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Real Estate Math 101: Farm and Land Preservation by the Numbers

If the farmer can get them, dollars from farmland preservation take a double hit in the current economy.

Farm and land preservation by the numbers.101Over the Thanksgiving Day holiday, I received an email from one of our former candidates for public office, who had read my post entitled: What’s up with Farm and Land Preservation in Frederick County? This post included an interview with Deborah Bowers, Editor and Publisher of Farmland Preservation Report.

The former candidate asked me to clarify a couple of my comments:

Question: “Land prices were strong enough to provide them with the opportunity to tap into the resources that selling easements provided”. Are you referring to the fact that there was enough coming in, in recordation taxes, to make funding for the easement programs available for many farmers to take advantage?

My answer: Yes,  That is one of the issues.  The other is that the margin between farm/rural values and land development value has become so thin that this causes the easement value to drop to the point that the farmer may not be able to achieve his original goals.
Next question: What do you mean specifically when you said “rural lots have been decreasing at a rate of one percent per month for the last few years”…do you mean that recording of lots has decreased…subdivision of lots has decreased…??

My answer: Nope, just the opposite! There are a number of forces at work here:

1.  The residential land and rural lot market are typically one of the first types of real estate to feel the pain from the downturn in the market … because when money gets tight buying a lot or any size or a farm to build a home is more of a discretionary decision and is quickly the type that is knocked down the list of priorities.

2.  In a recovery, on the other hand, the land and lot market is typically one of the last to receive the economic rewards in increasing values … for the same reason as noted above.

3.  While I think for the long haul our inventory of lots in the county will be very thin, the depth of this recession has allowed the existing inventory of lots on the market to be high … when directly compared to the demand.

For example there are currently in the Realtors MLS system there is an inventory of about 500 lots on the market … and that continues to steadily increase … compare that to the fact there has only been 66 lot sales in Frederick County, Maryland since January 1, 2010 … this tells us that at this pace of sales, there is about a 5 year over supply of lots right now.  Of course the hope is that we’ll see a pickup in lot sales over the next few years, but if the economy does not recover to a point that real estate catches the wave … it could be longer.  So, there is way moresupply than demand … which means lot values are continuing to fall at a rate (according to local appraiser Wayne Six) of 1/2 to 1% per month since mid 2006.  Farm land values have experienced a decrease as well, but not as much.

4.  With that said when you then figure in the fact that the time and cost involved in creating lots from design, application, fees through subdivision is extremely high, there comes a point where it is not worth it to develop the property.  That is while the lot values are as low as they are now … with the likelihood that they will continue to fall for at least 2 more years.

Take for example a 50 lot subdivision that was approved several years … 5 years ago those lots were worth $180,000 per finished lot.  A builder/land developer (buyer) was willing to pay $100,000 per raw lot at record (before finished improvements).  The cost to develop is about $65,000 per lot.   So the builder/land developer was looking at making a $15,000 per lot margin.  When the market collapsed the buyer canceled the contract and “walked” as they say in the business.

Today the best price I’m hearing from builder/developers for a comparable finished lot is $80,000 … then figure the development costs are down a bit to around $60,000, and if the builder/land developer wants the same $15,000 margin … the raw value is at $5,000!  So while the market value of the finished lots has dropped by about 55% in the last 4 years, the raw value of the lots has dropped 95%!  with the margin estimated at $5,000 per lot, the land is worth more as a raw track of land than as a 50 lot subdivision!

To bring this full circle, if such a property was eligible for preservation money, an appraiser would likely give this proposal very little value to no easement value … which is the difference between farmland value and development value.

So for those who own agricultural and are seeking a possible sale of an easement, you have two problems:  1) State and Local easement funds are extremely limited to non-existent, and 2) the value of your easement is likely significantly lower than what it may have been five years ago.

At MacRo, Ltd., we have assisted many clients in various types of agricultural and rural land easements, including Transferable Development Rights (known as TDRs) and Forest Banking Credits; so if you are interested in learning more let us know.

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