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When To Sell Land

We have recently had a number of discussions with clients regarding the decision of whether or not to sell land. One such discussion has been with Art Appreciator. He was struggling with the decision to sell land to pay off some debt. Art ran into some financial trouble a while back and has been sitting on about $100,000 of credit card debt in addition to having significant arrears on his term loans. Art has struggled to operate the farm efficiently, as cash flow is a real problem; he’s often not able to purchase inputs when he wants to because he has no cash. Art has operated like this for two years and he wants to make some changes.

Art is in an area where land prices have sky rocketed the last five years. Art’s initial thought was that he didn’t want to consider selling land at all because land was a good investment and it will continue to appreciate. We agreed that land has been a good investment, however the bigger question, as with any investments, is: What is the return on the investment; and, What is the opportunity cost of the capital you will be investing?

For Art we looked at it two ways — one in which he rented the land out and the second in which he farmed the land himself

(See Figure 1).

In Art’s case we discussed the strengths, weaknesses, opportunities and threats of his operation. It was agreed that the strength of his operation was that he has significant equity in the land. The weakness was that he had a lot of current debt that was negatively impacting cash flow. The opportunity was that he could pay off credit card debt and invest in himself improving his return to an immediate 13 per cent. The threat was that land values could be currently on a bubble and they could drop or that he may not have immediate buyer if grain prices dropped in which case the interest would continue to accrue on the credit cards. The other threat is that Art is unable to sell the land to an individual that would consider renting the land back to him in which case it would be lost forever.

Art’s decision was to consider seizing the opportunity to make the guaranteed 13 per cent and give up the opportunity to make

the 5.7 per cent to nine per cent that may fluctuate depending on rent and land appreciation. He must consider that if we are on a bit of a land price bubble that land may take years before we see any appreciation at all. During that time, the 13 per cent interest will compound and the land investment will likely never catch up.

On the other hand if Art is optimistic about the potential for land appreciation he could consider the use of a option that would have him selling at a discounted rate but allowing him to purchase the land back at later date at an agreed upon price. The key point here is that Art’s business is at a critical point which demands he consider his use of capital. A redistribution of capital at this point has the potential to decrease risk and increase returns. He will need to be comfortable that his decision to sell land is driven by a priority to improve the financial health of his business and if his decision is to retain land that it is either driven emotionally by the tie to the land or else speculation on future appreciation — neither of which is core to his farming business.

AndrewDeRuyckandMarkSloane managetwofarmingoperationsinsouthern ManitobaandarepartnersinRightChoice ManagementConsulting.Withover25years ofcumulativeexperience,theyoffersupport infarmmanagement,financialmanagement, strategicplanningandmediationservices. Theycanbereachedat [email protected] and [email protected] or204-825- 7392and204-825-8443

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RENT

FARM

Figure 1.

Land value $1,500/ac.

Margin: Land rent $50/ac.

Future Land appreciation $1,500 x .03% = $45

Land taxes: $9/ac.

Total land Income ($50+$45-$9) = $86

Return on Investment = ($86/$1,500) = 5.7%

Art’s Opportunity cost: Interest of credit card debt (13%)

Land value $1,500/ac.

Margin: Farming land $100/ac.

Future Land appreciation $1,500 x .03% = $45

Land taxes: $9/ac.

Total land Income ($100+$45-$9) = $136

Return on Investment = ($136/$1,500) = 9%

———

A redistribution

of capital at this point has

the potential to decrease risk and

increase returns

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