Tuesday, November 1, 2011

Agriculture Appraisal

Demetri Filios

Finance 181


Blog Post 2

Special Use Appraisal Interview

I chose to interview Mike Iliff, an appraiser who specializes in the field of agriculture. Mike also teaches Agriculture Appraisal here at Fresno State every three semesters. He was a great help in giving me great information for this post. Mike grew up in Tuba City Arizona. He always wanted to be a cowboy, but after graduating from high school his dad convinced him to go to college. Mike attended the University of Arizona but after graduation still wanted to be a cowboy. He soon realized he could make more money working for a Farm Management company. This is where he learned to appraise farmland. When asking about what approaches he uses I soon learned that agricultural appraisals use the same three approaches we learn about in class. These approaches are obviously used a little differently when appraising farmland.

The first approach we talked about was the sales comparison approach. In Mike’s eyes this is the most accurate and common approach to agricultural land. This approach is much like appraising and comparing any other type of real estate. It is important to use comparables with the same type of crop being grown; different crops can change the price dramatically. Next appraisers must find comparables from the same irrigation district. In order to farm, a farmer must pay a fee for access to water. Different irrigation districts usually pull water from different places; this is why the fee differs from district to district. If there is no comparables in the district, pulling from outside the district is not forbidden but needs to be adjusted accordingly. It is also important to try and get sales comparables from the same county to avoid difficult adjustments. After the comparable sales are collected its time to adjust, agriculture adjustments include: Type of crop, size, irrigation district, area, maturity of crop, and many more. The major difference is Ag Appraisers measure acres instead of square feet.

The cost approach is used in agricultural appraisal to value farms usually with immature crops. In the cost approach method, the improvements are not the house on the property, but the plants in the field. In fact, if the house is an old farmhouse it usually doesn’t even get valued. Usually, you find immature plants being vineyards or orchards since these type of plants have an adolescent stage. During this stage, the farmer has not achieved a stabilized income from the crops. When using this method one must first appraise the land as though vacant at it’s highest and best use. Next they must estimate the replacement cost new (RCN) of the crop and any other improvements. Then research the market to find any appreciation or depreciation of the improvements. Improvements on farms are the crop its self and not the commodity, real estate is land and things affixed to it, the grape or nut is not part of the real estate. After subtracting depreciation from the RCN, add the RCN to the land value and you have your total value using the cost approach.

When using the income approach you must first establish the yield history of the crops on the farm. The yield history should be measured in tons from the last three to five years. Next the type of interest in the property must be found. There are three major types of interests in agricultural land. The first is the cash rent, in which the tenant pays a fixed amount of money per acre; the landlord gets the rent no matter what happens to the market. The second type of interest is crop share in which the landlord participates in the risk of the crop, for example an 80%/20% share. Good yields could mean great profit but bad yields could mean less than desirable revenue. The third interest is owner operator in which the farmer takes full risk. A lot of the time the interest arrangement depends on the type of crop on the property. Next, once the landlord’s full income is assessed then expenses are deducted to get net income. Then look at the sales comparisons net income and divide by the sale price of that sale, this will produce a cap rate. Finally, pick a cap rate to apply to subject property’s net income.

The approaches used in agriculture appraisals are the same approaches commercial residential and industrial appraisers use for their properties. Even though there are many key differences within the approaches, the result is the same. Mike was a great help to me not just in regards to this blog post but also helping me really understand and grasp the concept of appraisal as a whole. There are so many variables when it comes to appraising farms, but Mike said that’s why he likes it so much “Your always learning something new at every job!”

All information in this Blog was from the interview of Mike Iliff, MAI.

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