brandon-wilcox

From One Generation to the Next

Wed, 10 Jul 2024 15:46:06 GMT

The Critical Role of Farm Appraisals in Succession Planning

The transition of a farm from one generation to the next is a significant event, and a process filled with emotion and significant financial implications. A farm appraisal is central to this transition, particularly for tax planning and providing an unbiased third-party valuation.

Hearing that you need an appraisal might initially feel as daunting as being told you need a root canal. However, it's important to recognize that a farm appraisal can actually be used to your advantage.

This article will explore the critical role of farm appraisals in succession planning and highlight their importance in offering a neutral perspective in what can often be an emotionally charged transition.

An Unbiased Lens

An appraisal provides an impartial and professional assessment of the farm's value. This is crucial in succession planning, when subjective opinions and emotional attachments can significantly skew perceptions of value. A farm appraiser brings a necessary objective perspective, ensuring that the valuation is based on current market conditions, the state of the property and its individual characteristics. This impartiality is invaluable, especially when multiple parties — often family members with deep emotional ties to the farm — are involved. It aids in minimizing disputes and ensures that all parties have a common factual basis for discussions.

Tax Planning

In the realm of farm succession, tax planning is a complex and critical component. The value assigned to the farm directly impacts the tax implications for the inheriting parties. In many scenarios, inheritance or estate taxes can be significant, and their calculation hinges on the appraised value of the farm. An accurate farm appraisal is vital to ensure that these taxes are fair and reflect the true market value of the property. Overvaluation can lead to excessively high taxes, potentially jeopardizing the financial viability of the farm under new management. Conversely, undervaluation could lead to legal complications or future disputes. Therefore, the farm appraiser’s role extends beyond mere valuation — it's integral to the financial sustainability of the farm through the transition.

Mitigating Emotional Complexities

Farm succession is often an emotionally charged process. For many families, the farm is not just a business but a legacy. This emotional weight can lead to disagreements or unrealistic expectations about the it's value. An unbiased appraisal brings detachment and clarity and provides a factual foundation that can help guide emotional decision-making. This is particularly important in situations where the successor might be taking over during challenging circumstances, such as the passing of a family member or during family disputes. The appraisal serves as a neutral ground, helping to navigate these emotional complexities and focus on the farm’s actual worth.

Farm appraisals are a cornerstone of farm succession, offering an essential balance between emotional attachments and fiscal realities. An unbiased third-party opinion of value from a farm appraiser is indispensable, particularly in the delicate interplay of family dynamics and financial planning. By ensuring the valuation is grounded in objective market realities, farm appraisals pave the way for a smoother transition, mitigate potential conflicts and set a firm foundation for future generations.

Engaging with a professional and experienced farm appraiser is not just a prudent step in farm succession planning — it's a vital one, ensuring that the legacy of the farm is honoured and preserved in both emotional and financial terms.

Trends and Considerations for Appraising Agricultural Properties

Wed, 10 Jul 2024 15:38:42 GMT

Appraising farms, like any other asset class, requires a certain level of competence from a Professional Appraiser (P. App.). A high degree of knowledge and professionalism is expected by clients in the agricultural space — and deservedly so. Part of the allure of being an appraiser is meeting the challenges of diverse projects to learn the nuances that determine value in any market. Fortunately, we do not have to walk a mile in someone else’s ‘boots’ to get an idea of what they find valuable about a farm property, although it definitely helps. Despite general agriculture zoning and permitted uses typically being similar, a cash cropper’s land requirements will vary considerably from those of a market garden grower and, even more so, from a horse farm or other livestock operation. Considering highest and best use in more specific detail is paramount to learning the driving forces behind farm values in certain areas.

So, let’s harvest some of real estate’s general principles and apply them to a farming context by examining how wars, disease, weather, and interest rates will keep prices of farmland dynamic for years to come, and how basic valuation adjustments and units of comparison differ by consumer types in agricultural appraisal.

Prime location can have very different meanings based on how a land user intends to apply its features. For example, boarding horses close to an urban centre is convenient, as recreational horse-riding often draws from suburban participants as opposed to a rural crowd. By the same token, standard and thoroughbred racehorses are often located near racetracks. These, again, rely on urban populations. On the other hand, livestock farm values are less inclined to correlate with urban proximity, but instead prioritize geographies with fertile soil. Other more traditional farming areas place a high value on flat grounds for large machinery, uniformly shaped parcels, and proximity to grain elevators or livestock producers, as opposed to urban areas.

The Direct Comparison Approach (DCA) to value is often the primary method of valuation for the average farm. When considering more improved farms, support from the Cost Approach (CA) can be helpful to supply reassurance that the values shown in the Direct Comparison Approach are reliable. There are very few instances where the Income Approach has relevance when valuing farms. This is mostly to do with the fact that most farms and accompanying structures are typically owner occupied and the ones that are not often have unique rental circumstances and limited market data to deliver reliable lease or capitalization rates.

