Acclaimed investor Warren Buffett once stated, “Price is what you pay — value is what you get.” This is basic to understanding that investors pay a certain price for an asset, and its value is derived by returns from the asset. Price and value are not the same, and the buyer’s value aspirations can determine price and decision to make the purchase.
Everybody has different perceptions of value when looking at assets. Some may see timberland or future development possibilities; others may see recreational value. Some prospective land buyers may consider all potentially valuable attributes. These varying perceptions create markets with competing offers from prospective buyers based on perceived value anticipated from properties they seek to acquire.
These same principles exist for land as an asset. Land offers permanence and utility, is non-destructible, and creates value over time for the owner – based on capital appreciation and income. Most buyers purchase land for the purpose of investment and for personal recreational uses, such as hunting, fishing, trail riding, and more. During the term of ownership, they aim for capital appreciation. This rationale for land acquisition is sensible. However, with some planning and initiative, land can also serve the owner beneficially by providing an ongoing income stream for the asset.
The importance of land income should not be understated to the overall economic return on the asset. An income stream can provide means to fund property taxes, maintenance, improvements, or provide cashback to buyers for other purposes. Without income, landowners must fund these critical elements “out of pocket” to maintain the property, which negatively impacts investment economics as the asset requires ongoing capital funding or additional sunk costs against the same future divestiture price for the asset.
Here are a few options for landowners to gain additional income and bolster the overall value of their asset.
Hunting Lease Income Opportunities
For most landowners, this choice, a widely accepted practice, is obvious. It can provide sustained annual income sufficient enough to cover property taxes and more. Critical success factors include suitable lease agreements containing landowner protections, hunting as well as general liability coverage for the property, and established safety practices for hunting clubs. In most instances, these clubs pay for the hunting liability insurance coverage for both the landowner and the club. Seeking legal advice about hunting lease agreements is a wise decision.
The benefit of this approach can be more meaningful than just rental income. Most hunting clubs own equipment and will maintain roads and open pasture areas or deer plots to enhance the asset’s overall recreational value. Over time this provides incremental value to the property by ensuring hunting viability is maintained in addition to preserving roads and open areas.
Agriculture Lease Income
Some property is classified as agriculture or with both agriculture and timberlands or pasture. Agricultural land provides the potential for an annual income stream from the property and increased value over time as commodity prices rise.
Some properties that have been used for agriculture may qualify for certain government programs that provide income depending upon soil types and budget priorities within the USDA. One of the largest is the Conservation Reserve Program, where fields set aside for pine tree planting provide a yearly rental payment.
Additionally, the ditch bank program provides protection and wildlife benefits to landowners who maintain and upkeep riparian buffers on their property. These programs’ financial perks can be highly beneficial as they provide sustained income during the contract’s term and enable landowners to enhance the property with pine and hardwoods for wildlife management.
Cost-sharing forestation programs which offer landowners options for converting less than all of their agricultural lands into a conservation reserve program may be a viable option for some landowners. These programs enable marginal properties to be included in the program, while higher-yielding portions are preserved in agriculture. County USDA offices have specialists who can offer direct advice on these programs and their suitability for properties.
Typically, available brochures explain and support education about these programs, and online materials are also available that summarize information for landowners. Other USDA conservation programs for wetlands may provide a one-time payment. Landowners should research the options available and consult with a tax professional to understand any tax impacts.
Timberlands are often considered a long-term investment, and for many properties, reflect the bulk of the investment return. One often overlooked avenue is the potential for thinning and select cuts to remove damaged or overstocked forests, which enable higher quality trees to grow faster, resulting in less competition for sunlight and nutrients.
In many instances, when seedlings are planted, they are overstocked intentionally to ensure a well-stocked forest. Thinning can provide landowners with the benefit of near-term income from the forestry investment while enabling the residual stock of trees to be improved. These income streams can be highly lucrative, and landowners can usually time thinning with funding requirements for the land or other projects to which they may aspire, or they can wait for higher timber prices before thinning.
Consulting with a registered forester for professional recommendations is wise. In most counties, a forester employed by the state is available and can provide insights for the landowner’s consideration. Having any timber harvest contract reviewed by legal counsel is a sound practice. Doing so ensures landowners that protections are in place and that the property is maintained according to best forestry practices.
