Land Rich, Cash Poor

By: Amos S. Eno
Posted on:09/28/2011

Insights on how to value land wealth over the long term

This is a continuation of last week’s interview with Bart Weisenfluh of Plimsoll Mark Capital.

People who own property are often emotionally attached to it.  It may have been handed down through the generations; it may once have been the source of the family’s wealth; it may be a beautiful retreat with bountiful wildlife or a wellspring of spiritual renewal.  In the words of Bart Weisenfluh, “People get attached to property, but not their stock portfolio.”

For these reasons and more, financial planning with property in the picture is not as straightforward as planning for other types of assets.  “One of the biggest mistakes that landowners make is gifting their land to someone without the cash flow necessary to maintain it,” says Bart.  “The parents think, ‘we gave them $1,000,000!’  The kids think, ‘you gave me a $50,000 liability!’  People need to make sure the next generation takes into consideration the associated annual costs of property, or if they sell, it may be at a discounted price due to liquidity issues."

Stewardship Trusts

“Our job is to anticipate the next two or three outcomes from a financial decision, such as kids recognizing the annual costs of maintaining property," continues Bart.  "It could be that one child is a teacher with a modest income, while another works on Wall Street and makes tons of money.  Shared property maintenance costs would put a disproportionate burden on the former.

“So we say, when you are gifting land it’s helpful to start a separate trust, a pool of dollars for taking care of the property.  For example, this could entail retaining the services of a consulting forester who might, in the best case scenario, be able to set up a management plan whereby the property generates income sufficient for its maintenance or for a reasonable income stream.

“We see the same issues with houses.  That cottage on the lake everyone has been visiting for the past 30 years?  The kids think of it as free.  They don’t think about the $5000 in taxes, plus $1,500 for annual upkeep and homeowner’s fees, and that it needs a new septic tank.  Communication in this process is key.”

Simple but Sophisticated

Whether your property is an investment or a family legacy, firms like Plimsoll Mark Capital can be invaluable.  They help to decipher those computer-generated pie charts that arrive by mail, purporting to enlighten you by showing the percentage of your money in various forms of investment.  Bart explains, “We specialize in delivering information to our clients in ways that people can understand. For instance we categorize clients’ investments not by what they “are” but rather, what they are designed to “do,” such as hedge against inflation, provide income, appreciate over time, etc. 

"In addition, it is important to include the land (500 acres for example) people own in their quarterly reports, but make sure they understand it may not be a core asset on their balance sheet because they do not have the liquidity required to do so.  This by no means diminishes the value or worth of the land over the long haul, but it does help put it in perspective for financial and income planning purposes."

Bart advises people who are ‘land rich, cash poor,’ that "there’s no secret potion out there about how to maintain liquidity; we’re in a low return world now, and we think that’s going to continue for some time.  There are opportunities, but first you have to assess what you have and make sure you understand how much of your property counts toward your net worth - is it 90% or 50%?

“If you’re never going to sell your land, and only want to derive income, then we’ll assume its value will only be available in extreme circumstances.  Sometimes people who are land rich don’t fully comprehend the context of their wealth – it’s important to understand that even though their property is worth $20 million, they may only have access to $100,000 of income.  Proper reporting and continued communication help push these concerns to the forefront so families can make informed decisions.”

Return Sep. 30, 2011 to learn what Bart says about a cash contingency.