LandReport.com » July 2007

Corn Drives Land Prices Higher and Higher

Eric OKeefe — Mon, 01 Oct 2007 19:48:12 +0000

It’s official. The New York Times proclaimed in August that the market for Midwestern farmland was “hot,” a declaration akin to labeling Hurricane Katrina “dangerous” two weeks after it devastated the Gulf Coast. Anyone remotely familiar with the Corn Belt knows that rural land prices have skyrocketed for several years. Here’s a rundown of some recent figures.

BY ERIC O’KEEFE

The amount of corn used for ethanol production has increased fourfold since 2000 from 600 million bushels to more than 2.4 billion bushels in 2006.

FACT: 16.5% Increase in average price of an acre of land in Iowa

In Iowa, the average price of an acre surged 16.5 percent to $4,313 for the year ending March 1, according to the Realtors Land Institute (RLI). The USDA reports Missouri farm values up more than 15 percent to $2,280 per acre. Even recreational land prices surged: 12 to 13 percent in Illinois, according to the Illinois Society of Farm Managers and Rural Appraisers. And the fuel propelling these increases? Government subsidies for corn ethanol.

The amount of corn used for ethanol production has soared fourfold since 2000 from 600 million bushels to more than 2.4 billion bushels in 2006 (more than 20 percent of the U.S. corn crop). According to the USDA, that number will increase more than 40 percent in 2007 when an estimated 3.4 billion bushels are used. In addition to keeping corn prices at near-record highs, this trend has led to a decrease in the number of acres planted in soybean and cotton, the conversion of Conservation Reserve Program acres back to cropland, and even farmers in nontraditional corn states converting crops to corn.

Broker Randy Hertz has been monitoring this price surge from the eye of the storm: rural Iowa. The president of Hertz Real Estate Services and the 2006 national president of the RLI, Hertz labels this phenomenon “ethanol euphoria.” He also offers some advice to those unfamiliar with the driving force behind these production numbers: “Never underestimate the ability of the American farmer to produce corn when the price is high.”

Francis Ford Coppola Creates A Napa Valley Masterpiece

Land Report Editors — Sun, 01 Jul 2007 07:00:56 +0000

BY JULIE BLACKLIDGE
PUBLISHED JULY 2007

You’ve seen his work. Chances are you’ve tasted it as well. The winner of five Academy Awards, Francis Ford Coppola has also won rave reviews for his wines. His first release, a 1977 Rubicon Napa Valley, received a stunning 93 score from Wine Spectator. Yet like so many aspects of his career, Coppolas roots as a winemaker were not tied to winning kudos but to his passion—in this case, an amazing piece of property.

In 1974, Coppola and his wife, Eleanor, were living in San Francisco with their two boys, Gian-Carlo and Roman, and daughter Sofia. His latest film, The Godfather: Part II, was both a critical and a commercial success, and the family was enjoying life in the city by the bay.

“It just seemed so interesting to me that when I lived in San Francisco, I thought, gee, we are quite close to the Napa Valley” Coppola says. “We ought to have a summer house. And we had boys. They couldn’t go swimming or whatever, and then in the back of my mind I thought … we could also have some acres of grapes and recapture that wacky tradition of making wine with the kids jumping in the grapes. And that’s what we did.”

Getting his kids knee-deep in Cabernet Sauvignon may have been his motivation, but finding the right piece of land in the Napa Valley proved to be a considerable undertaking. The couple drove back and forth from San Francisco to Napa, scouting different properties for more than a year with no luck. Finally their real estate agent told them that the Niebaum Estate was going to be auctioned.

“And we said, ‘What’s the Niebaum Estate?’” Coppola says.

Only the most storied vineyard in the history of the Napa Valley. Gustave Niebaum was a Finnish fur trader and sea captain who hit it big in the late 19th century. Like Coppola, he settled in San Francisco, and he too sought a Napa County getaway. In 1880, Niebaum founded the Inglenook Estate in Rutherford, which is now located at the heart of the distinguished winegrowing region.

Within a decade, Inglenook wines were internationally renowned. Although Niebaum died in 1908, his fabled winery stayed in the family until 1964 when it was sold to Allied Grape Growers and, eventually, Heublein Corp.

“It was this beautiful house and we thought, oh, this is where the rich people live,” Coppola says. And it was so beautiful that we made a bid.”

