Leads Systems

[Dan Scarborough]

I'm one of the newbies here, but from what I've read in the forum and blog, my interest in Farmland and Timberland puts me squarely in the minority... As a conservative contrarian in most matters, I'm very comfortable where I'm positioned....

However, if you are experienced (or even curious) about "fixing and flipping" what can easily be called "ugly farmland or timberland", please respond and let's talk.

DanJS  

[Chris Newman]

Hi @Dan Scarborough

Welcome to Bigger Pockets! 

Most of the folks here focus on what they've learned from late night TV: Some sort of Single Family Residential play that, with all the investor competition, is a lot of hard work and thin profit margins. $30,000 may be a lot of money to earn from a project, but if you had to churn $300,000 (and that much speculation risk), plus a lot of hard physical work, to get it, that's still a thin profit margin. I won't answer my phone for a 10% profit. :-)

They haven't yet learned that "the riches are in the niches." I like 500% - 2,000% mid-term profits a lot better. 

I invest in farmland and forests, too, in Snohomish county WA, just north of Seattle. The uglier, the better. But, what I'm exclusively investing in is rural acreage properties with Transferable Development Rights that are worth considerably more than the value of the land that contains them. 

In the briefest terms, from the county flyer, TDR is "the process by which the development potential is removed from one property and transferred to another. Snohomish county’s TDR program seeks to use market forces to discourage residential development of important natural resource lands, considered “sending” sites, and redirect this development to more suitable lands, typically within urban growth areas, considered “receiving” sites, that are appropriate for more intense residential use." 

In other words, TDR is a way to save farm and forest resource lands, which idea most of the public approves of, but isn't willing to pay for. Or, the alternate of arbitrarily downzoning buildable lands and cheating the homeowners of their retirement funding, which guarantees a lawsuit against the local government, that it always loses. 

If there's a loser with TDR, it's the current owners of urban Receiving land who will not be getting a windfall profit from arbitrary upzoning for higher density. The upzoning must be purchased by cashing in TDR credits, so this windfall value goes into the pockets of smaller farm and forestland owners, instead of wealthy investors. If someone has the spare resources to invest $millions into long term buy and hold of raw land and doesn't get a windfall profit beyond normal market appreciation, I have a hard time feeling sorry for them. 

One interesting thing is that the market value of the land generally does not go down after the TDR credits have been "harvested." At least around here in the local market, depending upon the source land characteristics. For me, "junk land is pure gold." For instance, my top four earmarked deals (one of which I already own) near Everett, WA, total 84 acres, will cost $800k to acquire and will generate 815 TDR Receiving credits worth, conservatively, $8.9 million. 

That's if the credits are simply sold to urban developers who need them. If the credits are used "in-house" to do your own developments, their economic value about doubles. An intermediary play is to lock in development land and package it with your credits, then relist the property with a guarantee that it will permit out at the higher X number of units. 

And, that's without selling the land (which doesn't go down in value) and you can still do everything on it that was previously permitted, except that you can't build a house. I like a 1,000% ROI for doing no more than pushing some paperwork than earning 10% for rehabbing an SFR. The challenge of course, is finding the first $800k and waiting a year or so before being able to start selling credits. Once just 10% of the credits have been sold, the initial cost is recouped and you're then playing with "house money" in acquiring even more land, for cash. Fortunately, this portfolio can be acquired in individual pieces, with a lower capital requirement. But, there's plenty of profits and I'm willing to share.

That's Snohomish county, at least. There are close to 200 TDR programs that have been created across the country in the last 50 years and every single Sending and Receiving program is individually "crafted" by the the local government, which is probably why most of them have abjectly failed. 

I just did a quick Google for "TDR Georgia" and came up with a lot of hits: https://www.google.com/search?q=tdr+georgia&oq=tdr...

You'll have to do your own research to see if there's an economic edge for a Georgia investor, even it it's just to pay for the land in order to put it back to use for sustainable local agriculture without a heavy profit-killing debt. 

The place to start looking is in the geographic area that interests you. Is there a TDR Sending program there? What are it's values, in terms of how much conserved land is required to buy density upzoning in an area that will Receive them? 

Are there any "holdbacks?" That is, are some properties excluded from the normal Sending areas because, practically speaking, nobody's ever actually going to build houses here. Wetland issues would be one example. SnoCo has no holdbacks, but many programs do. If the zoning here is right, it qualifies. 

Then again, a wetland can be conserved as a "mitigation bank, which credits are different than TDR, but still required by some urban areas. This is after the TDR credits have been harvested, so it's a big double-dip.

Around Seattle, ecological mitigation bank credits are selling for up to $2.2 million/acre - I just got off the phone with the Seattle mitigation program manager and learned this. In this case, you can't use the land for anything else, but that would sure buy a lot of other, more functional, farmland for cash. There's at least one company in California that offers turnkey mitigation bank services for landowners and they're making a fortune.

Once you've found a Sending area, then check Receiving areas for that Sending area. Is there actually a market demand there for TDR credits? If so, how much are developers paying? Often, a Sending credit will "multiply" during the transfer, depending on a variety of factors. For instance, 1 SnoCo Ag Sending credit becomes 8 Receiving credits when they're "cashed in" in an urban growth area. A good place to inquire would be the local government program manager (usually in Planning) for TDR.

Now, you need to incorporate all this TDR information into the local market values. Start at the end and work your way backwards. 

The relative "par" value of a TDR credit is the market value of the physical land that a developer will not have to buy in order to build the desired number of residential/commercial units. Around here, the per-unit market value for the dirt part of a mixed use project is about $35,000, so figure that the credit will sell for half the value of the physical land, in order to give the developer some serious monetary incentive to use TDR to build. 

One thing to consider is that the "face value" of a TDR credit remains the same, regardless of the qualified Receiving site where it will be landing. So, you'd want to be looking at the nicest prime development sites, perhaps view property, where the per-unit value is a lot higher than average. This is not the time to be looking for cheap Receiving land, but just the opposite.

Once you've established a reasonable market value estimate for what TDR Receiving credits are going to be worth, track backwards to the market value of the farm land that you're interested in. In other words, how much is it going to cost you for the credits that you'll be selling for a known price?

If the cost of land acquisition is lower than the value of the credits that can be harvested, you've got yourself an arbitrage deal, where the profits are locked in as soon as you close on the purchase.  

Make sense? The new idea here is the idea of "portable land." That is, with TDR, it's possible to buy development rights from cheap land and move them to more expensive urban locations. At least, it's possible if all the numbers and economics line up.

Good luck! If you have questions, please post them here for all to learn.