In addition to selecting the best comparable sales, selecting the most relevant unit of comparison is a crucial exercise when using the Direct Comparison Approach to value farms and farmland. At a high level, cash croppers are primarily concerned with workable land, so using a rate per workable acre is often the most relevant approach. When the subject has less than 75% workable acres on their entire farm, there are circumstances where overall rate per acre might be more applicable than using a rate per workable acre.

When farms are bought for more recreational or rural residential purposes, comparing the total sale price and making adjustments thereon is more practical than trying to apply a rate per acre, because these buyers are not necessarily using the number of acres to make their buying decision.

Overall, selecting sales most comparable to the subject is always the key to substantiating value. Using sales of properties which would appeal to similar market participants provides the best information to then make sound conclusions and arrive at a final estimate of value.

The COVID-19 pandemic has been talked about enough over the past few years, so we will keep the point short and sweet here as to some of the pandemic-related trends we witnessed from 2020 through 2023. The metropolis exodus is more or less over and many people are returning to their regular commuter lifestyles. The appeal of owning rural property and hobby farms has subsided, as maintenance and upkeep of these property types takes a great deal of money and, more importantly, time. During the pandemic, the 10- to 50-acre farms just outside of urban centres saw some of the biggest jumps in value, as borrowing costs were low and people flocked to have more space. Fast forward to 2023 and Canadians are essentially back to work and areas of the country with bad cell reception or poor internet connectivity might not fit the hybrid model that many now follow in their workplaces. The country lifestyle that so many dreamed of during the pandemic does not always facilitate the hybrid work model that so many now follow. In fact, we have noticed that these hobby farms and rural estate properties experienced the largest decline in value as interest rates began to increase.

As the housing market cooled in some urban areas in early 2022, the working farm not only maintained its value, but increased in value. The 2022 FCC Farmland Values Report illustrates this growth, with land value increases of 8.0% to 19.4% making the average national increase in farmland value 12.8% for the period between 2021 and 2022. (Note: Due to lack of data, these figures exclude Newfoundland and Labrador, Northwest Territories, Nunavut, and Yukon.) This increase in value is the highest since the farmland value boom of 2012/2013.

Like all things in our economy, value is driven by supply and demand. Events such as Russia invading Ukraine, a major world corn and soybean producer, created fears of supply shortages. In turn, commodity prices shot up. When prices of animal food like corn and soybeans rise, so do prices of those animals, as well their meat and byproducts like eggs, milk, and cheese.

In addition to supply and demand, inflation has seemingly played a large role as well. For a period, the traditional bank barn, older livestock barns, and even farm sheds were nearing the end of their useful lives. However, when the costs to replace or rebuild some of these structures skyrocketed, farmers began to use repairs, additions, and alterations to squeeze some extra utility out of structures that would otherwise be ‘taken out to pasture’. Contributory values placed on some older farmhouses and livestock buildings saw a definitive bump from years past, when some of these structures would have been, for all intents and purposes, written off. In general, some of these trends are starting to return to what would have been seen pre-pandemic, but appraisers have had to be cognizant of these trends over the last few years.

Staying up to date with trends in agricultural building code is also important while valuing livestock buildings. Nearly all sectors have had some guideline changes centered around improving animal welfare. The table below indicates a few notable changes.

The S.W. Irvine & Associates internal databases suggest construction cost increases between 54% and 68% across all three of these livestock housing sectors from 2019 to 2022/2023. These cost increases are not directly associated with the previously mentioned animal welfare changes, but rather a combination of supply shortages in both labour and material, primarily lumber and concrete. More recently, interest rate increases and high construction costs have impacted plans for farmers considering building new structures. Instead, they are choosing to modify and modernize their existing building envelopes, or delay construction until costs normalize somewhat.

The importance of Canadian agriculture is increasingly at the forefront of conversations around the national economy. This is due, in large part, to pressure to expand urban areas in order to meet housing demand, increasing concerns around food security, and climate change. Although there is much to be considered in determining the competence of a given appraiser, especially since agriculture is such a diverse sector, chief among these considerations is an appraiser’s ability to keep up to date with changing factors, such as supply, demand, inputs, and regulations. Gaining or increasing competency as a Professional Appraiser (P. App.) takes time and effort, whether it be through research, courses, and/or aligning yourself with a subject matter expert. Besides our Canadian Uniform Standard of Professional Appraisal Practice (CUSPAP) requirements, farmers are the real industry experts and they are owed the courtesy of being knowledgeable, professional, and up to date on the rapidly changing industry that is their business and livelihood.