An emerging area of income for timberland owners is carbon credits. Because businesses are looking for carbon neutrality, timberland assets may be a means to achieve this for companies needing a carbon solution. For existing timberlands, some landowners may consider harvest deferral credits, whereupon they agree not to harvest their forest for a certain period, in return for a payment. While the program is relatively new, it may be something that could be of interest to landowners. One company that is engaged in this area is NCX.
Landowners should familiarize themselves with the program and seek professional advice, but it may be a good option for income generation. Another company working in this space, Green Trees, is more focused on afforestation over existing tree stands. Additional companies are entering this space, meaning it will be a growing area of interest for timberland owners as the industry matures in providing carbon options for businesses to achieve a carbon-neutral stance.
Cell Tower Income Opportunities
Many landowners may have opportunities for cell tower income. These can be very beneficial in providing them with a long-term income solution. Typically, landowners will receive a monthly income, and lease terms can be for as long as 50 years, or more. Often, the amount of land used for towers is less than half an acre, and some towers can be placed in areas with low impact on the overall property. Cell tower income provides great optionality for landowners while enhancing the property’s return and value.
For example, the tower lease can be a landowner benefit conveyed to future owners of the property, or retained in any divestiture of the property by the prior landowner (not part of the property transfer to enable the income stream’s continuation). Often, the payment income may be inflation-protected to increase to some degree with inflation. Because negotiation of these cell towers requires specialized knowledge, retaining an attorney with expertise or experience in tower-lease negotiations is desirable. Many cell tower companies offer a place on their corporate website where landowners can nominate acreage for cell tower consideration.
Oil and Gas Lease Income Opportunities
Some landowners may own minerals on their property and can grant an oil and gas lease to a company to facilitate drilling and exploration. Typically, landowners receive a bonus payment on a per-acre basis for granting the lease, and with respect to any oil and gas discoveries, receive a non-cost-bearing share of the products. This is known as a royalty which is negotiated by landowners and energy companies in the oil and gas lease. As in all cases, obtaining legal advice from an attorney knowledgeable in oil and gas practices is best.
The energy company may also pay for any surface damages that may arise from the drilling operations, as well as any rights of way for pipeline operations. This is an area where landowners will need to be reactive, as the energy company is only interested in areas they believe are geologically interesting, given the seismic or subsurface data they secure for the area. In other words, energy companies typically do not buy leasehold on acreage just for the sake of building a position, unless they have some rationale to believe the area may be prospective for oil and gas.
Specialized Tree or Seasonal Crop Production
Often an overlooked area is fruit and nut production, such as pecans and Christmas trees. Many areas, particularly in the South, have pecan trees that provide income opportunities. Some companies contract on a share basis to retrieve pecans annually and remit proceeds to landowners. Christmas trees can require more maintenance for development as a business opportunity but likewise can provide income. In some areas, pine straw is a commodity that can be provided to landscapers on a commercial basis. Some hardwood trees may be used for firewood, which is in higher demand in urban areas.
Landowners have also considered the development of specialized crops such as pumpkins or watermelons for income potential. These projects often require little maintenance after they have been planted and don’t require year-round work to maintain.
Some landowners have chosen to dedicate portions of their property for rental or weekend houses, or even for recreational vehicle parks or storage units, which are in growing demand. These may be very beneficial for owners in that they can provide cash flow, and, in some instances, the houses are sold with landowner financing, allowing monthly principal and interest payments. In these instances, land with utilities is a critical element for success.
There are also properties that may have clay composition soil or gravel deposits to provide landowners with income opportunities from others in the area needing materials for roads and homesite improvements.
Many landowners may have received a brochure in the mail from a solar company seeking interest in the property for a solar farm. These can be great opportunities to lease land that is likely to be in pasture or agriculture. However, generally, the land must be relatively flat with good drainage (no flooding) and be near power lines and other established infrastructure to be viable for a long-term solar lease.
The lease provides annual income to the landowner for the use of the surface for solar power generation. Wind power is even more specialized, and investors may be focused on areas with potentially higher elevations and sustained winds for power generation. As with any use of the land under a contractual arrangement, appropriate legal advice should be obtained to ensure landowner protections are in place and the developer is a credit-worthy entity to fulfill its obligations to the landowner under the lease agreement.
Hopefully, the opportunities discussed above give some insights into the prospect for land income, beyond capital appreciation considerations, and enable landowners to realize greater property value. If you’d like to learn more about these potentially lucrative opportunities, then contact one of our experienced Land Professionals here at National Land Realty!