Hunting for Recreational Properties

Investors spot new opportunities in the great outdoors.

Land is America's new stock market. In some parts of the country, people burned by Wall Street are putting their money into what Scarlett O'Hara called “the only thing that lasts.”

For example, Curt Eilers, CCIM, a broker/investor who owns PrimoTerra Realty in Naperville, Ill., purchased 160 acres of undeveloped land in California early last year and bought another 200 acres in the fall. He bought the land mostly for investment reasons, but he hasn't ruled out other uses.

“Recreational land investments provide an opportunity to gain appreciation equal to or superior to the returns of the stock market,” he says. “It starts with finding appropriate parcels.”

Eilers' property is zoned both residential and recreational. It is about 30 miles outside of Redding, one of the fastest growing areas in the state. However, it is off the local power grid because “you can get nicer land for less money if it is not on the grid,” he says. Other owners in the area rely on solar and wind power. “Cell phones work in many remote areas, and the Internet and media programming are available by satellite dish,” he says. “These newly available services make living in a wild-urban interface area much more feasible than in the past.”

Demand for both improved and unimproved recreational property is one of the strongest factors boosting rural land prices nationwide. An increased interest in outdoor recreational hobbies as diverse as hunting and bird-watching, a graying baby-boom generation that is more conscious of the investment potential in vacation and retirement properties, and low interest rates have come together in the past five years to create a niche market for recreational land.

Soaring Land Prices

Recreational property is a broad term that covers a variety of land uses, some native to particular geographic regions. Gentleman and hobby farms, hunting and wildlife plantations, ranches, ranchettes, timberland, and tillable and nontillable crop land all fall under this rubric.

Farmland is increasingly being converted to recreational use in some areas of the country. Last year's Iowa State Land Valuation conference estimated that out of $14 billion spent on U.S. farmland in 2003, $2.5 billion was spent on nonfarming recreational use.

Recreational land use follows investment as the second most popular reason for farmland purchases by nonfarmers, according to the Federal Reserve Bank of Kansas' 2003 Survey of Agricultural Credit Conditions, a 10 percent increase from the previous year, the survey reports.

The average price of an acre of U.S. farmland is $1,360, up 7 percent from a year ago, according to the U.S. Department of Agriculture's Land Values and Cash Rents 2004 Summary. The report credits strong demand for nonagricultural land uses as a main factor in boosting prices. Nationally, farmland in the path of immediate development was valued at $5,700 per acre and farmland with development potential was $4,000 per acre.

Changing Land Values

Wildlife-related recreation, such as hunting, fishing, and observing, is a $108 billion industry that is contributing to strong land value gains, according to the Federal Reserve Bank of Kansas' Center for the Study of Rural America. In 2001, wildlife recreation accounted for more than $12 billion in land leasing and ownership, according to the April 2004 Main Street Economist, the center's quarterly rural commentary newsletter.

Nonagricultural uses such as recreation are changing the market dynamic for all rural land, according to University of Nebraska's Nebraska Farm Real Estate Developments, 2003–2004. Last year the state recorded a 9.2 percent jump in farmland prices, the highest in 14 years. Typically crop productivity and commodity prices create the base line for valuing farmland. But recreational interest in poorer-quality farmland — land with trees and streams, not conducive to farming but good for encouraging deer and other game — can raise the value of all rural land.

It's a change from the old mind-set that “if it can't be cleared and farmed, it isn't worth much,” says Eric L. Sarff, a recreational land specialist with the Loranda Group in Springfield, Ill. In the past five years, his company has seen a pronounced uptick in demand for recreational property, although little of it is converted farmland. “Most of the recreational land we sell is woodlands,” Sarff says. “Very little of it has been used to raise crops.”

Land parcels in the 40-acre to 100-acre range are the easiest to sell, Sarff says. In Illinois, 40 acres is the minimum required acreage to obtain a deer-hunting shotgun permit. And many buyers have “an imaginary threshold: They view anything under 100 acres for entertainment value and not investment potential,” he says. Currently, lenders in Sarff's area are offering 20-year property loans at 65 to 70 percent of appraised value, with interest rates between 5 percent and 7 percent.

Most of his buyers are businessmen who like to “hunt, fish, and enjoy Mother Nature,” Sarff says. He estimates that about 25 percent of the people he speaks to each week are interested in recreational properties. “We spend a lot of time trying to educate callers about the realities of the recreational market — what the land will cost, what the taxes will be,” he says. But he predicts the market will remain strong, although “the rate of increase will probably be in the range of 4 percent instead of [last year's] 8 percent.”

While buyers who purchase recreational properties for personal use don't qualify for 1031 exchanges, “We get calls from 1031 buyers interested in an [income-producing] combination of tillable and recreational land,” Sarff says. Cash-flow opportunities include leasing hunting rights, leasing tillable land for farming, or enrolling in the Conservation Reserve Program, a federal program that pays owners to plant cover crops to preserve farmland subject to flooding and erosion.

Exchange investors also are active recreational property buyers in central Alabama, says Carter Burwell, CCIM, an associate broker with Aronov Realty Brokerage in Montgomery, Ala. “More than half the [recreational] deals I've done recently have been 1031 buyers,” he says. “Most buyers are local or from the Florida Panhandle and are looking for half-fun, half-investment.” Central Alabama is known for its turkey, deer, and quail hunting, he says. “Some of the properties are old family farms, and the new owners lease the farm to farmers and then use it for hunting and fishing recreation.”

