[Guest]

There is a farm in our area for sale. 52 acres of fertile pasture with a stock pond, 1300 feet of frontage on pristine river in Atlantic salmon territory, a 2300 sq ft. house in great shape, multiple barns in excellent shape, an established CSA with 60+ members, a co-op business and store with established clientele, PYO raspberries and strawberries, a drilled and a dug well, established Christmas tree and perrenial sales relationship with a major seed company, and a hay operation. The current farmer is willing to teach the new owners.

Asking price: $595,000.

Here's the rub. The hay operation takes in $25,000 per year. PYO is another $10,000. Retail veggies, trees, etc. comprise another $10,000. They sell out of everything they grow, but they are unable to do more because of their age. There are no numbers available yet on the CSA profitability, but shares are $100 each, so that's at least another $6,000. Profits on the co-op are 10% of the total, but no hard numbers are available yet. These numbers also represent two elderly folks running the farm with no help, and they haven't tapped any farmer's market/restaurant possibilities yet. The farm has a stellar reputation throughout the entire state. They raise no animals currently, but they're set up to do it.
Rub #2: Because of the Atlantic salmon issue, the local conservation group is seeking to purchase easement/development rights to the shoreline. The easments are very flexible and would allow us to continue haying/farming. Speculation is that the easement would put between $80-100,000 into the landowner's pocket. The state is also interested in upland easements, perhaps to the tune of another $100,000. The conservation group has a lawyer that donates her time to work out the legal issues, and they pay for the appraisal and I believe some of the closing costs of that aspect of the deal.

Mortgage would be about $3000 per month with 10% down on $600,000. That's almost double what I'm paying now, and I can't afford it. We would need about $15,000 to make up the difference.
As it stands, the established business kicks in a minimum of $45,000 per year. Then, we can count on another min. $80,000 from the conservation group, which would significantly reduce the mortgage payment again. So it's starting to look good. It's a lot of damn money, but once you crunch the numbers, it looks doable.

So what am I missing?

 

[Ken Scharabok]

EXPENSES!!!

It's not the gross which matters, but rather what you actually have to spend freely after all the expenses and taxes are taken off. Plus, I don't believe you mentioned equipment and the associated cost there.

Are you sure the couple isn't in their 30s and just look old because of all the hard work involved.

The Conservancy won't give you fair market value. At best what they will offer is fair market value as is, minus fair market value once the conservation easement is in place.

Perhaps if you are a family of ten with eight of them being strong, healthy, young boys with no plans to every leave home...

Ken S. in WC TN

 

[Jena]

The first thing is most farm loans do not involve monthly payments. You need to find a real farm lender who will offer a mortgage with annual or at least semi-annual payments.

How skilled are you? How much do you already know about growing these things? Maintaining equipment? Your skill/knowledge level will have a dramatic impact on your bottom line. How much are they willing to teach? How long are they willing to stick around to do so?

How much of the business will leave with them? If they have a great reputation, will it hold through a new owner? Are the customers loyal to the farm or to the people themselves?

As has been mentioned...are your numbers gross or net? What are the expenses of these things? What is the real profit? Where will you get the capital for putting the crops in? Where will you get your machinery and equipment?

Quit speculating on the easement value and find out some hard facts. A nice written offer would be nice. If you are willing to have the easement, check into other outlets as well. I know there's some program that will pay market value for the land if you basically give it to them. You are allowed to use it for certain purposes during your lifetime, but then it goes to the agency. Check on all the specifics of any and all easement options and don't use speculated numbers, use real ones.

If it were me....and I had run all the real numbers and found it to appear viable...I would ask the owners for a lease/option type arrangment. During that time I would do the learning part...see what exactly is involved in running this operation, what the expenses are, etc. At the end of the lease, you could either buy it or run the other way screaming in fear. You can set up an option like this anyway you want....they can remain on the property until you actually buy it, you can pay to live there, whatever will work. Human nature being what it is....once these folks have the money in hand, they will probably lose quite a bit of motivation to spend the time teaching someone how to run the place. Get your education before you hand over the money.

Jena

 

[Ken Scharabok]

What Jena refers to is known as 'goodwill'. For example, a doctor buying out another doctor's practice costs more than starting a new one simple because it comes with an established customer basis. However, how many of those continue shopping there (in effect) determines the real value. Here also you have 'their' established reputation which may not impart to you.

One of the sisters and her husband bought a floral shop from a woman with a good part of the cost being the goodwill of her established customer base. However, what they found this most of them were loyal to her - not to her business. Once she left, they also did so.

