PowerPoint Presentation

Norman C Wheeler & AssociatesBozeman & Missoula, MontanaMay, 2014Montana Land TrendsIn The Re-emerging Market

Looks Like Weve Weathered The StormPlease Note:

Opinions Ideas

Observations Shameless Projections

Values or Scenarios

These are of a small minded appraiser and may not be coherent or representative of those who govern over us.The Land Ranch market is re-emerging

What is the Market Rewarding?

Productivity&Good Buys

Not Speculative Development or Values

Not the best environment for beneficialConservation Easement valuation.

One MarketThe Other MarketHistorically 4

State ProjectNote this is the Western Land Survey 2004 verses 2013Lowest Price Point on Average since 1990sAlso a factor of Supply & Demand

Later

Bifurcation Analysis 2012 vs. 2013

2013 was $1,164per acre overall

2012 was $776 per acre overall

Strong Value Influence Based on Commodity Prices

Listings:Quick Sample over 640 Deeded Acres194,603 Acres

$1,920 Per AcreLess IX Ranch

134,603 acres

$2,309 on Average2013 Market Average

$1,164 Per AcreJanuary 2014And Then Theres DemographicsWhos next behind the Boomers?GenXers: born between roughly 1965 and 82 .now 31 to 48 yrs old.Millennials: those following, now 18-30 yrs old

Source: BabyBoomerHeadQuarters www.bbhq.comGenXMillennials13So when looking at Montanas Rural Land Markets now, post-RESET.Location and Highest & Best Use (Really) Matter

GenXMillennialsChanging Matrix BuyersDesires Land Ethic14Native Range $600Mountain Pasture$850Riparian $6,500Irrigated Pivot - $4,000CE HistoricallyLimited Change CE Historically changes to H&B Use- GreaterProductivityFeatures Native Range Mountain PastureRiparianIrrigated Pivot -BuildingsLeasesTypical Matrix

3.1%

3.4%

1%Return 2013 Small Lands Analysis100 to 320 Deeded Acres 24 Sales $12,846,0004,430 Deeded Acres$2,900 per acre Improved$2,348 Per Acre Unimproved

321 to 1,000 Deeded Acres 25 Sales $24,167,84314,076 Deeded Acres$1,717 per acre Improved$1,394 Per Acre Unimproved

Appears to be an upside to selling smaller parcelsBased on averages averages Good 2013 SalesWater Amenity Properties

5,546 Deeded Acres - $20,550,000

$7,135 per acre - Improved

$5,425 per acre - Unimproved

Average 504 Deeded AcresWater Class Values - 2013Class One Water Land Value Per Acre- Overall $5,877

Non CE - $6,460

CE Encumbered - $3,95838.73% Property Rights AdjustmentClass Two WaterLand Value Per Acre- Overall $4,227

All Non CE Encumbered

Southwestern Montana River TrendingMadison County

Beaverhead CountyMadison Only - Riparian Trending2003 2004-05 2006-07 2010-13$3,056$4,301$8,432No Sales$8,536Beaverhead Only - Riparian Trending2003 2004-05 2006-07 2010-13$1,150$2,385$3,858No Sales$5,896Not Appreciation Changing Property Features Spring Creeks Averages Good Recent River Site Data Trends2011 to 2013 Average Site - 78.86 acres

Average Site - $810,000

$10,272 per acre UnimprovedHigh Amenity $914,000

Lower Amenity$595,000

2013 River Sites $20,550,000

15 Sales 1,427 Deeded Acres

95.13 acres per site

$1,370,000 Per Site - Improved

$14,401 per acre overall

Average $960,000 Site/Land Value Only$10,091 Per AcreUnimproved

FCS Southeastern Montana Ranches2012Sales Volume $81,000,000

Deeded Acres208,000

$390 Per Acre - Deeded2013Sales Volume $51,000,000

Deeded Acres117,000

$436 Per Acre Deeded(11.8% Increase)

2010: $225 to $275 Per Deeded Acre2012: $350 to $400 Per Deeded Acre2013: $435 to $496 Per Deeded Acre2005: $175 to $225 Per Deeded AcreEastern Montana The Other Market Predominately Agricultural H&B Use2010 - Emergence of N Bar Sale & Expanding Western MarketMid State - Spanning Two Market Areas More Recreational Influence - $400 to $500 Per Acre

Effect of Transitional Market On Animal Unit Values - 2010

Effect of Transitional Market On Animal Unit Values - 2012

11,730$ Per AU Unimproved8,043$ Per AU UnimprovedAvg AU Rec InfluenceAvg AU Grass Ranch 15,000$ Per AU Unimproved11,000$ Per AU UnimprovedAvg AU Rec InfluenceAvg AU Grass Ranch What's Up with Appraisers Regulation began in 1990

