Timberland and Why Now?

Real Estate is a tale of two markets right now. Everyone knows that the larger real estate market, like our total economy, is not doing well. However, farmland seems to be breaking new record highs on an almost daily basis. Many factors contribute to that. Some of it is scarcity, some of it is commodity prices, some of it is advancement in the productive capacity of good farmland, some of it is capital from non-farm sources flowing into the ag land economy, and some of it is pure speculation.

Let’s focus on the last two, as these are the factors that are driving prices the most in the current market. Speculation. There’s a bad word, isn’t it? I beg to differ. Speculation brings liquidity to markets the world over. Unless you can predict the future 100% correct all the time, every decision you make is a speculative one. Without this speculation many of our markets would swing more wildly than they already do. Speculation will help put a bottom sagging markets. Speculation in the commodities markets helps farmers plan their crops, and protect their investments. Speculation has a purpose in a free-market economy. Speculation can propagate itself to unsustainable levels, as we have witnessed in so many “bubbles” in the last decade. Speculation that is based on provable numbers, and time-tested data is a better bet than speculation in a market because everyone else is doing it. The cropland market has a fair amount of speculative value built into it right now. Yesterday is when you should have invested it cropland. If you are going to profit from the appreciation in an asset based on the forward momentum of speculation, the time to do that is before it’s all the rage. Timberland is positioned well to take advantage of this right now. As the cropland numbers push higher, more people will see the value in substituting timberland for cropland. More people will grow uneasy with the run-up in cropland values and substitute away from it. Get into timberland now, and benefit from this economic law.

There’s also much more capital in the agricultural economy today than is traditionally present. People that would not know which end of a cow to feed, or that peanuts grow in the ground now are owners of farmland. Many of these people have invested in the land factor of production because they are substituting away from investments in the stock market that they have deemed more risky. They simply hold the property for the rental income, appreciation, and hedging ability of the asset. They rely on a traditional farmer to actually produce from the land. Until recently, this was a very uneasy partnership between the big money, city-slicker and the farmer. With the maturation of our ag markets, and the sheer volume of capital available from urban investors, they have grown to appreciate each other a bit more than in the past. Many of these same dynamics are at play in the timberland market. More investors are realizing the income, appreciation, and hedging properties of the timberland investment. This market will soon develop in much the same fashion as the cropland market has in the past couple of years. Plus timberland can be more easily managed by someone who has not been a farmer all of their life, or even someone who lives in a downtown loft apartment. It’s a bit more forgiving to the newbie than is cropland and you have the opportunity to time your harvest to highs in the wood fiber markets instead of taking the going price at the end of the growing season. This puts the investor in the position of profiting from the production aspect of timberland…not just sitting back and collecting rents from someone else trying to work out a profit using the land too.

Why is Timberland a Good Investment Substitute for Cropland?

Timberland has all of the qualities that today’s investors are paying premiums to obtain in the cropland market (income, appreciation, hedging). Timberland has a lower capital requirement per unit of production than cropland. Timberland has not experienced the recent run-up in prices that cropland has. Timberland can be more easily managed, in a hands-on manner, by the novice than can cropland. You can do all of this with timberland and still obtain rents on the timberland from outdoorsmen who wish to hunt on the property…while you are growing your timber crop. The numbers you need to make speculative investment decisions are available, proven, and time-tested. No fuzzy math. Just good solid investment sense. Get yours before it’s all the rage. Then profit from a timberland investment once everybody’s doing it. Get ahead of the curve instead of behind it. Buy Low. Sell High.

1031 exchange rules have been refined since being created by the Department of Treasury ninety years ago. The Internal Revenue Service (IRS) enforces a Treasury Regulation known as Section 1031 that provides all taxpayers with the ability to defer federal and state capital gain and recaptured depreciation taxes when property held for productive use in a business or investment is exchanged for like-kind property held for productive use in a business or investment. Supporting the 1031 code are 1031 exchange rules based on case law, regulations, revenue procedures, revenue rulings, private letter rulings, technical advice memorandum and other guidance from the IRS.