They didn’t win, and although they were disappointed, the Coppolas continued their search, visiting bigger homes and bigger estates. The result was a realization that an exceptional opportunity had been lost. “Everybody said, ‘Inglenook was the Queen of the Napa Valley And so we were sort of a little discouraged,” Coppola says.

“And then a year later, because of the change in the agricultural laws, the people who had bought the estate were not permitted to develop the mountain into homes, which is why they bought it,” he says. And so we heard the rumor that it was going to become available, and we just grabbed it.”

Coppola purchased 1,560 acres of the Inglenook Estate in 1975. “[The land] is just very, very beautiful. It’s a whole small country. It’s very big, and each part of it has another joy. It has forests and mountains, lake and vineyards, and many, many attractions. So over the years, I mean, it was just a fabulous home and fabulous climate, weather, and we sold the house in San Francisco and just moved there permanently. And, in fact, I raised my kids there. My kids went to the local schools in St. Helena, and it’s just a sort of a paradise.” As a child, Coppola listened to his father and grandfather tell stories about making wine during Prohibition in the basement of their New York City home by stomping the grapes with bare feet. The image of that lingered in Coppola’s imagination for years.

“The thing that was in the back of my mind were these stories I had heard from my father and uncles about how they actually made wine in New York and just the story of the kids trying to steal the grapes,” he says. “And I said one day, ‘Maybe we should make wine.’ And I had no money at all because I was going through all the reverses of some movie I had financed and lost with, and I remember I borrowed like $40,000 from my mother to just begin a small winemaking operation. That’s when we made the first Rubicon,” he says.

In 1977, his vision was realized as he watched his father, his kids, and his wife stomp grapes barefoot in the basement of their new Napa Valley home. That lot produced four barrels of a critically acclaimed wine that was never commercially released. A winemaking tradition was born, one that continues to this day.

In the decades since, Coppola has found himself faced with many decisions. Quite often he feels it best to trust his heart as well as his head.

“One day I came home to the estate and I noticed the whole vineyard was planted with aluminum grape stakes, you know, these poles. And I looked at these aluminum poles and normally it’s wood. I called the guys and asked, ‘What is this?’ All of a sudden I’ve got to look out at a farm of aluminum grape stakes. And they said, ‘This is the newest thing because the wood … gets old, you have to replace it, and the aluminum is good forever. What’s more we’re going to plant the new XR stock, which everyone is going to, which is a root stock that is guaranteed … to be resistant to any form of pestilence or pest or phylloxera.’ I said, ‘I really do not want to look at aluminum grape stakes.’ So I asked them to take them all out. And I don’t want the new XR stock either. I want the original kind that Captain Niebaum had in the estate.’ They all thought I’m a wacko, but they pulled it out. Pulled out all the grape stakes and pulled out all the XR and planted it with the original ones,” he says.

As many disappointed Napa vintners eventually learned, the new and improved XR root stock was not bulletproof. It was, in fact, vulnerable to the dreaded phylloxera, a tiny insect that has decimated vineyards worldwide. Coppola says, “All over Napa Valley, vineyard after vineyard, large, large amounts of acreage all got phylloxera. So that’s how sometimes being a little bit of a fanatic can save you multimillions of dollars.”

Being a good steward of the land is a top priority for Coppola, who is a sentimentalist at heart. His initial purchase, in 1975, was of only a portion of the Inglenook Estate. The Queen of the Napa Valley had been parceled off in several sales by the Niebaum heirs as well as subsequently by Heublein. In 1995, two decades after his initial acquisition, Coppola acquired the remaining portions of the Niebaum Estate, including the stately chateau, which took two years to renovate and return to its original glory.

From the very start, however, Coppola has treated his land with utmost respect: nurturing it and bringing out its best qualities. He has plans to revive an old olive grove on the estate and grows all his wines organically. In 2006, he purchased the former Chateau Souverain Estate in neighboring Sonoma County. He renamed it after his more affordable wines, Rosso & Bianco, and gave the Rubicon name to the Inglenook Estate, where his higher-end wines are produced. The Diamond Series Collection, Sofia, and his new Director’s Cut line are all crafted at Rosso & Bianco.

“It’s so rare in American history. I mean, there are great old things that are broken apart and sold off to companies and split into pieces like the movie studios, for example. And that’s what had happened to Inglenook. The winery was shut down, and the winemaking, since it was part of the big company, was moved over to another winery in Oakville. We pieced it all back together and restored it all. And it stands today as it had been.