If you do buy, have a separate contract they will not start all, or part, of a similar business within say 300 miles within say ten years.

Ken S. in WC TN

 

[Guest]

We have lots of experience with crops, livestock and related areas and almost no experience with maintaining tractors and other large equipment. On our current farm, we keep the scale down to keep large machinery out of it. But, as I mentioned before the current owners are willing to teach, and they plan to stay in the area.

I guess I left out one of the most important parts: the property will never appraise for $600,000. While it might be worth that in a perfect world, it will never happen. BTW, we're not speculating on the easement value. Those are hard numbers.

We're thinking a lease option, as Jena suggested. The old man wants to retire. We're thinking we negotiate a deal where he sells the house, barns, etc. to us for one sum, and then we fix a rental deal on the land that kicks in after a year or two and continues for 20 years. That way, we get the farm with a conventional mortgage and the former owners have a monthly retirement income. If, after two years the deal won't work, we sell the house and the former owner keeps the title on the land. This, of course, is assuming that the property actually appraises at $600,000, which it won't. We won't be getting a farm loan either way; we might look into combination business/residential mortgages (like bed and breakfasts, for example).

The state and the conservation people really want to see this deal through. The town is EXTREMELY concerned about maintaining open space. We have heard stories about citizens kicking in their own money to see a deal go through, if the alternative is that it is developed. The customer base is obviously loyal to the owners as well as the farm; their average customer travels 25 miles to frequent their store. I believe the loyalty will continue through to the next owner; there aren't many alternatives in the area.

 

[Blu3duk]

An on going business to be purchased is only really worth 3.5 times the gross annuall profits, and there are exceptions to that rule, but holding to the rulle your prospective business should in reality be set for about $168,000.00 for the business, [which is the 52 acres] you can add to the price the house appraial, but the out buildings are not worth the cost of building them in accordance with the realestate appraisers ive dealt with unless they are currently occupied with a commerical operation.

No one who appraises can take into consideration the "potential" for the property.

Employees cost more dollars than most people believe, however there are socialist programs in every state that alllow you to get back dollars you pay someone to an extent....most of the time they are not worth the time put into the programs though. Wages are one thing, if you do not contract for the labor, then you are responsible for federal taxes, state taxes, worker compensation premiums, and so forth, which ALL come out of the employer pocket, [ok some are matched by the employee].

The payback for a farm operation is generally from the sale of the farm..... not the farm products if you pay an exobanent amount of money for the farm upfront, there are exceptions to this rule as well....

Costs of prodcuing a garden for CSA just about break even at 25-40 customers depending upon the area....
Christmas trees can produce about $6000.000 per acre, but take 5 - 7 years to mature leaving a net gross of less than $1000.00 per acre per year, expenses for the tree production are intensive for the first 3 years, either by tilling after planting to reduced fire hazzard from dry grass and weed, or by chemical spraying to reduce grass and weed growth, but adding to the evioronmental hazzards espeacially in a salmon recovery area. cost of planting if not done mechanically can be high, and must be done in a short window time frame in the spring [finding good tree planters for hand planting is not easy and mexican nationals are imported to plant the Forest Service contracts here in Central Idaho now]. Figure in fertilizer cost for trees, and then yearly tree shaping in the 3rd, 4th, 5th and successive years until harvested to get proper look for city slickers and your 7 year end profits with dramatically decrease.

PYO Raspberries, not to bad a crop to raise, fertiler cost, plant replacement is not as high as a person thinks here, however the cost of cutting out the old canes, and tieing up the new ones again labor intensive. A freind had 10 acres of Raspberries in Northern California, picked every berry themself and made a jam that sold exceptionally well, actually mmade enough from it to pay for all expenses and then some.... after a 5 years they turned the ground into an old horse sanctuary because of less labor involved.

Anytime you deal with conservation groups or state agencies you lose control of what you can do with your own property and the compensation they offer is not enough to deal with it, then when you sell the property to someone else you will get less for it because of the existing headaches [not always the case and there are exceptions to this rule of thumb as well]

Investing 10% down of your own dollars[in this case 60K] is not bad, considering you should get a return on your money eventually figure 6% per year it should return on your investment, meaning you need to realize above your current income $3600.00 per year st8t interest..... nope you cannot do that anywhere but mutual funds, or high risk stocks, but an investment in a farm business is high risk.

