Valuing Fractional Share Of Farmland For Sale To Other Owners

[leasedfee]

* There is not much of an outside market for this type of partial-interest farmland property, so I am the market, and whatever price I am willing to pay is essentially the current "market price". If the seller does not want to accept it, then their asking price is too high. (Econ 101) We have no restrictions that limit how it can be sold, so the seller can always put their share up for public sale. (I know, not easy to do...)

My bold added. Public sale is a market. You're the most like buyer of the partial interest, true. But you're not the market, hence market value, for the partial interest. You have a vested interest, a non-arm's length interest in the property. In some cases a person in your shoes may pay no discount as it behooves you to consolidate the interests or your relationship with the other parties may be jovial or angry, happy or sad. I'm somewhat more of the "market" as I care nothing about the selling party. Right here and now, I'll offer $1 for the deeded partial interest. Okay, I'll raise my bid to $100. Silliness aside, a farmer or land investor from rural Illinois will bid higher and take you towards market value of the partial interest.

 

[Mark K]

If you had to sell your interest in the real estate, what discount from market value would you feel is fair for your portion?

On a side note, when this is resolved I'd encourage you to have a good buy/sell agreement created to avoid this situation in the future.

 

[KHS445]

Are you trying to value the farmland or the partnership? The reason I ask is the partnership may have more or less value than the farmland. If it is a straight partnership (similar to stocks, bonds, REIT) where none of the partners has contributed anything other than their original investment, valuing the land and trying to decide the appropriate discount is the way to go. However, if one of the partners has contributed time, equipment, storage, etc. while the others have sat back and shared the benefits equally, the discount may need to be adjusted either positively or negatively to compensate/off set these differences.

Several other things to keep in mind, some of which should be included in the discussion regarding the appropriate discount:
- If offered for sale to the general public most likely you will pay some sort of commission to list the property or if you go the FSBO route the buyer may have a buyer's agent who will figure their commission into the offer.
- You are offering the partner a buyout. No marketing time, no holding/carrying expenses waiting for the property to sell. In your appraisal from two years ago what was the marketing/exposure time estimate?
- I am assuming you are offering a cash out vs. an installment sale. Many times in my area farmland will initially sell using a land contact or a seller's mortgage.
- You are offering your partner the liquidity of cash.
- How are crops that are either in the ground or in storage being handled?
- What is the cost of money for the purchasing partners? Do you have to liquidate investments or borrow to complete the buyout?
- Is the selling partner wanting to walk away free and clear? Might you offer them one of the parcels of land as a partial payment and let them sell it (all expenses being theirs) for whatever they can get for it and then cashing them out of the remaining parcels, possibly at a smaller discount.
- Then there is the all important PITA factor, which may negate everything else just to get the deal finalized.

Your situation is really not a great deal different than those encountered in valuing real estate. You have a buyer and seller and each has their own motivation and their own idea of value. The problem is to arrive at a point (a meeting of the minds) where no one may be completely happy but all can agree that it is the best solution for all involved. For years when doing divorce appraisals I have said, if I can upset both sides my value is probably about where it should be.

Good Luck