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HomeMy WebLinkAboutEastern Shores, Maryland 2003Memorandum To: Joshua Y. Horton, Supervisor and Members of the Town Board I From: Moratorium Team 'it,~/¢'~P~ Re: Report on Eastern~' ~" ~ ~~hore~s, M~ryland Date: May 20, 2003 Enclosed please find a copy of the report compiled by Valerie Scopaz and Lisa Kombrink in which the findings of their trip to Eastern Shores was recorded. Also attached are three documents that were obtained as part of the follow-up research on the question of equity. To: Valerie Scopaz From: Lisa Clare Kombrink Re: Farmland Equity Issue Date: May 19, 2003 Here is the summary of my follow-up discussions on the equity issue in Maryland. Kyle Hutchinson, son of Richard Hutchinson, the farmer we met with on our trip to MD, is a lending officer with Farm Credit in East New Market, MD. He advised that in his experience, farmland is appraised not as residential use when a farmer applies for a loan. Rather, it is "accepted practice" to appraise the property according to its value as a farm. He also explained that, in his opinion, upzoning in Baltimore County to one dwelling unit per 50 acres has increased land values for loan purposes. He noted that where development rights are sold, depreciation of 30 per cent is applied on an appraisal. He then referred me to the Principal Appraisal Officer at Mid-Atlantic Farm Credit, Dale Colegrove for further information. Dale Colegrove explained that when preparing an appraisal of farmland, he uses a.comparable sales approach, based on available records. Separate records are kept depending on property size and type. He also referred to the 30 per cent figure for land values where development rights have been sold. He could not identify any specific Federal Regulations guiding his methodology, and maintained that the appraisal process used by Farm Credit is not linked to any federal rules. When deciding whether to make a loan, he Said that the lender looks at several factors, including the value of the land, the ability of the farmer to repay a loan, the total indebtedness of the farmer, and the overall viability of the farming operation. These two conversations supported other information we gathered that equity has not been adversely affected due to upzoning, since farmland is not appraised according to its speculative residential development value. Rather, a farmer's ability to borrow is based on many considerations: the value of the land as farmland, and aspects particular to the farmer under consideration: his cash flow, history of operation, total indebtedness, and ability to repay the loan. MEMORANDUM To: Re: Date: Moratorium Group Report on Field Visit to Eastern Shores, Maryland March 26, 2003 This memorandum summarizes our recent visit to the Eastern Shore region of Maryland. The purpose of this field visit was to find out whether Talbot County's zoning and farmland preservation programs were successful. Back.qround and Context: Talbot County lies southwest and southeast of major cities of the Mid-Atlantic Seaboard .... (Baltimore, Washington, D.C., Philadelphia). It is almost entirely surrounded by the Chesapeake Bay and its tributaries with approximately 600 miles of shoreline. There are five incorporated towns within its boundary. Nearly 40% of the population of Talbot County lies within these towns. The county encompasses over 172,000 acres of land, of which 110,000 to 120,000 are farmed, and about 47,000 are forested. The land has been in active agricultural production since the 1800s. Most dairy, cattle and hog operations have been phased out or relocated to communities or states with less stringent environmental regulations. Chicken raising currently is the dominant sector of the agricultural industry along with the growing of feed crops, such as corn, soybeans, wheat and barley. Of the more than 10,928 acres of developed land, about 1,441 acres are commercial or industrial in nature. Similarities: For reasons of comparison, it is worth noting key similarities. Like Southold, Talbot is a very popular seasonal tourist destination. Like Southold, Talbot's demographics are skewed with a high proportion of affluent retired population. Twenty percent of its population is aged 65 or older. Like Southold, Talbot's traditional economic engines of agriculture and fishing are being diversified by changes and growth in the tourism and service sectors. Like Southold, Talbot's goal is to manage growth so as to protect its environment, its rural quality of lifel its historic character, prevent sprawl and traffic congestion, address affordable housing needs, and prevent the disappearance of farms and open space. Land Use Controls in Effect: In 1984 the State of Maryland declared a Chesapeake Bay Critical Area, which encompasses all land within 1,000 feet of the shoreline or the inland edge of tidal wetlands. This land represents 38% of Talbot County's acreage. Within the CA, new development within 100 feet landward of the head of tidal wetlands generally is not permitted. Clearing is restricted within this area as well. The State rarely permits any intrusion or construction within the CA 100 foot buffer. In June 1991, Talbot County debated the merits of twenty, thirty, forty and fifty acre zoning. According to the then (and still) Planning Director, half the citizens were in favor of twenty acre zoning, the other half did not want zoning to change. Some citizens wanted thirty to fifty acre zoning. With the full support of about 50 per cent of the agricultural landowners, the County ultimately decided to adopt twenty acre zoning for all farmland within its borders. Land within the CA (1000 feet from the shoreline) is zoned one lot per 20 