Machinery, with 52 acres you should not need much in the way of machinery, but then again if you put up hay, you need a tractor, baler, swather, a hay turner, pickup and trailer or small 1 ton or 2 ton truck. add the necesary items to go along with all the machinery like tools to fix minor breakdowns, fuel storage tank [you really dont want to run out of fuel in the middle of any work you are doing] tires, oil, grease, baling twine, mechanical tree planter, power saw for cutting trees, machetes for trimming trees, shin gaurds, posts for tieing up the raspberriy plants......other some what minor expensesneed figuring in for purchase as well.


Get dollar costs for insurance on your crops, your buildings, your vehicles and your machinery. break these costs down from yearly to monthly costs, and figure them into with your mortage costs....

I am not trying to say anything about not trying to maake this operation work, and potentially you could add pasture raised poultry, grass fed beeves, goats or sheep for ethnic market in the right area, and you can increase profitability without much added expenses to the already functioning business, but it takes time to go outside the already set lines of traditional farming to the specialty markets, add cost of advertising in, even giving away a chicken is a cost.....

Justification can only be yours ulitmately, and the decision to jump into an operation you described can only be yours in the end. The folks upon this forum board will be there to help suggest things, but in the end you are the one to provide the daily/yearly labor and you family will be the ones trying to make it work yearly.

I widh you the best in every decision you make, and if you need more of a defintion on anything i typed.... PM me and i will check back to this post too.....

William

 

[Mike in Ohio]

A couple questions......


1) How does the purchase price break out as far as land versus improvements? Have you calculated what the depreciation will look like?

2) Can you use NOL against other income? Don't guess.....if you make a mistake on something like this you can end up with some real interesting times with your "favorite" IRS agent.

3) Even though the easements sound good I would recommend against selling them. As has been pointed out, you will be limiting your future choices. You are essentially selling an ownership right that limits your use of the property.

4) We have to take you at your word that the numbers are good. I've never evaluated a business where the numbers provided by the seller weren't on the rosy side. Have you calculated a "worse case" scenario?

The first step is to figure the value of the land without the buildings. You should be looking at comparable farmland, not land being subdivided. You then need to figure out what the buildings are worth to you. Not replacement and not depreciation. What is the use (utilitarian) value to you based on your business plans? Then you need to consider the value of the house as housing for your family.

You didn't mention taxes. Is the property under agricultural use valuation? What would be the impact on taxes if you did choose to sell the easements?

If you are dead set on doing the easements then I would make that part of the closing. It sounds like you are counting on this money. What will you do if the easements aren't purchased once you own the property?

Just a few thoughts.

Mike

 

[Ken Scharabok]

"One of the sisters and her husband bought a floral shop from a woman with a good part of the cost being the goodwill of her established customer base. However, what they found this most of them were loyal to her - not to her business. Once she left, they also did so."

To this I'll also add it looks like she also padded her profit/loss sheet in that they found their expenses for doing bascailly the same amount of business to be much higher than what she gave them to use.

When evaluating the business insist on seeing their federal tax returns for the past 3-5 years. If they aren't willing to share them, then be leary of the figures they provide.

Ken S. in WC TN

 

[bumpus]

.
There are no guarantees in farming of any kind.

One drought could put you out of bussiness.

And that is the only guarantee you have.

Farming is a very risky bussiness.

And what you are talking about is not a hobby either ! ! !

Speculation is that the easement would put between $80-100,000 into the landowner's pocket. The state is also interested in upland easements, perhaps to the tune of another $100,000.

This is only a Speculation like you said, and not a written guarantee.

Without this money you will be going broke before you start.

You have no written guarantee that these people will teach you any thing, or even stay around.

This is not a place just to live on and 52 acres is not much land to make a full time living on either.

Better think more than twice. Maybe 5 or 6 times.
Then run away ! ! !
.
.

 

[Ken Scharabok]

Interesting thread.

Keep in mind the tax consequences of the conservation easement payments. Likely the IRS would consider them as current year income, subject to the applicable tax codes, such as alternative minimum taxes. You will need the advice of a very good tax accounting on that angle at least. You might actual end up with 50-60% of it after taxes.

Ken S. in WC TN

 

[Guest]

Ken-good point about the taxes. I will ask for income statements.

As far as the easements go, they are specifically directed at protecting the salmon habitat. I believe that the land is currently valued as agricultural use, but the development rights/easement appraisal is figured at a higher valuation rate. The conservation group is very flexible at what they will allow for our use; even a fishing/camping/canoing enterprise is doable. What they're concerned about is someone buying the farm and chopping up building lots. We wouldn't do that anyway.