1031 Exchange Activity

The Joint Committee on Taxation estimates that in Tax Year 2004, the total dollar amounts deferred were $73.6 billion. In Tax Year 2011, the estimated total tax dollar deferral is $2.5 billion, with $.800 billion from individuals and $1.7 billion from corporations. In Tax Year 2012, the estimated tax deferral is projected to increase to $3.2 billion.

1031 Exchange Rules

The basic five 1031 exchange rules include:

1. The federal and state capital gains taxes are deferred if the replacement property is equal to or greater than the property sold.The common misconception is that only the realized gain needs to be reinvested. Both the net equity and debt retired – if any – from the sale must be reinvested to defer 100 percent of the gain.
2. A Qualified Intermediary (QI) must be engaged to accommodate the exchange. This cannot be your CPA , attorney, realtor or financial advisor or a related party such as your employee or lineal blood relative.One exception is in a pure exchange where the Taxpayer and Buyer want each other’s property. For the nominal QI fee, it still makes sense to engage a QI to make sure the 1031 exchange rules are followed.A second exception is if the attorney has provided services related to title closing, they can also accommodate the 1031 exchange.
3. The taxpayer cannot touch or have access to the exchange proceeds or those funds are subject to taxation. Once the exchange proceeds are touched, the exchange is over.
4. The taxpayer who sells is the taxpayer who buys. If the wife owns an investment property, then the wife is the titleholder to the replacement property. The husband can be quit claimed or added to the replacement property title after the closing.
5. Following the first leg closing, the forty-five calendar day identification period begins, followed by an additional 135 calendar days to acquire the replacement property, for a total of 180 calendar days.

A 30 year or more leasehold of land is considered like-kind to a fee interest in land. Providing that the taxpayer has the right to extend the lease, the thirty year leasehold interest is eligible for Internal Revenue Code Section 1031 exchanges, allowing the taxpayer to defer federal and state capital gains while replacing with any type of real property.

Leasehold Interests

Wind energy projects are plentiful in north western Indiana, where it doesn’t take long driving county roads to see the ever present three whirling blades of megawatt turbines, producing electricity and revenue for the land owner. Purdue University, located in western Tippecanoe County, Indiana, is working towards a 100-megawatt turbine park that includes 50 two-megawatt turbines on 1,600 acres. Annual leases are projected to generate $10,000 per turbine. Many Indiana farmers have opted for similar thirty year leases with developers who combine engineering and construction services with power purchase agreements from utilities.

The right to use someone else’s property is a leasehold interest. Improvements made to land leased for thirty or more years are considered real estate. In the example of the wind turbines, the taxpayer who owns the wind turbines, along with the leasehold, can sell the lease. As long as the remaining term of the lease is 30 years or more including extensions, the taxpayer can defer the capital gain taxes when replacing with another thirty plus year lease or other real estate.

Examples of Leasehold Interests

In addition to wind turbines, other common construction projects on leasehold land include cell phone towers, billboards and outdoor advertising. Given the leasehold interest of thirty or more years, billboards and cell towers are improvements to the land and considered  like-kind to a fee interest in other real property.

Leasehold Gray Area

As a general rule, leaseholds with a term of less than thirty years are not considered like-kind to real property. In private letter ruling 200842019, the Internal Revenue Service (IRS) stated in an exchange of leaseholds:

“ if the two leased locations vary in value or desirability or in lease terms, these are factors that relate only to the grade or quality of the properties exchanged and not to their kind or class.”

The IRS may be saying that a lease for less than 30 years may be like-kind to a lease of more than 30 years. In Everett v. Commissioner Internal Revenue, a timber lease for three and six years for rights to remove timber on 5,000 acres was exchanged for a ten year timber lease on 24,000 acres.