acres. Developers of land in the Rural Agricultural Conservation ("RAC") Zone can chose between three options under 20 acre zoning. They are described here as follows: Rural: o This option permits 1 lot for each 20 acres plus 3 additional lots (regardless of the size of the original property as it existed in June of 1991). o This option allows a larger property to be split into two or more 20-acre lots. o The subdivided building lots must be 2 acres in size minimum. o The remaining large lot (with or without a building envelope) can be sold separately as a farm but cannot be subdivided. o Example: a 100-acre lot divided by 20-acre zone would yield 5 lots, plus 3 additional for a total of 8 two-acre lots. Cluster: o This option permits 1 lot for each 10 acres plus 3 additional lots (regardless of the size of the original property as it existed in June of 1991). o All development must be placed onto 25% of the original parcel. o No building lot may be less than two acres is size. o The remaining 75% must be kept and restricted to agricultural use. Retail sales of agricultural products generally are not permitted from this portion of the land. o Example: a 100-acre lot divided by a 10-acre cluster option would yield 10 lots plus 3 additional for a total of 13 lots. The 13 lots must be within 25 acres. 75 acres remains open space. ClusterFFDR: o This option permits 1 lot for each 10 acres times two plus 3 additional lots. The practical effect of this is to permit the equivalent of five acre zoning except that the additional lots 2 must be transferred off the property into designated growth zones. o All development must be placed onto 25% of the original parcel. o The remaining 75% must be kept and restricted to agricultural use. Retail sales of agricultural products generally are not permitted from this portion of the land. o Example: a 100 acre lot divided by a 10 acre cluster option times two would yield 20 lots plus 3 additional for a total of 23 lots. Ten of those lots have to be transferred into the 25 per cent growth zone. o The sale of the rights takes place on the private market. The transaction takes place entirely between willing sellers (original land owners) and buyers (developers seeking credits). How is this Approach Working? To date, this approach appears to be working well. Seventy-four (74) percent of new growth is taking place around existing urbanized areas of the County. Although the County has not set definitive growth boundaries around these areas, there is a proposal to do so. In actual numbers, about 62 lots a year are created outside growth boundaries. Only two landowners have exercised the TDR option noted above. The County planners feel that this will change as development pressure increases and large scale developers looking to do large suburban subdivisions move into Talbot County. An aggressive land preservation program supplements the zoning program. Maryland has a transfer tax program similar to New York's but the tax is primarily on the transfer of land from agricultural use to residential use. Farmer to farmer transactions are exempt. A portion of the local proceeds (25%) must be remitted to the State for statewide redistribution of land preservation funds. Talbot's average annual income from this tax is about $300,000 a year. Talbot typically is able to leverage this money to obtain additional funding for a total of about 1.2 or 1.5 million a year. Talbot typically has an average waiting list of 18 to 22 landowners wanting to sell their development rights. The average wait on the list is 3 to 5 years before rights are purchased. The average per acre cost of development right per acre is about $1,800. The average price of raw land with development rights is about $3,500 per acre. This value has been rising in recent years. Since 1983 Talbot County has preserved over 27,000 acres of farmland using two different types of rights purchase programs. One is a straight purchase of 3 development rights on prime farmland in large blocks, Rural Legacy. The other is a greenbelt-based program, MALPF. They are described below: · MALPF Farmland Preservation: o All rights purchased under this program must be from land that meets strict criterion: · A minimum of 50 acres. · More than half of the land being acquired must have prime soils. · The land should be contiguous to other preserved land. · ** The level of development threat to a farm does not improve its ranking. The primary goal of this program is to preserve the best land. *** Rural Leqacy: o Land purchased under this program must meet environmental ranking criteria that can include quality of farm soil but which do not rank it a top priority. · This program enables the preservation of other sensitive environmental features outside of the State designated Critical Area (1000 feet from any shoreline). *** The local land trust runs a Farm Rescue program which tries to purchase farms that may be key to preserving continuity of farmland but which are not eligible for preservation under these programs because they don't meet the criteria noted above. *** Downzoning (an increase in the number of dwelling units permitted on a lot) is permitted only within the urban growth areas around the five towns within the county. Equity :Issue During our first meeting with Talbot County Planning Director Dan Cowee and his Deputy, Frank Hall, they emphatically stated that upzoning to 20 acres had not adversely affected farmer equity. Dan Cowee, in particular, shared that this was a serious concern in the farming community before and after the upzoning. He pointed out that land values had actually increased since then from appx. 2,000/acre in 1991 to between 5,000 - 6,000/acre today. Cowee noted that Talbot County had actually considered upzoning to 40 or 50 acres, and that at least 40 percent of the Farm Bureau members supported this because they wanted to continue farming. 