The 9,700-acre Tahawus property in the heart of the Adirondacks, acquired by the Open Space Insitute
By
Kim Elliman and Nate Berry
rollercoaster
The Real eSTaTe
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Summer 2009 saving land www.landtrustalliance.org
The Open Space Institute shares advice for the ride
CarL HeiLman PHoto
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ith the current economic crisis every land trust confronts new challenges and, hopefully, encounters new opportunities. The Open Space Institute (OSI) is not alone in facing enormous uncertainties in the real estate market and public and private conservation funding. Here are some thoughts and assumptions that are guiding our work as we manage through the downturn that may be of help to the land trust community. continued on page 22
Editor’s note: To help our land trust members through the economic downturn, the Land Trust Alliance has been running articles in saving Land and our e-newsletter with practical advice on how to weather the storm. The Open Space Institute in New York is not only a land trust that has protected more than 100,000 acres in New York state, it is also an organization that knows about conservation funding. Its Conservation Finance Program provides short-term, low-cost bridge loans and grants for land transactions in selected landscapes in the Eastern U.S, and through these efforts, OSI has made more than 60 loans and grants to protect 1.6 million acres in the last eight years.
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Many of OSI’s land acquisition projects are located within 300 miles of our New York City headquarters. Our primary conservation partner, New York state, has long been a leader in land preservation. Today, however, the state forecasts severe budget shortfalls over the next four years, as its most important direct and indirect source of tax revenue, the financial services industry, is in shambles. Nearly all public programs will suffer, and those that engage in land preservation are no exception. The implosion of Wall Street hits us doubly
hard in that many of our significant donors are (or were) employed in finance, and many have seen their equity decimated and incomes slashed. We do not know how dramatically contributions will decline, but we are not optimistic. While we are fortunate to have a sizeable endowment, it has fallen significantly in value (at the time of this writing) down roughly 30% from its peak. Although the absolute dollar amount of our endowment is important to us, perhaps more important is our purchasing power with respect to land. Oddly, despite the centrality of real estate to the economic crisis, we have yet to see prices in our region drop commensurately with the decline in the stock market. We now find
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ourselves not only poorer on an absolute basis, but also on a relative basis, in that our $1 post-crisis buys less land than our $1 pre-crisis. Needless to say, we are not wholly convinced of the popular argument in the media that dropping real estate prices make now an opportune time to purchase land for conservation, at least in our region. While our crystal ball is as clouded as anyone else’s, we expect real estate to fall still further. The simple takeaway for OSI is to be patient and proceed with a great deal of caution. How does this translate into action (or inaction) for us? First we are taking a close look at our historical funding sources, both public and private. On the private side, we are reaching out to our donors to urge them to continue to support OSI and make good on prior commitments. With respect to public funding, we are calculating a worst-case scenario in terms of New York state’s conservation funds. What we thought was an insulated source of funding has proved vulnerable in the downturn; New Schunnemunk Mountain in the York proposes cuts mid Hudson Valley in its dedicated in New York, protected by the Open environmental fund Space Institute from $300 million to $222 million (and even that level of funding is not a sure bet), and of that, only $58 million is slated for land conservation. Given the condition of the state’s finances, current and forecast, it is quite possible that things will get worse before they get better. Perhaps more important than determining the level of current and future public conservation funding is determining the level of unfunded commitments from public agencies to private conservation groups, i.e., how much new public money is already spoken for. Like many land trusts, OSI
mr. Jean mieLe
often acquires land of interest to government agencies that they cannot purchase directly for various reasons. New York has been very fortunate in recent years to be home to a number of landmark conservation deals. However, many of those transactions were executed by land trusts, including OSI, who now hold the properties with the expectation of state takeout. We estimate that land trusts in New York currently own real estate valued at $200 million, which the state has committed to buy. Even without any additional transactions, it would take the state years to clear the land pipeline under normal circumstances, and longer yet if the proposed budget cuts take effect. What’s more, there is no certainty that, given the declining real estate market, we will be able to dispose of the properties we have acquired for the state at the price for which we purchased them. Backlogs in deals are common around the country, at all levels of government. We would urge land trusts to be mindful of this before transacting on behalf of their public partners, as there could be the real risk of a prolonged holding period during which the property declines in value. We are also taking a fresh look at what it means to “buy right.” In a stable and steadily appreciating real estate market this is a relatively easy task, but given the uncertainty and dislocation of the real estate and other markets it has become much more difficult. The reality is that real estate prices in many cases are sticky and not subject to dramatic and erratic fluctuations like other asset classes. What currently guides our process in determining the right price is referencing the prices we were paying before the real estate and equity markets began appreciating at an accelerated pace in the late 1990s. In certain respects, then, we are looking at land values when the nation’s level of wealth matched its (depreciated) wealth today.
