Back to the Farm? Banks Stuck with Land Explore Sales for Agriculture

Try farming.

The advice sounds about as crazy as building a ball field in the middle of your corn crop, but some bankers are seriously considering farming as a possible solution to their real estate problems.

Their books stuffed with foreclosed and abandoned developments that have little chance to be finished in the near future, some banks are talking about returning the land to agricultural use. Banks could sell their foreclosed real estate to agribusiness companies, farm the property themselves or put the lots into a special tax category for environmental conservation.

"This is a very real issue for many community banks," says Justin Barr, managing principal with Loan Workout Advisers LLC in Chicago. "A number of our clients have been forced to revert to [considering] this strategy."

The examples of banks selling foreclosed developments to agricultural concerns are few and far between, and some experts argue against it, but conditions are dire enough to make farming at least something to ponder.

Many banks are drowning in other real estate owned properties and are desperate to get the OREO off their books. Of the 25 banking institutions with the highest percentages of OREO to tangible equity at Sept. 30, about a third failed in October and November. Some banks have had outlandish ratios. The RiverBank of Wyoming, Minn., which failed on Oct. 7, had a ratio of OREO to tangible equity of about 7,000%.

At the same time commodity prices have reached historic highs, prompting a spike in the value of agricultural land.

"Land is priced to perfection right now," Creighton University economist Ernie Goss told American Banker Magazine this month. "Yields are strong, commodity prices are strong, and the dollar is weak, which fuels exports."

Long-term factors also seem to favor agriculture. Meredith Whitney, the chief executive of New York-based Meredith Whitney Advisory Group LLC, predicted in an August panel hosted by American Banker that food production will be one of the top national issues.

"The next 25 years will be characterized by real supply/demand issues, all related around population growth and lack of food," Whitney said in the panel discussion. "The U.S. has the opportunity to become the equivalent of Saudi Arabia of food. Every 25 years our economy reinvents itself."

Though Barr says he is unaware of a bank completing the sale of a lot to a farming interest, he believes that kind of deal will happen soon. He has spoken with investors who have discussed creating funds for that specific purpose.

"Some banks think they're better off holding the property and continuing to extend and pretend," Barr says. "The days of that strategy working, however, are most definitely numbered."

The most likely areas for these types of deals are the farthest reaches of the suburbs, where farmland was recently acquired and slated for residential development, Barr says. It makes sense for some of those properties to be returned to agriculture use.

Even with factors that favor agriculture use, it would be a financial stretch for many community banks to sell these lots to farmers, says Jon Winick, president of Chicago-based Clark Street Capital Management LLC.

"Trying to sell it as farmland gives you a much broader potential pool of buyers, but it's still going to be a pretty big haircut," says Winick, who advises banks on real estate loans.

One real estate broker who sells OREO on behalf of two Chattanooga, Tenn.-based community banks says he has seen little interest in converting a half-finished residential subdivision to farmland.

"It would be really hard to knock down houses and turn it over to farming," says Pep Grimes, president of Cloudland, Ga.-based Lookout Mountain Real Estate LLC, whose clients include $425 million-asset Cornerstone Bancshares Inc. and $651 million-asset First Volunteer Corp.

Three community bank executives interviewed for this story — Mike Brown of Harbor Community Bank in Palm City, Fla., Washington Banking Co.'s Bryan McDonald in Oak Harbor, Wash., and Gary Petersen of Lakeside Bank Holding Co. in New Town, N.D. — have not seen any banks in their region sell foreclosed development properties to a buyer intending to convert it for agricultural use.

A more realistic option for many community banks is placing OREO in a conservation easement. For a bank that can afford it, such a move can produce significant tax benefits, says Walter Hall, co-founder of Atlanta-based Yukon Property Consultants LLC.

"While the land is illiquid, the tax benefits are not as illiquid," Hall says. "The tax benefits are more valuable than a fire sale of the land."

But even a quick look through the websites of community banks that advertise their foreclosed properties are for sale turns up land that appears more appropriate for farming than housing families.

The $188 million-asset Montgomery Bank & Trust of Ailey, Ga. lists for sale 183 acres in Vidalia, Ga., the namesake town of Georgia's famous sweet, yellow onions. The bank describes the property it describes as an "agricultural tract with thinned timber and numerous home sites. City water available."

Montgomery Bank's asking price is $675,000. Calls to two bank representatives, Jeff Palmer and Andrew McIntyre, were not returned.