4 Farmer and Talbot Planning Board Chair, Richard Hutchinson, reiterated his opinion that farmer equity had not decreased due to upzoning. He mentioned a Farm Credit study on the equity issue, which apparently was not widely circulated because it did not support the argument that upzoning would adversely affect equity. He stated that the report showed some loss before and after the upzoning, but that it did not support a substantial reduction in value. Hutchinson also mentioned that equity is not the only factor in the Farm Credit loan program: both equity and cash flow must be considered. He explained that an appraisal would be discounted 30 per cent for "after value" where development rights have been sold and a loan is sought through Farm Credit. Development rights currently are being purchased at an average price of $1,800 per acre. Sales of raw land without development rights are selling for an average of $3,500 per acre. Gail Owings, Director of Planning and Zoning for Kent County, MD, confirmed that Federal regulations determine what must be included in an appraisal for a Farm Credit loan, and mentioned that the speculative use of the land cannot be used as a basis for the appraisal. We learned of two other studies on the equity issue: one underway at the MD Center for AgroEcology by Sara Taylor Rogers and another by the Valley Planning Council out of Baltimore. We have requested copies of these reports and are very interested in the analysis. The information contained in the studies will be addressed in a separate memorandum at a later date. Owings confirmed that in Kent County, MD, there has not been any change in equity due to upzonings. She noted that most of the land in agricultural production in her area is at 30 acre zoning. She revealed that the farming community had initially felt "very threatened", but that now farmers are bidding against each other to acquire more land. Finally, Maryland offers generous tax benefits for land in agricultural use, and tax rates for such land are based on value as farmland rather than as residential use. Conclusion: The experts with whom we consulted expressed their strong opinion that upzoning has not adversely affected farmer equity. They also pointed to Federal Regulations, which may cast doubt on the apparent use of "highest and best use" of the land as the sole criteria for determination of value for farm loan programs. 5 Flexible conservation programs Growth Boundaries and Ham/et Centers A large component of Talbot County's preservation strategy relies strongly on clearly identified "Growth Boundary" areas (outside hamlet centers), which are proposed to serve as receiving sites for development rights transferred from proposed green belt areas. The boundaries are based on historical trends and "landowner expectations." The areas were first created in 1974, and then updated in 1990 and 1997. The officials we met with all stressed the importance of agreed-upon areas available for more intense development which are not currently in farming, including the growth boundaries and hamlet centers. Density in these areas could be increased through the transfer of development rights. If water and sewer hookups are available, development may occur at 4 units per acre. With water availability only, building may take place at one unit per acre. However, Frank Hall pointed out that this particular emphasis, and the eventual "squeezing" of areas remaining for development, will conflict with the "no growth" political platform of recently elected County officials. Density Incentives and PDR In Kent County, the Code offers a variety of generous and flexible incentives to encourage landowners to sell development rights. These may include allowances for the construction of a larger house or a longer dock on a residential parcel. The impact of these bonuses is less since often the parcels are quite large. The County allows clustering of residential development on agricultural parcels at a rate of 1/10, with a required 600' setback from the road. Under these provisions, buildings are to resemble a collection of farm buildings rather than a more traditional cluster subdivision. According to Gail Owings, only three of these type developments have been done in 12 years. She did not consider this program successful. She expressed reservations about the clustering of homes to resemble farm buildings - saying that it had not worked out visually as they had hoped. She highlighted that most development outside the growth boundary areas occurs at a rate of 1/30. Equity concerns have not been triggered. Landowners in this group are split between active farmers and "martini farmers" a/k/a gentlemen farmers. Within the second group, owners are willing to donate or sell development rights, but with greater concern that they maintain equity. All or most development outside the growth boundary areas over the past 12 years has originated with the martini farmers. 