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In going through this exercise, we found that over time the increase in prices paid for raw land in many of our geographies closely tracked the price appreciation seen on improved property in the New York City metropolitan region (as measured by the Case-Shiller Home Price Index). Properties for which we were paying $1,200 per acre in 1997 (when the S&P 500 was approximately where it is today) were fetching $3,000 per acre in 2007. It is perhaps worth noting that the Case-Shiller analysis, looking back over 100 years, reveals that improved real estate in the United States has historically appreciated at a rate just higher than inflation, almost without exception, and where there were exceptions, prices eventually reverted to the long-term appreciation trend line. What does this say about where real estate prices need to go? Nationally, they have only fallen roughly two-thirds (down 30%) the amount they need to fall in order to revert to trend. For us in New York, prices have only declined 17.5% after a dramatic run-up of 163% from 1997 to 2006. Returning to trend would mean a further decline of 30% from today’s prices. Whether this means that OSI is today only willing to pay $1,200 per acre for a property that a seller (and possibly an appraiser) believes is worth $3,000 per acre is unclear. It will, however, be difficult to entertain valuations based on comparable sales data from 2006 or 2007 without a significant negative adjustment to reflect current market conditions. We cannot predict precisely where real estate prices should be or will go. We can only use what we know to inform our decisions. As with most land trusts, we generally target those extraordinary, one-of-a-kind properties with high conservation value. Sadly, the number of these unspoiled properties dwindles daily. Their scarcity allows them to defy, at least to a degree, the rules of the wider market. However, where there is a scarcity in product, there is also scarcity in consumers. OSI typically competes with wealthy individuals or established developers. By and
large, financing for developers has evaporated and wealthy individuals are fewer in number and less wealthy. We expect these two groups to be much more realistic in terms of prices they are willing to pay, if they are still in the game at all. A fundamental question all land trusts should seek to answer is what actually drove land prices higher in their region. Unlike many areas of the country where rampant speculation and questionable lending practices pushed real estate prices sky high, it was more the inflating and inflated wealth of the New York business commu-
have lost or could over time lose significant value. They know that their properties are unlikely to appreciate in value in the near term, and perhaps never will at the rate they witnessed in the last decade. These are the landowners we are targeting for land and conservation easement donations and bargain sales. As appraisals trend toward lower values, timing is critical to these potential donors. These transactions require both a realistic (and generous) seller or donor, and a property with high conservation value. Such deals are harder to find, but they do exist. Despite the current economic climate, we remain hopeful. The lack of development pressure certainly provides some breathing
We now have the opportunity to be more proactive instead of reactive in our work, and spend time engaging in land use planning and landowner outreach.
nity that spurred the real estate boom in our area. This being the case, we see few fire-sales and little forced selling, which has elsewhere put much more immediate and pronounced downward pressure on real estate prices. Many experts feel that for real estate to return to levels seen at the height of the bubble, income and wealth will need to return to those levels. This seems like common sense, even a mundane idea, but its implications, if true, are quite profound. Many in our area have seen income and wealth cut in half, meaning their 50% loss will take a 100% gain to get back to prior levels. It is our hunch then that real estate prices have a ways to fall before returning to 2007 levels. While this is logical to us, it is more difficult to find sellers who agree. However, there are some landowners who “get it” and understand that their properties room. We now have the opportunity to be more proactive instead of reactive in our work, and spend time engaging in land use planning and landowner outreach. Although it is likely that we will do fewer transactions in the short term, we look back on past recessions when we were able to acquire many iconic properties at severely reduced prices. We are optimistic that this downturn will be no different, provided we exercise discipline now.
Kim elliman is tHe oPen sPaCe institute’s Ceo, and sits on tHe boards of tHe wiLderness soCiet y, doris duKe CHaritabLe foundation wiLdLife Habitat PoLiCy researCH Progr am, natur aL resourCes defense CounCiL’s gLobaL LeadersHiP CounCiL, and tHe Center for Humans and nature, and serves on yaLe universit y’s forestry and environmentaL LeadersHiP CounCiL. nate Berry, ProJeCt manager for osi, is a yaLe gr aduate witH a degree in eConomiCs. For more inFormation about osi, PLease visit w w w.osiny.org.
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