The Law of the Land

Land Report Editors — Sun, 01 Jul 2007 07:00:49 +0000

BY TREY GARRISON

Stephen Small paces the stage of an auditorium at The American College in Bryn Mawr, Pennsylvania. Despite his low-key speaking style and his obtuse subject matter-federal tax code-the Boston attorney holds his audience’s attention like a prophet preaching salvation, which in effect he is. Small works the crowd, answering questions and drawing engrossing illustrations from his iconic legal career. His styled silver hair and trim physique, wrapped in a simple tailored black suit, belie his 61 years, just as his confident Midwestern accent runs counter to his Boston roots.

The 50-plus audience members range from bookish attorneys in suits and tennis shoes to conservancy directors to curious local landowners. Everyone, it seems, is taking furious notes because all seek protection in one form or another: to protect a valued client from possible tax liabilities, to protect a piece of land from crass development, to protect a cherished legacy from the bad decisions of a dim-witted heir.

And with Small, they are indeed finding their salvation. Or something very nearly like it. The 1967 Yale graduate was a young lawyer with the IRS when he helped write the tax code for conservation easements in the early 1980s. Since then, the laws themselves haven’t changed much. What has changed is the landscape of America.

“When I left the IRS in 1982, I was the foremost authority on a topic no one cared anything about. Over the past 25 years, everything has changed. What I see now is an interest in conservation easements I couldn’t have dreamed of back when I started,” Small says.

Quick backgrounder: Conservation easements are a voluntary agreement made by a landowner and a nonprofit organization. (Or, in much rarer cases, a government entity.) The easement places restrictions on the development or use of the land even as the landowner retains his or her other rights. Each easement is tailor-made for the land in question; owners can still use the land for anything not prohibited by the easement. But there is a catch: Once given, an easement lasts forever. The tax code requires that the easement be enforceable in perpetuity.

So what does the landowner get in return? For one, it’s an assurance that his or her land won’t be developed or subdivided by heirs or subsequent owners. That’s the altruistic angle. But there’s another aspect as well: money. Or, rather, saving money. Conservation easements are treated by the tax code as charitable contributions, and this year the deduction would be equal to writing a check to your alma mater.

Right now there exist deductions almost unheard of in IRS history, but unless the increased deductions are renewed by Congress, they will expire at the end of the year. Previously, an individual could deduct the value of a conservation easement donation generally up to 30 percent of the donor’s contribution base for the year with a five-year carryforward of any unused amount. Also, under the old law, a corporation could deduct 10 percent of the corporation’s taxable income for the year, with a five-year carryforward.

Under the new law-and remember, it’s set to expire at the end of 2007-landowners can deduct the value of their donated easement up to 50 percent of their adjusted gross income over as many as 15 years. And qualified landowners who derive their primary income from ranching or farming have an even better deal: 100 percent of their income is deductible with a 15-year carryforward. Also, landowners in some states, including Colorado, Maryland, North Carolina, and Virginia, are eligible for deductions from state income taxes as well.

“This is a tax-planning opportunity the likes of which we’ve never had before,” Small says. “If it’s extended, fine. But anyone who wants to take advantage needs to assume it won’t get renewed and needs to start doing their work now.

“Now, the difference between 30 percent and 50 percent, while nothing to sneeze at, is minor compared to the difference between a deduction you can carry forward for 6 years versus 15 years,” Small says. “A charitable donation now, to lock in a 15-year carryforward to use against an anticipated income event in, say, 10 years, seems to me to be a value no one would want to miss.”

In short, he says, landowners who are interested in increased incentives need to act now. And landowners across the country are heeding the call. From picturesque New England to the wide-open space of the West, conservation easements and land conservancies are spreading like wildfire.

Douglas Hart wears two hats in Billings, Montana. He’s a director and principal partner for Hall and Hall, a leading real estate firm out west. And he’s also director of the Wyoming Stock Growers Agricultural Land Trust, whose mission is to preserve ranches and the ranching way of life without violating the local ecosystems.

To Hart and other ranchers, “government regulation” is a phrase polite people don’t use in mixed company. A rude epithet automatically precedes it. Conservation easements, however, are an agreeable, even preferred, means to protecting the land.

“We’ve had the opportunity to get out in front of this and educate people about how this is a way they can ensure [the future of] their land without having a bunch of rules come down from Washington,” Hart says. “There are a lot of people who see anything the government does as a communist plot, but people are realizing this is keeping land in private hands and with easements enforced by private entities. There’s just no way for the land or the easement to end up in government hands, and that’s appealing.”