Originally written for the Canadian Property Valuation Magazine ( https://www.aicanada.ca/article/trends-and-considerations-for-appraising-agricultural-properties/ )

Farm appraisal 101

Wed, 10 Jul 2024 15:38:41 GMT

An Interview Conducted By Jeanine Moyer

(J.M.) WHAT CIRCUMSTANCES REQUIRE A FARM APPRAISAL?

(Brandon Wilcox) Farm appraisals are most often used for lending purposes. Banks and other lending institutions rely on an appraisal as a form of security to make sure they can get their loans back in the event of a default. Appraisals can also be used for family or business succession planning, taxes, and litigation situations such as divorce or a partnership dissolution.

Savvy farmers planning on making large purchases or capital investments will often have their farm or farm properties appraised in advance. This way, they, along with their lending institution, are prepared to make significant business decisions whenever they are presented, or for time sensitive closings.

HOW IS A FARM APPRAISAL CONDUCTED?

The first thing an appraiser looks at is the topography and layout of a farm property. We look for access, location to users, such as elevators, and drainage solutions to make sure there is an outlet for runoff or excess moisture.

One of our most important roles is to follow up with questions and research about a property that cannot be observed by the eye, such as finding out if the land has been tile drained, the history of crop rotation, and soil types. When evaluating a grain elevator operation, we would find out the age of the bins, dryers, and equipment, storage capacities, fuel used for drying or generators, and access to a sufficient power source. We would also examine the site to make sure it can be easily accessed, handle large machinery and trucks, and has a marketable ‘flow’ of operations for unloading, cleaning, drying, and shipping.

WHO IS QUALIFIED TO APPRAISE A FARM PROPERTY?

In most cases, the Canadian Revenue Agency and most banks will require appraisals to be completed by professionals belonging to professional associations including the Appraisal Institute of Canada (AIC) or the American Society of Farm Managers and Rural Appraisers. An AACI designation is the most common requirement for appraising farm properties in Ontario.

HOW IS A FARM APPRAISAL REPORT EVALUATED?

Appraisals can be lengthy, often a result of the guidelines in place to ensure consistency of work. There can be a lot of information to read through within a report, but the most important aspect is the analysis portion and the factors are included to assist in determining an estimated value. Choosing similar properties to comparable and making appropriate adjustments that impact value is paramount. When it comes to evaluating farm properties, you don’t need to adjust for things such as ‘how close the farm is to public transportation or good elementary schools’ because that isn’t really relevant to farmland values. Values should be estimated using relevant data that an experienced appraiser has access to, such as surrounding farmland values, the age and maintenance of buildings, and access to natural gas.

WHAT FACTORS IMPACT THE VALUE OF A FARM APPRAISAL?

Location is always important to value. Farm properties near large cash crop farms and livestock producers will yield the most competition and inflate the value. These are often located on or near prime farmland with optimal soil conditions for yield and returns.

The layout and topography of a farm is a factor. Farmers prefer large, open, flat fields that are free of creeks, tree and fence lines, and obstacles to drive around. Flatter fields also tend to have less run-off and erosion and take less fuel to work.

Drainage is important, and systematically tiled farms with an outlet source to reduce standing water and allow drier fields for earlier planting are most valuable.

Farm management is also a factor. While this is often the hardest component to appraise, we can look for common signs of building, field, fence row, and equipment management and maintenance. Things such as keeping bush areas trimmed back from the headlands so they don’t get in the way of equipment, proper crop rotations, picking rocks regularly, and replenishing soil nutrients with manure and fertilizers will ensure the best farmland value.

DOES AN APPRAISAL VALUE IMPACT A FARM’S PROPERTY TAX RATE?

No. An appraisal that is completed by an independent firm will not impact a property’s tax rate or assessed value unless a property owner is using the information in an appeal process. The Municipal Property Assessment Corporation (MPAC) use their own in-house assessors to determine the property value base and tax rates. Conducting a farm appraisal should not impact or result in any tax rate or tax assessment change. But, if a property owner is appealing an MPAC assessment or tax rate, private appraisals can be useful for providing a third-party opinion in arbitration or mediation circumstances.

Originally written for the Ontario Grain Farmer Magazine ( https://ontariograinfarmer.ca/2021/03/01/farm-appraisal-101/ )

Home Sales Remain Steady in May; Interest Rate Drop May Influence June Housing Trends

Fri, 28 Jun 2024 18:10:35 GMT

Canada recently experienced its first interest rate decrease in over four years. While it's too soon to gauge the full impact on the housing market, some early indicators suggest that activity might increase soon.

May Data Highlights from CREA:

Home sales in Canada dipped by 0.6% in May compared to April.
The number of newly listed homes rose slightly by 0.5% in the same period.
The MLS® Home Price Index (HPI) showed a marginal decline of 0.2% from April to May.

