How they got it wrong on BEV

Discussion in 'Commercial/Industrial Appraisals' started by Terrel L. Shields, Oct 2, 2011.

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  1. Terrel L. Shields

    Terrel L. Shields Elite Member

    59
    May 2, 2002
    Professional Status:
    Certified General Appraiser
    State:
    Arkansas
    Attached is an excerpt of a letter from the author of an Intangible Assets Class in 2004, during a period when Hmong poultry farmers were driving chicken farm prices sky high. New farms were being built and sold to the neophyte buyers right and left. A contract with the grower by an integrator is central to the use of the farm as a poultry operation.

    If you would like a copy of the whole four page letter, PM me.

    The gist of the letter was it was a response to a complaint made by Tim Kelley of the Missouri FSA and addressed to Sharon Lowman, Chair of the MO. Real Estate Commission...(the Board).

    The letter was addressed to James Vine, TAF chair at the time. (apparently forwarded to TAF from Ms. Lowman??) The author of the class, Mr. Ronald Geer, ASA and creator of the Intangible Assets class, authored the letter.

    Apparently Mr. Kelley objected to the class on the grounds that he felt the interpretation of the author would require 2 appraisals, one with the contract and one without. Mr. Geer wants to reassure Mr. Kelley that 2 appraisals are not required, only 1 but the impact of the BEV must be addressed.

    That's all good and well in the super hot market of 2004. The same could apply to a host of developments, hotels, and even housing....fast forward to current market conditions. Now read the excerpt.

    Mr. Geer gave a credible example of what BEV was by demonstrating that farms were selling for more than the depreciated cost of the barns thus the difference was "BEV" - a value accrued to the contract to grow birds according to Mr. Geer...a business enterprise value.

    There is an alternative view. I shall express it. Two issues. The buyers were ill informed about the economics of poultry farming in the first place...duh. Secondly, most of these farmers were from Minnesota. As refugees from Vietnam, many received subsidies . They call it "farming the government when it involves FSA. http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=2415
    http://www.minneapolisfed.org/publications_papers/studies/hmong/index.cfm

    As an appraiser I had more than one Hmong tell me that they were paid an annual payment of $4000~ per month as a "new" farmer. One said they got the subsidy in MN to grow vegetables and flowers but that the subsidy was phased out and they were told that if they moved south to grow poultry, they could get a "new farmer" subsidy. In fact, I have evidence that some farms changed hands between relatives after 2 years and the "new" farmer got the subsidy as well. Thus, there was an "intangible" value to certain people that was not disclosed nor was it calculatable in the poultry contract itself.

    Secondly, dozens of Realtors left this region regularly and gave seminars in Minnesota hawking the glories of chicken farming in the Ozarks and KY, E. Texas, etc. Speciality Realtors sprang up selling only farms and obviously, the bigger the better since FSA seemed to be unwilling to turn down any Hmong in fear of a discrimination complaint after all the grief they got from the lawsuit by Black Farmers.

    There was no "BEV", imho. Chicken farming is buying a job. Nothing more. And you only pay more because someone is giving you cheap and ready credit, an annual subsidy, and a snow job. The Hmong got screwed. Before the present financial crisis, Hmong realized the economic was decidely poor. By 2006, sales tailed off rapidly. Since then the farms are selling for a fraction and absolutely no one is building a new farm to market to Hmong. The last few new operations I have seen that sold are selling for a reasonable discount from the RCN and the rest that have gone under are selling as distressed property....some are put back in production. Most of the oldest are not.

    The difference between farms with and without a contract that Mr. Geer alludes to isn't a measure of the contract BEV. It is a measure of the distress of a farm that no longer can meet contract standards. There is no "BEV" and what was mistaken for it is nothing more than a whole ethnic group being duped by the government and Realtors preying upon their naivety.
     
    Last edited: Feb 11, 2012
  2. aalderman1

    aalderman1 New Member

    0
    May 10, 2010
    Professional Status:
    Certified General Appraiser
    State:
    North Carolina
    Terrel rests his case. Way to break it down. Very convincing. This emphasis on BEV seems like a whole new can of worms from Real Property Appraising, which was a pretty big, deep can to begin with.
     
  3. Terrel L. Shields

    Terrel L. Shields Elite Member

    59
    May 2, 2002
    Professional Status:
    Certified General Appraiser
    State:
    Arkansas
    Land Residual or BEV? which one works best??? take your pick.
     
  4. NORTON

    NORTON Senior Member

    0
    Oct 10, 2007
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    interesting and informative, thanks
     
  5. JSmith43

    JSmith43 Elite Member

    9
    May 5, 2003
    Professional Status:
    Certified General Appraiser
    State:
    California
    Another great example of government interference with market signals leading to an eventual, predictable disaster, a bubble developed on the steroid of government subsidy for a chosen class of recipients, bursting at a level far beyond where it would have shaken out, were it not for the government interference in the market.
     
  6. Stone

    Stone Elite Member

    6
    Feb 1, 2002
    Professional Status:
    Certified General Appraiser
    State:
    Wisconsin
    True, but you cannot ignore the market participants who took advantage of the situation either. To do so is not telling the whole story. The government may have set it in motion but non-government players did their part. That is frequently the case when government is blamed (no matter how accurate the government criticism may be).
     