Hart says there tend to be more easements donated by landowners who are not necessarily the operator-owners.

“Rural ranchers and farmers don’t have a lot of income, even if they have a valuable asset. Of course, the bona fide operator may want to preserve their family farm anyway, and that’s who among them would donate an easement,” Hart says. “But the people in the best position to take the best tax advantage of [conservation easements] are people with a high income or people who are looking at a high-income event a little down the road.”

Determining the value of an easement, of course, takes a little savvy, and that’s what Small’s seminars cover in addition to legal issues. (More information is available at www.stevesmall.com.) The value of the easement as a charitable gift is determined by an appraiser who values the property before and after the easement restrictions are applied. The difference between these two values is generally the amount of the charitable gift for tax purposes. And every easement is unique. Some might allow agricultural production but not timber harvesting. Some might allow homebuilding on a few acres while reserving the rest of the acreage. Some might allow hunting and subsurface mining while precluding agricultural use. Some allow limited development on certain tracts, disallowing it on others. How much building is too much? Depends on the land in question.

“There’s every combination you can think of,” Small says. “When I started, there was no information, almost no land trusts, and no one could be bothered to hear what a conservation easement was.”

A quarter of a century later, Small’s yeoman efforts have changed the landscape. Today there are close to 2,000 land trusts operating in the United States and more than 5 million acres under easement.

Small is passionate about both the law and the land. Ironically, he is a city boy who has never owned more than a quarter-acre lot in the urban confines of Boston. He remembers early on how little information was available to landowners. There was no shortage of books lining the shelves on how to develop land but nothing on conservation easements. In the late 1980s, he put together a compilation of his memos into a self-published book titled Preserving Family Lands. Little did he know that the book and its sequels would sell more than 100,000 copies in decades to come.

Small has been at the vanguard of the conservation easements movement, representing landowners or conservancies in some of the most important donations and purchases in history. He advised the New England Forestry Foundation in the largest easement deal ever: a record-setting 762,000 acres in 2001 by Maine’s Pingree family (see The Land Report, April 2007). Although the Pingrees sold the land’s development rights for $37 per acre (more than $28 million), their Seven Island Land Co. continues to run timber operations on these holdings.

Small has acted as counsel to more than 500 individual and family property owners. He was an adviser to the seller in a $100 million conservation purchase by a government agency and counsel to the easement holder in what he believes is the largest conservation easement purchase by a non-profit to the tune of $60 million.

“The field has moved,” he says. “The field has exploded. I’ve never been so busy in my life.” Two of his favorite deals involved watershed easements that pointed the way for landowners. The first was the late Gertie Legendre, who owned Medway Plantation, almost 7,000 acres just outside Charleston, South Carolina.

“Gertie donated easements to Ducks Unlimited and Historic Charleston Foundation, and she [set] an example in the state. Others followed there,” he says. “The other was Bob Woods of Martha’s Vineyard. Bob owned 530 acres of land on Martha’s Vineyard. He loved his land, which he inherited, and wanted to protect the land for nature as his mother had. The property is now under easement to The Nature Conservancy.”

That’s the kind of motive for people like Rhett and Barbara Austell, prominent landowners in the Philadelphia area who attended Small’s seminar in Bryn Mawr. They aren’t (necessarily) seeking the income tax savings. They are more interested in preserving their family lands and preserving the open green spaces they have come to love.

“We’ve seen too many families allow their land to be developed or divided and whatever is left is ruined,” Barbara says. Asked whether she thinks placing such limits on lands she will bequeath to her heirs is fair to them, she quips, “They’re fortunate to inherit land, and if we are leaving it to them, we should be able to place whatever conditions on it we desire.” Then she adds, “If we put a strip mall on it, is that any more fair for our heirs 100 years from now?”

The growth in popularity of conservation easements has not been without some controversy. While it is still a sleepy field, the late 1990s saw the rise of sharks-bad faith promoters, bad appraisals, and questionable deals. This was highlighted in 2003 when The Washington Post ran a series of articles on abuses of the system. The Post profiled people such as Mike Kahn, a Florida consultant who advised investors to do things like buy golf courses and prohibit building on the fairways. Kahn described it as easy money. The IRS described it as fraud.

Criticisms of easements run the gamut. Some worry that because trusts can operate behind closed doors, they aren’t transparent enough. Others worry that “in perpetuity” can be challenged in court later down the road. And, of course, the trusts and conservancies themselves are the enforcers of easements. Trusts can be persuaded to turn a blind eye to development that exceeds an easement’s terms, they say.