Bumpus, thanks for your feedback. I know that there are no guarantees in farming, but there are no guarantees I won't die tomorrow either. I do know enough about the farming business to be diversified enough to soften the blow of one aspect of it failing.

Blu3duk hit on a point I had been considering-running a big batch of pastured poultry in the spring and fall, before and after hay season.

I guess the biggest issue right now is the listing price. If a bank appraiser can't come up with a value that high, then no bank will finance it, regardless of its intended use. The conservation people have offered to show me the appraisal when it comes in in a couple of weeks. They had the shoreline appraised, as well as the entire parcel in case they want to purchase an easement on the uplands as well. I guess I can start to make some more concrete decisions when I find out what the place is really worth.

 

[rambler]

The easement is a deal breaker. I would NEVER allow that. Once they have the easement, that have control of the shoreline. It don't matter _at all_ ehat they say - it matters what is _written down_. And you said they are nice enough to do all the legwork 'for you'. Yea, right! Once they have control of the shoreline, they can dictate what you can do on the rest of your property. Because, you won't be allowed to 'affect' the shoreline. And what you are doing 1000' away from the easement still affects the easement. And they will be _sure_ to have that control written into their contract, which they so 'nicely' will take care of for you.

You are in effect selling off $300,000 worth of current value of the property for $100,000 to them, and restricting any hope of ever selling the entire parcel for anything ever again.

Nice deal - for them. They gain control of a $600,000 property for 1/6 the cost, & no future expenses like taxes. Man, I'd love to sell you some property.......

Run away. Now. This is a _lousy_ deal for you. And you are falling right into it.

--->Paul

 

[Hoop]

I also happen to think the easement is a very very poor situation. Right know its a carrot, dangling out there for you. You can only sell this easement once. I think it would come back to forever haunt you.

In todays Milwaukee Journal-Sentinel, they published an article about one of the surburban communities north of Milwaukee purchasing "developement rights" from farmers with plots of land similar to yours. The gist of the story is this.....many of the landowners sold their developement rights years ago......and today the land has appreciated to the point where the people would be millionaires had they not sold off their developement rights.

The price structure of this farm is set up for someone wanting to leave the rat race of California or some other metropolitan area.....that has acquired a fair amount of equity in their house.....and is looking to "buy a job". While it might make great economic sense for someone with $300,000 worth of home equity......it makes far less economic sense for someone that has to finance 90% of the purchase price.

 

[JulieNC]

Like a lot of other posters, the easement makes me nervous.

The conservation-minded part of me says, "That's great that he doesn't want to develop the property into yet another subdivision!" However, the more practical side of me thinks that even though YOU may not want to do it, if you decide to sell down the road, that easement could seriously limit the potential pool of buyers.

I'd see if this deal is doable without the easement.

As others have pointed out, make darned sure you understand the tax consequences of the sale of an easement. My guess is that it'd be capital gains, which could generate income taxes as well as possibly AMT. Still, the tax should be on the portion that's income, and that would be affected by your basis, which should be pretty high (the basis, that is) given that you would just have purchased the property. For example, if the easement is $80,000, not all of that would be income since some of it would be in effect a return of principal (which is nontaxable). My guess (and it's only a guess) is that the tax consequences wouldn't be too terrible (and may in fact be negligible), but I'd want an accountant to verify that.

More importantly, you may get a nice payout, but you're also reducing the market value of your property, perhaps by more than what you'd receive. The appreciation on your land could be substantial over the years, but if you've limited your options (and the options of future owners) with a conservation easement, you won't see nearly as much appreciation as if you had left the property unencumbered.

I suppose I just hate to think of you tying your hands so early in the game before you've even figured out whether you can truly make a go of it. Is there any way to see how marketable properties are when encumbered by these easements?

 

[BCR]

Have you considered having someone from the SBA or SCORE help you consider the property? There is no cost for these services and if you go to a local office, they will have heard of the business and may help you consider some things you have not. You get a lot of experience at your fingertips.

Go to SCORE.org to find your local chapter. Send me a PM if you can't find it.

 

[65284]

Rambler wrote, "Because, you won't be allowed to 'affect' the shoreline. And what you are doing 1000' away from the easement still affects the easement. And they will be _sure_ to have that control written into their contract, which they so 'nicely' will take care of for you". He is exactly right. Some of the conservation groups are too green, and overzealous to the exclusion of common sense. If you do this don't surprised that someday (very) soon you are told that you can't plow, might cause ersosion resulting in silt and poor water quality, fertililzer use would soon be a thing of the past causes algae bloom problems they will say, and as far as any type of spray just forget it, unthinkable. If you must have this easement income to swing this deal RUN don't walk away from it.