  7. farmguy

    farmguy Member

    0
    Jun 27, 2007
    Professional Status:
    Banking/Mortgage Industry
    State:
    Texas
    When the Hmong started buying broiler houses in Central Texas we also saw a 15% +/- premium paid. I visited with one new grower from California; he was a programming engineer who wanted to raise his kids in the country. He was one of the few I could understand and visit with. I asked about the premium over and above physically depreciated cost. He said when he wanted in the integrator was not in an expansion mode so if he wanted to farm he had to buy an existing farm, and pay a premium to "buy" the contract. He also discussed time value of money. He was buying a relatively new farm. He said I can buy this farm and get chickens next week or I can build and pay interest on a loan and not raise chickens until construction is complete. So in his mind he also paid a premium for income now as opposed to income later.
    I have always heard folks talk about the money Uncle Sam pays Hmong and others to farm. I worked for USDA for a time and I don't recall ever hearing about the checks we would write to the Hmong. Maybe it is a tax credit. I would like a link to an article that discusses the payment. I went to the link in the OP and I didn't find a reference to the payments they got from government, if I missed it somebody please point it out to me. I do think they finance amongst themselves, family to family.
    I have always been able to talk myself on both sides of the fence on appraising poultry farms. What is real estate, what is business value, what is contract worth, blue sky, etc? Looking at a bunch of sales over the years it seems the market is impacted by whether or not the integrator is in an expansion mode. Existing farm sales are slow or low in an expansion. Makes sense to me. If I have a contract it is hard for me to argue it has value if integrator will give you one.
    For the most part folks tend to beat up integrators and essentially describe poultry farming as slave labor. I have known a lot of guys during the years that have, in their minds anyway, done alright with poultry. Wife has a decent job, husband raises few cows, cuts some hay, could be he was an electrician or something and he picks up small jobs here and there. There are economies of scale to consider. A three house farm will take a lot of time but maybe not generate enough income. Four house farm fairly typical for scenario above. Get more than four and you have to consider a hired hand. At that point need to grow to pay hired hand.
     
  8. Stephen J. Vertin MAI

    Stephen J. Vertin MAI Senior Member

    0
    Jan 17, 2002
    Professional Status:
    Certified General Appraiser
    State:
    Illinois
    Your not the first to discover BEV disappears in down markets and reappear in strong economies. It is the nature of the beast. If BEV exits it should be incumbent to warn clients of volatility not the concept is worthless. In simple terms BEV is the difference between going concern and real property values. When times are good BEV exist, when bad, not so much.
     
  9. JSmith43

    JSmith43 Elite Member

    9
    May 5, 2003
    Professional Status:
    Certified General Appraiser
    State:
    California

    Stone, if the Government passed legislation to feed migratory ducks and some of those fattened ducks that should have left WI for the winter stayed and froze to death or got eaten by coyotes since they couldn't find open water at 20 below, one could also blame the ducks that stayed.

    That example was just for fun:)

    What I believe is that, knowing human nature, it is best to avoid as much as possible, substituting bureaucratic judgement for judgement of market participants or devising programs that are easily & predictably hijacked with political lobbying/cronyism. The GSE's come to mind.

    Exceptions that come to mind are where there is no pricing mechanism closely linked (smoke stack emissions, etc).
     
  10. Terrel L. Shields

    Terrel L. Shields Elite Member

    59
    May 2, 2002
    Professional Status:
    Certified General Appraiser
    State:
    Arkansas
    There is a disconnect between the readily available credits, which includes the "first time" farmer which is a reduction in the interest rate. That subsidy is, in theory, available to all "first time" qualifed buyers but all those who qualified around here appeared to be Hmong. The USDA guy bristled when I suggested they were being subsidized a few years ago but one of the other FSA boys pointed out that virtually all of them got "first time farmer" status and thus got 1% lopped off the interest.

    The 1951 Refugee Act also makes provisions for payments that may apply here. I don't know. http://newmexicoindependent.com/63689/feds-to-end-ssi-for-impoverished-political-refugees

    There used to be a link circa 2002 or so where the Minnesota USDA specifically addressed a complaint by Hmong growers that subsidies were time limited and they couldn't survive without them. I couldn't find it but there were "outreach" programs in addition to the "new farmer" subsidy. And the USDA does sponsor such "outreach" on an on-going basis. Sometimes that means education, workshops, etc... Does it mean direct cash payments? I dont' know.

    However, I do find it curious that USDA guaranteed loans were made to Hmong but I cannot think of a single non-Hmong in the 2003-2006 period who received a USDA backed loan around these parts. A few of the assignments I got were SBA loans to non-Hmong but nothing from USDA.

    Of the two instances I can think of one grower said that he got $50,000 a year for being a new grower... (did he mean that was how much his interest was reduced??)...and the other actually made the claim that he got $50,000 a year "from the CIA"...He was also the one :) who introduced me to his "daughter" but HER kids kept calling him "daddy"...?? The farm was one in three that was in the name of his "wife" whose name was Cindy. He lived on one. She lived on one. and his son lived on one..all with considerable extended family... go figure. I never figured that out.

    A fellow who used to bale my hay baled hay off one place and the guy there told him that he had an SBA loan on a grocery in St. Paul, MN but was losing money after a large chain moved in. He was going to file bankrupcty but they talked him out it and lowered the balance on the building. He sold the building "for a million dollars" to be redeveloped, according to Calvin, and took the money south to buy a farm. He, too, told Calvin that he got a check from the government for "being a refugee."

    Today, the new farms are being built about 50/50 - Hmong growers (usually experienced growers) and non-Hmong. (BTW, I have yet to see my first Hispanic chicken farmer...they are smarter than that...) Our new farms are from 55' x 600' up to 66' x 600' with a few specialty farms (pullets, etc.) being 46' x 500'... And the farms are typically no less than 4 larger barns up to 12 small barns (43' x 500' is the new "small" barn) The existing 40' x 400' (standard size from about 1985-2000) are dropping like flies and were steel truss. The new barns are wood truss with drop ceiling and tunnel ventilation.
     
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