Then there are the cases of deals that are less obvious than Kahn’s, but no less shady.

As a general rule, Small says, the income tax deduction is equal to the fair market value of the subject property before the conservation easement minus the fair market value of the subject property before the conservation easement. Simply put, the fair market value is what a knowledgeable and willing buyer would pay for the property if it were put on the market and sold. The IRS, Small warns, is aware of some of the tricks appraisers use to increase value.

“The most common appraisal trick I’ve seen is for an appraiser to assume the highest possible level of development that could be approved under local zoning and value the land under that intense level of build-out, totally without regard for whether there is sufficient and realistic market demand for the product,” he says. “My favorite illustration is Aunt Sally’s farm, 20 or more miles from the nearest city, based on a 3,500-unit planed development, with hotel and conference center, that in fact could be approved under local zoning but that no builder would ever build because the demand simply does not exist.”

That simply won’t fly. That’s what his seminars and books are all about. More than 100,000 copies of Small’s Preserving Family Lands have sold. It’s available at www.stevesmall.com.

Small submitted a statement on easement abuse to the Senate Finance Committee in 2005 defending good faith easements, which still represented the lion’s share of donations. He says the attention actually helped the field because it introduced landowners to the vehicle of easements. Tightened controls on valuations and reporting meant fewer abusers; yet despite these tighter controls, easement donations have still grown.

Under the deduction rules, a taxpayer who claims in excess of $5,000 for a charitable gift must have a qualified appraisal, and any deduction more than $500,000 must include the appraisal with the return. In short, appraisers become subject to scrutiny from the IRS. Failure to comply with all of the new appraisal regulations means the IRS could disallow the deduction.

This kind of code tweaking keeps Small busier than he’s ever been. Easements as a vehicle have been exonerated. After the Senate hearings, the Bush administration expanded the tax benefits for easement donors in the Pension Protection Act of 2006.

“One of the few things they’ve done right,” Douglas Hart says. Some easement deals are now in the works that equal or even exceed some of the largest on record. They’re betting against the renewal of the 2006 revision.

And Small? He is pleased, if a little shy about admitting to it, that his legacy will be something more than just that of a legal career in tax law. Because of the code he helped write and his work since leaving the IRS, American land has been conserved, property rights have been protected, and American landowners have benefited both in the bottom line and in their souls.

“I’ve been blessed. I have a real passion for this. It feels like a fit,” Small says. “I’m just hoping we see the benefits renewed this year. If not, I’m going to be even busier through the end of 2007. My wife won’t be happy about that.”

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Open Fields Legislation Offers Payments to Landowners

Joseph Guinto — Sun, 01 Jul 2007 07:00:28 +0000

Remember that little place in the woods where you used to get off spectacular hip shots while hunting birds on the wing? Well, there’s a strip mall there now. That’s an increasingly common issue for hunters, whose once-prized spots are being encroached on by urban and suburban sprawl. But some in Congress think they have a way to offset those land losses. Legislation sponsored by Sen. Kent Conrad, D-North Dakota, and Sen. Pat Roberts, R-Kansas, would provide $20 million annually to bolster state programs that pay landowners to open their properties to hunters.

BY JOSEPH GUINTO
PUBLISHED JULY 2007

The “Open Fields” legislation has been winding its way through the Capitol since 2003, but it has yet to see a floor vote. That may be about to change. Backers hope to attach Open Fields to the annual farm bill, and that bill is expected to emerge from committees in the House and Senate this month, headed for floor votes.

If Open Fields goes to the floor as well, lawmakers will have to evaluate whether its cost is worth its promise. The cost: $100 million total from 2008 to 2012. The promise: As many as 4 million new acres will open each year to both hunting and fishing enthusiasts. Under Open Fields, the USDA would award grants to state programs that pay landowners to open their properties and make improvements on them that attract more wildlife.

The bill has strong backing from sportsmen’s groups and some conservationists. And backers in Congress are making an economic argument that may connect with their colleagues.

“Anyone who has driven through a rural community in the fall has seen the ‘Welcome Hunters’ signs in front of Main Street restaurants and local motels,” says Rep. Jerry Moran, D-Kansas, and one of Open Fields’ co-sponsors in the House. “This legislation will help ‘ boost rural economies and provide additional income to our farmers and ranchers.”