 

[SueD]

That would get my heart a-racin' too!!!!! Sounds good on paper..........

I'm all for taking a good risk, but this one scares me a little...

My concern would be the numbers... What proof did they give you on the dollar figures?? Did they show you several years tax returns etc, or just tell you? If their price is based on what they earn in addition to property value, they are required by law to present at least three, if not five years of documentation. Get it - and keep copies if you can.

The other thing I would do is to make sure its a well-calculated risk. CONTACT their current customers to make sure they will stay with you if you buy.

It doesn't matter how much money a place CAN make... It matters what a place WILL make. If you know you cannot afford to do it without added cash, make sure that you will get at least the triple amount you mentioned - at least so far as humanly possible!!!

I don't know how one would go about doing this, but I would look into getting signed contracts from customers before purchasing such a small place for so much money. Use those as part of your collateral... I know it can be done for some business purchases, maybe it can be done for this type of business as well.

Get your duckies in a row before you put in any funds.

Sue

 

[Guest]

Thanks everyone for the advice on the easements/taxes/rights/etc. BCR, your SBA idea is brilliant.

Here's what we're thinking. Let's set the easement aside. The owner wants to retire. He thinks that the $600,000 is what he needs to do that. Let's just assume that it will appraise for that.

We're thinking we structure a deal where we purchase the house, buildings/equipment, and some land for one sum on a conventional mortgage. The owner keeps ownership on the balance of the land. We have two or three years on the land on a free lease to see if we can make this work. After two years, we begin monthly payments directly to the farmer, either through a lease-to-own agreement or an owner-financed mortgage. That way, we can get onto the property and try to make a go of it, he can get a huge chunk of change initially, and then he can secure himself a monthly income for the next few years. Perhaps it's a 20 year deal. Maybe it's 10 years of payments with a balloon. If after two or three years we can't make it work, we can sell the house/buildings, and he is free to sell the land separately.

 

[Guest]

Sounds good from your point of view. Will he agree to it?

Only if the real estate appraises for the $600,000 and he is not selling you any blue sky and if he isn't afraid of rising inflation, higher interest rates, and a poor land selling period coming up. You are getting a 2 year grace period on what, 1/2 the value of this place/blue sky? So what does he get in return? That's a $300,000 loan for 2 years.

In any of those cases (& I believe all of them are true) then he would be a fool to take this offer. If you don't make a go of it, all the customers (blue sky) is gone, the property is already split which decreases control/value, and he will have to start all over finding a buyer, while possibly paying backtaxes if you default on the building site and restoring all the damage you have done to the buildings.

(I'm not saying you are a bad person or will not pay your taxes or run the place down; I'm looking at this from a seller's point of view, and that is what you would have to consider in such a deal if roles were reversed.)

Can't imagine you would get such a deal. Rent free for 2 years, who pays taxes? If that property/business portion is worth $300,000 that's a lot of liability in taxes. Who pays insurance, the old guy can lose it all if you don't pay up your insurance & he is prop owner & some fool breaks an ankle in a U-pick type of deal, so he would need to carry insurance anyhow even if you say you have some.

Can't see it working out for him this way, guess it doesn't hurt to ask. As a seller I'd get real skitish & start looking for better buyers...... I can be reading this all wrong, but based on how things work over here in Minnesota & what little info I understand, this would be a poor deal for him.

--->Paul

 

[Ken Scharabok]

The more complicated you make the deal, the more likely it is to fail.

Can you do it on a strictly no money down, land-contract basis for ten years with a baloon payment at the end of that time for the balance?

In effect, you are paying rent the first ten years as it would not be refundable. They have the incentive to help you make it work since they probably wouldn't want to go through another sale in ten years.

At the end of then years you should have an established business on which you should be able to get financing for the baloon payment due then.

This structure would allow you to simply walk away if it proves to be a bad deal.

If the hay is 'horse-quality' hay, it takes a pretty experienced grower and a whole lot of luck to produce it. Locally there is a rule of thumb even with excellent management you will get really nice hay once in three years. However, as much as management, it is the labor involved in handling it after it is on the ground. Most young folks these days aren't 'hungry enough' to be willing to throw around hay bales.

Even under the best of cicumstances this deal would scare me - and I am somewhat of a risk taker.

Ken S. in WC TN