You can’t talk about ranch real estate markets without talking about the proverbial circle of life.
Many ranches come on the market because someone is retiring or has died. But even with succession planning, ranch transitions can be tough on both ends, yet people are getting creative on sidestepping the obstacles.
With the proper planning, the whole selling and buying process can be avoided altogether. Those who want to retire from ranching, but want to hold onto their family’s land, can lease their property out to younger people hoping to start their own ranch.
“There’s a lot of land being leased to young, bright, shiny professional farmers and ranchers. That’s been going on in the Midwest for a long time and I think we’re seeing more of that in the West,” observed Patrick Bates, owner/broker of Bates Land Consortium. “
Leasing can help both potential buyers as well as potential sellers. With supplies of working ranches tight and price tags just getting bigger, securing financing is a perennial problem for those wanting to buy their own ranch. Leasing is increasingly becoming a strategy for potential buyers to sidestep this obstacle.
“When you lease, you don’t have to finance,” Bates explained. “You just have to come to an agreement with the owner and the tenant as to what he can pay per year. They don’t have to go to a bank.”
Despite this, lease demand for working ranches is very high.
“The ability to lease property here on an ag basis is extremely competitive in my region and the demand is extremely high for the exact reasons you were describing,” Brian Ripley, broker and ranch sales specialist with the Paoli Group, told WLJ.
“The price tags are so high on the properties that even those that are truly looking at it from an agricultural standpoint, …the competition is so intense.”
He explained that he constantly is getting calls, usually from younger people, seeking hay ground or grazing ground for lease.
“But there are so few opportunities.”
A different sort of legacy
Planning doesn’t always happen, and even when it does, it doesn’t always work for those left behind.
“We get calls all the time saying, ‘Mom and Dad passed away and the ranch or farm is worth, say, $6 million and there’s four of us, but I can’t afford to buy my brothers and sisters out for $3 or $4 million and keep the ranch going,’” explained John Knipe, president and managing broker at Knipe Land Company.
He described a common problem that crops up even with succession planning; the heir who wants to keep the ranch going can’t buy out their disinterested siblings.
“So they break it up and they sell it and they each go their separate ways and do the 1031,” Knipe continued.
But he did have a story of a creative client who wanted to retire from ranching several years ago, and provide for his three kids, including providing for the possibility that one or another might want to ranch. He used the 1031 Exchange to do it.
“We sold the ranch, he took the money, and bought three properties with the money,” he explained, detailing that the three non-ag properties is an office leased by a local government branch, a commercial building, and an apartment complex. This $8 million in properties came with a 10 percent annual return of about $800,000.
“That’s a really happy story if you will, and then the kids can take those assets and sell them for ranches or he can leave one for each kid,” Knipe continued, adding that the seller has made and reinvested the annual earnings from those properties into other properties in the years since he sold the ranch.
“There are other ways to leave a legacy than the family ranch,” Knipe observed. — Kerry Halladay, WLJ editor