As a Wisconsin REALTOR specializing in rural properties, landowners often ask me about how government programs will affect their property sale. The question is usually something like, “I’m thinking of enrolling my property in a program; will that affect the market value when I sell?” Most often, the programs they’re referring to are the Conservation Reserve Program (CRP) and the Managed Forest Law (MFL) program. There are other programs that rural properties are enrolled in but those usually have a similar effect on land value.
Let me first say that I’m not against these programs in general as they can provide benefits when implemented with some forethought. The problems that I see are usually the result of landowners simply not understanding the full implications of enrollment. The result is that they commit themselves and future owners of the property to contract terms that may be less than ideal yet last up to 50 years or in some cases may even be permanent.
The following tips are based on my experiences as a land broker for over a decade. As pros and cons of these common programs are presented, it is my goal that the information will help landowners make choices for their property that will benefit them and future owners*.
Managed Forest Law (MFL)
In the Managed Forest Law program, the landowner receives a significant tax break on wooded land in exchange for following a timber management program. While the benefits of this program are obvious, I’ve often met with an owner that wants to sell a property which is entirely enrolled in the MFL program. This may have sounded good at the time they enrolled it since they wanted to use the land for hunting only. The problem arises when it’s time to sell. Enrolled acreage is not buildable and any time a property isn’t buildable or is cost prohibitive to build on, the sale price will usually be lower. While recent changes in the MFL rules have made it easier to take a building site out of the program, it can be costly. Added costs mean buyers will likely offer a lower price. This loss of value could have been avoided by making a few simple changes at the time of enrollment.
1) 25 Year contracts are usually more desirable than 50 year: MFL contacts run 25 or 50 years in length. Even buyers that are in favor of MFL programs often don’t like 50 year programs especially if the contract is early in the term. Buyers often view a 50-year contract as something that may outlive them and shy away from encumbering a property for that length of time. A 25-year program will usually seem more reasonable to them.
2) Property with ‘Closed’ MFL Contracts are usually an easier sell: MFL contracts can be designated as ‘open’ or ‘closed’. ‘Open’ MFL is open to public access for hunting while ‘closed’ MFL is not available to the public. As one may expect, it is usually easier to sell ‘closed’ MFL land than it is to sell ‘open’ MFL land. Buyers (especially hunting buyers) often see little sense in investing in land if everyone else gets to use it too. Current MFL regulations allow a buyer to change the contract from ‘open’ to ‘closed’ after they purchase it, but the change doesn’t take effect until the following calendar year. This means a new owner closing an MFL property will have one hunting season where it is still designated as ‘open’ to public access.
3) Consider excluding a building site: A building site that is excluded from the MFL program is appealing to most buyers. When choosing a site, consider (among other things) the distance from a public road, access to power, how steep a driveway will be, a likely site for a septic system, and the view from the building site.
Conservation Reserve Program (CRP)
In the Conservation Reserve Program, the federal government pays a land owner to take tillable ground out of production for a set period of time. While it provides many benefits, the program may also provide some challenges when it’s time to sell. Buildings cannot be built on land that is enrolled in the program and any building site must be removed (at a cost) from the program. In addition, traditional farming practices cannot be carried out so a new owner cannot pasture or crop the land which can lower the desirability and number of potential buyers.
1) Projected rent trends may want to be considered before enrollment: Grain commodity prices and crop ground rent prices often affect CRP desirability. In most cases, buyers are more willing to invest in CRP enrolled land when commodity prices and crop ground lease prices are going down. They are less excited about the program when lease and commodity prices are going up. The reason for this is that the price paid by the government on CRP ground is affected by the crop ground rental market at the time of enrollment. If ground rental prices are dropping, the CRP payment will often be higher than what the owner could get from a farmer. If the land rental prices are rising, the CRP payment may be locked into a rate that is lower than the owner could get by renting to a farmer.
2) CRP enrollment may limit active farmer buyers: Farmers often don’t want to buy CRP enrolled land as they usually make more money by planting a crop than taking a CRP payment. If the property has a lot of tillable acres, farmers are the most likely buyers for a parcel. One exception is if the program is expiring soon. In that case, farmers could still be interested but it may not be at top price.
3) Consider excluding a building site: Just as with MFL, leaving a building site out of the program is a good idea if there is any chance that the owner may sell in the next 10 years.
Acreage enrolled in multiple programs
All too frequently I see a property that the owner has enrolled in both MFL and CRP. This is possible since the MFL program rules allow for up to 20% of the total acres to be un-forested. The problem arises when a potential buyer wants to use an old field for a pasture or a large garden. Since that portion of the property is enrolled in two programs, the removal cost is often doubled. I have on multiple occasions, seen buyers walk away from a property because it didn’t fit their needs as it was and buying out of two programs was just too expensive. In some of these ‘double dipping’ cases the landowner didn’t even know what they were agreeing to when they enrolled it. They had two parties advising them and each party didn’t know what the other was doing. To avoid this, a person should be very sure everyone that is advising them knows the full picture of what programs already exist on the property and more importantly, what the owner’s goals are for the future.
The bottom line when making decisions about enrolling a property in a program is to remember that the only thing permanent is change. The person that is “never going to sell their property” often will have a change of plans if they lose their job, develop a health condition, or lose a spouse. That being the case, if landowners want to maximize the value of their property when/if they need to sell, they should try to anticipate what the next person may want to do if they were to buy the property and plan accordingly.
If you are considering a government program for your property, you will want to discuss the pros and cons with your tax advisor and/or attorney. If you think there’s a chance you might sell your property before the program would expire, you may also want to seek the council of a land professional to get input on minimizing or eliminating problems when it’s time to sell.
To learn more about how a land professional helps sellers maximize their rural property sale, visit www.MaximizeYourLandSale.com*Disclaimer: All tips in this article are intended for general informational purposes only. They are not intended to advise in any specific situation.