Why the Stability?

CREA's Senior Economist, Shaun Cathcart, described May as a "quiet month for housing activity in Canada," possibly one of the least eventful in recent years. However, this may change soon as the data does not reflect the market's response to the Bank of Canada's rate cut announcement on June 5.

Cathcart anticipates that June will provide a clearer picture, with Canadians gaining confidence that interest rates are stabilizing or decreasing. This could prompt many potential buyers to enter the market, although some may still wait for further rate reductions. Cathcart advises caution, noting that even with potential rate cuts, we won't return to the low interest rates seen in 2021. Current expectations suggest that rates will not decrease by more than half of their peak values.

Increase in Listings

To balance the market, an increase in listings is crucial. Currently, there are 175,000 properties listed on Canadian MLS® Systems, marking a 24.8% increase from the previous year. However, the growth rate for new listings in May was just 0.5% compared to April, which is still below historical averages. The national sales-to-new listings ratio slightly decreased to 52.6% in May from 53.3% in April, maintaining balanced market conditions.

James Mabey, CREA Chair and Edmonton-based REALTOR®, noted that the initial rate cut could release pent-up demand into the market, with buyers finding more homes available now than in almost five years.

Price Trends

Nationally, the average sale price in May 2024 was $699,117, a 4% decrease from May 2023. While prices remain relatively stable, cities like Calgary, Edmonton, and Saskatoon are seeing upward trends.

Bank of Canada's Role

Cathcart emphasized the uncertainty surrounding the interest rate easing cycle and its dependence on the U.S. economy's performance. A significant divergence between Canadian and U.S. economic policies could reignite inflation concerns. However, recent positive inflation data from the U.S. might lead to rate cuts there, reducing potential divergence issues.

Cathcart also mentioned that the Bank of Canada is closely monitoring the upcoming renewal of five-year fixed mortgages, initially set at sub-2% rates, which will begin as early as summer 2025 .

Reference: Canadian Real Estate Association (CREA)

Key Considerations When Buying a Farm Property

Fri, 28 Jun 2024 17:48:42 GMT

Key Considerations for Farm Property Purchases
Are you considering purchasing a farm property?

Whether you are envisioning a new agricultural venture or a tranquil rural retreat, the decision to buy a farm involves careful planning and evaluation.

Here are essential factors to guide your decision-making process:

1. Clarify Your Motivation

Begin by clearly defining your reasons for wanting to buy a farm. Are you looking for a sustainable lifestyle change, a business opportunity, or a combination of both? Understanding your motivations will help shape your search criteria and ensure that the farm property aligns with your goals.

2. Financial Planning and Revenue Forecast

Before investing in a farm, conduct a thorough financial analysis. Estimate the initial investment required, ongoing operational costs, and projected revenue streams. Develop a realistic revenue forecast based on your intended agricultural activities to assess the financial feasibility of the farm purchase.

3. Assess Water Sources and Regulations

Evaluate the availability and quality of water sources on the farm property. Determine if there are any water rights or regulations that may impact your agricultural operations. Adequate water access is essential for irrigation, livestock, and daily farm activities, so ensure compliance with local water usage laws.

4. Determine Optimal Land Size and Usage

Consider the size of the land needed to support your farming objectives effectively. Whether you plan to grow crops, raise livestock, or engage in mixed-use farming, accurately calculating the required acreage will optimize productivity and minimize unnecessary expenses.

5. Soil Quality and Environmental Considerations

Assess the soil quality and environmental factors of the farm property. Conduct soil tests to evaluate fertility, drainage capabilities, and suitability for your desired crops or livestock. Consider environmental conditions such as climate, natural hazards, and local zoning regulations that may affect farming operations.

6. Evaluate Existing Infrastructure

Inspect the existing infrastructure on the farm, including buildings, fences, and equipment. Assess their condition, functionality, and alignment with your farming needs. Evaluate the cost and feasibility of repairing or upgrading infrastructure to support your operational requirements.

7. Location and Market Accessibility

Evaluate the farm's location in relation to markets, suppliers, and community resources. Proximity to markets and potential buyers can enhance the marketability of your farm products. Consider transportation access, community support, and local amenities when selecting a location that supports both productivity and quality of life.

8. Partner with Expert Guidance

Navigating the complexities of buying a farm property can be daunting. Seek guidance from professionals familiar with farm real estate and local market dynamics. A knowledgeable advisor can provide valuable insights, identify suitable properties, and assist in negotiating favorable terms.

Buying a farm property is a significant decision that requires thorough research and careful consideration of various factors. By addressing these key considerations—motivation, financial planning, water sources, land usage, soil quality, infrastructure, location, and expert guidance—you can make informed decisions and embark on a successful farm ownership journey.