Interest in Alabama recreational land has been steady over the past 10 years. “Land prices pretty much follow the stock market,” Burwell says. “From 1995 to 2000, prices doubled and tripled. Since 2000 it's remained steady, and in the past three years, it's probably increased 5 to 10 percent.”

From Farms to Recreation

In the West, aggressive conversion of agricultural land to nonagricultural uses such as recreation and residential development literally is changing the lay of the land in some states. And because western lifestyles and livelihoods are much more closely tied to the land than in other areas of the country, the effects are far-reaching.

For example, the highest and best use of Texas ranchland is no longer cattle ranching; it's recreation, says Charles E. Gilliland, a research economist at Texas A&M University's Real Estate Center.

“Deer hunting is the primary impetus behind this switch,” he says. “In many cases, a hunting lease brings in more than five times the revenue from [cattle] grazing.” Although the major switch to recreational use began in the 1980s, “in the past decade the situation has spread and reaches into all corners of the state. Add to that demand, birdwatchers and other nature lovers have entered the contest for space to pursue their hobbies. That has led to a marked change in ownership patterns.”

Per acre prices range from $250 in the Texas Panhandle to more than $3,000 in southern Texas and the Hill Country, where buyers are looking to hunt primarily whitetail deer and quail. A common due diligence factor is often a biologist's game report, Gilliland says.

But he notes that the change in land use has not sparked development in the usual sense of the word. “Some owners are restoring improved pastureland to its native state. From that perspective, land use is reverting to earlier uses now.” In fact, today's buyers prefer unimproved native rangeland with brush and undergrowth that provides wildlife habitat. Water features, high fences, and wildlife management plans also increase the land's value in recreational buyers' eyes.

And ranches aren't the only land changing use in Texas. In east Texas, the timber industry has sold nearly 1.8 million acres of timberland, much of it in rural second-tier counties that may become the state's new big-growth areas, Gilliland reports. Twenty-acre to 100-acre parcels have increased the most in value.

While the average price of a Texas acre is $1,100, the average size of property transfer has declined from 107 acres in 2002 to 100 acres in 2003. Texas land transactions for 2003 totaled almost $800 million. And prices should hold, says Gilliland. He predicts that 2004's increase in value “will likely surpass 8 percent.”

But ranchers seeking additional grazing space for cattle are thwarted not only by high land prices and competition from recreational buyers, but also by what may be a permanent change to their way of life. “Many of the current [recreational] buyers are flush with cash and plan to retire on their rural retreats,” Gilliland says. “Taken to its ultimate conclusion, rural communities could see a transformation from agriculturally oriented business to specialized horticultural establishments. Livestock and agriculture will not vanish, but the real money in those communities may move in different directions. One aspect of this movement is a vanishing middle class in many rural communities.”

Losing Open Spaces

In the Rocky Mountain states, more than 15 million acres of rangeland have been converted to nongrazing uses in just the past five years, much of it to meet the needs of buyers looking for vacation and retirement properties.

Population in western states jumped 47 percent in the last 20 years, much of it near Aspen and Telluride, Colo., and in Wyoming and Montana surrounding Yellowstone National Park and other federal lands.

Mountain property is second in popularity only to waterfront among vacation property buyers, according to a 2002 National Association of Realtors survey. A 2003 update showed a marked shift in the number of buyers who purchase vacation properties for investment reasons.

For buyers of large western recreational tracts, demand for elk hunting has been the strongest, says Jim L. Whitney, CCIM, owner of Whitney Land Co. in Pendleton, Ore. Whitney primarily sells hunting and fishing recreational ranches from a few hundred acres to 44,000 acres. “While the ranches contain significant recreational opportunities, they also remain leased out to the agricultural users that they historically have been utilized for,” he says.

Many buyers in the $3 million to $8 million range don't want a return on the investment, but they do want to generate enough money to cover expenses, Whitney says. They do that by leasing land to cattle ranchers, enrolling in conservation and wildlife enhancement programs, and placing conservation easements on parts of the property. “There are a variety of conservation easements available that offer significant tax benefits,” Whitney says. “And they don't reduce the value of the property.”

Conservation easements are being used more frequently to preserve both open space and ranching as a livelihood. Ranchers can sell easements that restrict future development and still work the land; at the same time they also can lease fishing and hunting rights to recreational users. Nearly 1 million acres of western ranchland now is protected by conservation easements, according to the American Farmland Trust.

Of course, ranch is a relative term. Buyers seeking a couple hundred acres and a small house might find something under $500,000. But trophy ranches in the 1,000-acre to 10,000-acre range with fly-fishing and hunting opportunities start around $1.5 million.

“The real value is in Oregon,” Whitney says. “Land prices are half what they are in the Rocky Mountain states, and you can use your property for more days per year,” due to a milder climate and less snow at the lower elevations. Deer and bird hunting are big in Oregon, he says. But, “the Rocky Mountains have the sizzle,” not to mention the higher elevations that attract elk.

If the general economy continues to strengthen, recreational property buyers should benefit, although it is hard to predict how long the market will sustain record-high prices. “If recreational land gets too expensive, people will just quit buying it,” Sarff says. “Remember, it's typically used for a hobby.”