Grandfathering

Lack of Mentorship(intelligence)

IRS Enforcement ( Intimidation) 2006Overstatement Penalties - Sanctions

Lack of Effective Support or PushbackBy Appraisal Organizations

USPAP

YELLOWBOOK(One hand tied behind your back)

QUAILIFIED IRS APPRAISAL(Two hands Tied behind your back)Report FormatsPushback was Limited

Errors and Misleading Reports Flagged - Bad

No Logical Defense

No Real Standards in Place

IRS Walk Over Appraisers & Land Trusts

Subsequently Decreed RulesStandard Procedures

Property Rights Adjustment Gutted for CE Valuation

But Still Fully Acceptable for any other Damages MeasurementAccessFireEnvironmental

Virtually Whole Appraisal Practice is based on Property Rights AdjustmentUSPAP(Follow the rules)

5 Standards of Practice & Incorporated Rules

10 Statements on Appraisal Standards

32 Advisory Opinions

316 Frequently Asked Questions

USPAPReport Credible Results in a Non Misleading Manner Based on Standard of your Peers

As dictated By Your Experience/EthicsYellowbookReport all undeniable elements In a Supportable FormatIRS QualifiedAppraise As OrderedBased on Non Regulated Rules No Review Until?Maybe NeverReview and acceptance by a qualified reviewer based on a statement of workRadom based on unlicensed IRS Engineer

Only Federal Agency that has not adopted USPAP1-Larger Parcel Issues

2-Highest and Best Use

3-Valuation

4- Trends Larger Parcel Mom & Pop

CE Subject

640 Acres Unity of 1-Ownership

2-Location

3-Unity of Use

4- Highest and Best UseLarger Parcel Mom & Pop

CE Subject

640 Acres Mom and Pop 160 acres No CEUnity of 1-Ownership

2-Location

3-Unity of Use

4- Highest and Best UseMom & Pop

CE Subject

640 Acres Mom and Pop 160 acres No CEMom & Pop

CE Subject

640 Acres Mom and Pop 160 acres No CEUSPAP640 CE Subject - EncumberedYellowbookBefore 800 acresAfter 640 Encumbered160 Non different H&B UseIRS 800 acres Partially EncumberedWith Analysis of Benefit to Remainder and EnhancementsLarger Parcel DaughterMom & Pop

CE Subject

640 Acres Ex Son In-lawUnity of 1-Ownership

2-Location

3-UseMom & Pop No CELarger Parcel- USPAP DaughterMom & Pop

CE Subject

640 Acres Ex Son In-lawUnity of 1-Ownership

2-Location

3-UseMom & Pop No CELarger Parcel- IRS DaughterMom & Pop

CE Subject

640 Acres Ex Son In-lawUnity of 1-Ownership

2-Location

3-UseMom & Pop No CENow for IRS 920 acres PartiallyEncumbered Larger Parcel

640 encumberedBenefitsEnhancementsLarger Parcel- IRS DaughterMom & Pop

CE Subject

640 Acres Ex Son In-lawUnity of 1-Ownership

2-Location

3-UseMom & Pop No CENow for IRS 920 acres PartiallyEncumbered Larger Parcel

640 encumberedBenefitsEnhancementsSon Highest & Best UseBefore Easement

Legally Permissible

Physically Possible

Financially Feasible

Maximally Productive Legally PermissibleZoning

Prior Easements

Floodway

Governmental Restrictions

Physically PossibleTopography

Access

Floodway

Size/Shape

Soils

Financially Feasible

What Economic Use Supports Market Value

KEY ProbableMeasurablePredictableAgricultureProductivity

RecreationFeatures

InvestmentQualityBullshitProbableForeseeableFutureInterimSubdivision - Really

Subdivision- OK

Value Analysis

Discounted Cash FlowNO-NO

Bulk SaleUnhappy Client Based on Buyer Logic: A = $100,000 - 20 Acre Lot

Then regardless of input costs

My 320 acres = 16 times $100,000

Or B - $1,600,000$5,000 per acre

CE Reserves 2 build sites and no divisionSo After Value

2 times $100,000 = C- $200,000

D- (duh)= CE value $1,400,000 Joe Bag of DoughnutsBuys a 320 acre tract At market - say $1500 per acreOr $480,000320 acres assuming zoning and all that:

Infrastructure - $10,000 per lot- $160,000Cost of Sale at 12% - $192,000

Retail less $352,000 net $1,248,000

After IRS two enhanced build sites at $150,000

280 acres of permanently restricted pastureAt $500 = $140,000

After Value - $440,000/ $1375 per acre

CE Value - $808,000

But wait - What about Financial Feasibility?

Demand-?? Why of course.

Supply not like this.

Absorption It is redhot.

Cost of Money Who cares.

Discounted Cash Flow

Typically a six to seven year window.

Based on:Extraordinary Assumptions

Remember: There is no mythicaldevelopment market out there.

Maximally Productive

Rural Recreational Investment with Agricultural Influencesin Anticipation of Appreciation

Based on value and use measured byNon EconomicIntrinsic Personal Use Benefits

And is that improved or unimproved

Oh Yea Measure the Effects of Super Adequate BuildingsOn land values within CE sale Analysis Average $960,000 Site/Land Value Only$10,091 Per AcreUnimproved

Average 78 acres

Remember average River Class One 504 acres at $6,400 per acre $3,225,000So CE allowing 2 sites within 504 acres Two 78 acre sites at $960,000 each$1,812,000Remainder 348 acres restricted at CE Value of $4000 per acre$ 1,392,000After Value - $3,204,000

Sites $1,812,000

Open Space - $1,392,000Take Down $21,000Real World H&B Use Yea so you cant divide to capitalize on two sites - But do I have any sales to go down that road- or is it an Extraordinary AssumptionLets Go To Real World

Irrigated CroplandBozeman Proper$10,000 Per Acre Irrigated CroplandToston$3,500 Per Acre Irrigated CroplandHolland Settlement$5,500 Per Acre Assume Identical CEs No Splits- No HomesAssume water/ systems /productivity - similarConsider Change in H&B UseIrrigated CroplandBozeman Proper$10,000 Per Acre Irrigated CroplandToston$3,500 Per Acre Irrigated CroplandHolland Settlement$5,500 Per Acre Highest and Best Use a Function of:Consider Change in H&B Use

RememberFinancial FeasibilityMaximally ProductiveLOCATION

PRODUCTIVITY

SUPPLY

DEMANDIrrigated CroplandBozeman Proper$10,000 Per Acre Irrigated CroplandToston$3,500 Per Acre Irrigated CroplandHolland Settlement$5,500 Per Acre Assume Identical CEs No Splits- No HomesConsider Change in H&B UseLOCATION

PRODUCTIVITY

SUPPLY

DEMANDDo we even have a sale of encumbered irrigated cropland?Well I have sales that contain lands including irrigated cropland.

Those sales say 30% property rights adjustment - overall.

Oh yea those are at Dillon and they are 4 years old.I have non comparable pasture sales in this area that show a Property Rights adjustment of 40%.I have county and NRCS purchases of CEs on Irrigated cropland that were funded at 20 % of market value.

Oh yeaIRS and courts can try to default to established Programs.Irrigated CroplandBozeman Proper$10,000 Per Acre Highest and Best Use a Function of:Consider Change in H&B Use Financial FeasibilityMaximally ProductiveIf This was Entitled It would Sell at $25,000Per AcreSimple Entitled to Speculative$25,000 to $10,000- 60%But wait - $10,000 was fee simpleandWho really puts an entitled tract under CE?

Based on a preponderance of the data my $10,000 speculative land could be assumed to be affected 60% bringing $10,000 per acre down to $4,000 per acre which somewhat equates to Toston irrigated sales, with some unexplainable consideration that Toston sales are fee land, whatever, but considering location I have to adjust $4,000 per acre up 57% to $6,280 based on locational premium of Settlement lands as compared to Toston lands; and by the way that ends up as a 37.2% property rights adjustment that just happens to coincide with the average of every non comparable easement sale in my database that occurred in Montana over the last 10 years, that wasnt a riparian property sale.Case solutionDry CroplandSemi AridNative RangelandRiver - RiparianIrrigated Cropland Mountain PastureBuildings Highest And Best UseConsiderationsEx UrbanLandsDry CroplandSemi AridNative RangelandRiver - RiparianIrrigated Cropland Mountain PastureBuildings Highest And Best UseConsiderationsSite Site Site River - RiparianHistorically Discount Based on

Principle of Substitution

In the Maturing Montana MarketYou have to ask yourself

Is there a substitute?

And realize that for high end property

Most are Encumbered!AcresVolumeLand Value AvgGallatin1,592 11,855,000$ 7,447$ Avg Site200 unimproved 7,384$ Paradise3,082 23,900,000$ 7,755$ Avg Site770 unimproved6,328$ Bitterroot1,688 19,875,000$ 11,774$ Avg Site562unimpoved6,120$ Parting Thought What Drives Value in Your market?

Thanks For Your Time !