6 At this zoning, 1/30, development is allowed on 10 per cent of the property, with 1/10-design standards. However, if the property abuts a conservation easement, 1/10 development cannot occur immediately adjacent to it. A 600' setback from the property line is required, and the reviewing Board for the development must make a finding that the project will not adversely impact farming or hunting. Accessory Uses on Farm/and Kent County encourages flexible "accessory" or related uses on farmland. For example, retail sales are allowed on parcels of 20 acres or more. Farm buildings over a certain size (20,000 sq. ft.) that are used for processing of agricultural products must obtain a special exception from the County Zoning Board. Criteria considered include whether the use is good for the community, whether it constitutes a natural-resource industry and whether it is good for the environment (check if more...) Retail buildings must be landscaped if approved. In Baltimore County (appx. one and a half hours away), Owings explained that one vineyard (Boardy) had been granted permission for wine tastings, dinner and related activities. Owings also referred us to the Chesapeake Fields Institute, which searches for alternative markets for agricultural products. In sum, this approach favors allowing farmers to utilize a number of tools in addition to farming alone, to make keeping the land in agricultural production as profitable as possible. There appeared to be no concern of expansion of secondary uses to the detriment of agricultural uses. However, keep in mind the twenty-acre minimum per agricultural use. Housing When asked about the impact of farmland preservation and twenty or thirty acre zoning on affordable housing, Ms. Owings of Kent County felt the middle income housing market was a more pressing issue presently. However, due to ongoing gentrification and relocation of retired people into the City, she anticipated that affordable housing was likely to become of greater concern. Both Kent and Talbot County allow transfers of development rights into the towns and this is accomplished through provision of water and sewer service. For example, in Kent County, development within the growth boundary can take place at % acre density with public water and can take place at the ¼ acre density with public water and sewer. Most service workers travel to Talbot County from adjoining counties where land values are lower. 7 Summary Some conditions in Kent and Talbot Counties differ markedly from Southold Town. The average size of active farms, the commitment to farming among the farming community, and the strong desire of new residents to keep large parcels open and minimally developed make the planning landscape unlike Southold. Nevertheless, the emphasis on hamlet growth boundaries, use of TDR, and incentives coupled with sale of development rights seen in MD provide useful guidance on tools for use in Southold. The upzonings have been met with support, including among the agricultural community. Officials advised that 5-acre zoning would not be sufficient to protect remaining farmland. When we explained the amount or remaining farmland and undeveloped land, Talbot County Planning Director Dan Cowee remarked "you're screwed", and further expressed his opinion that we had waited too long to act. Despite his reservations, we must press ahead to put forward all available tools to encourage the preservation of remaining land and the rural quality of the Town. Sources: Daniel R. Cowee, Planning Director, Talbot County Frank Hall, Assistant Planning Director, Talbot County Gail Owings, Director of Planning, Kent County Richard Hutchinson, Planning Commissioner, Talbot County 8 THE EFFEcTs OF AGRICULTUkAL ZONING ON THE VALUE OF FARMLAND February 22, 1991 Submitted to: State of Maryland Planning office By: Resource Management Consultants, !nc. 12!2 New York Ave., NW 'Suite 345 - Washington, D.C. 20005 Tel: (202) 408-5111 Authors: Robert J. Gray Carol Fesco Christopher Purdy Diane Vosick ACKNO~LE DCA~ENT S_ Resource Management Consultants, Inc. wishes to acknowl- edge the significant contributions of a hum%bet of individuals who made the preparation of this report possible under an ex- tremely short tLme table. We would like to specifically note the assistance of Ken Noble, of the Maryland Office of Planning, in helping to other data. We also like to thank analyze ~he land sales and Larry Duket and'his staff, Gary Schlerf, Mike Northrop and others for their efforts in putting the land sales informa- tion together. Roland English, Ed Thomas and JLm Noonan, of the Office of -Planning,.--were extremely helpful in providing additional data and general ~uidance throughout the ~onduct'- of this study..- Henry Riley, .~ary!and State Department of Assessments and Taxation, provided us with data on land sales and other information relating to the agricultural transfer tax from his office. Bill Powell, from Carroll County and ¥~ke Cirino from Anne Am-~ndel County, provided us with additional information on the location of land sales within their counties. SUMMARY OF FINDINGS MAJOR CONCLUSIONS In summary, data from actual land sales in four counties with agricultural zoning show no evidence of decreases in land values over a period of fif~eD~ years. General economic trends and grovrth pressures seem to affect land sale prices to a much greater degree. ._ _ Interviews with major agricultural lending institutions in Maryland reveal that the ability of the specific farm enterprise to repay a farm loan is the most Lmportant criteria for approving a loan. This is true for both real estate and operational loans. The farm owner's management a~ility and experience are also ~portant factors. ktthough the market value of the land is considered dur- ing the loan making process, it is not the overriding factor in determining the quality of the loan. The farm enterprise must be able to "cash flow" based upon the actual farm business, dairy, cash grain, poul- try, fruit or vegetable crops. INTRODUCTION Over the past fifteen years six Maryland counties (Anne Arundei, Carroll, Baltimore, Frederick, Montgomery and Caroline) have enacted agricultural zoning ordinances as part of local efforts to protect their agricultural land base and to ensure that farming remains economically viable. With the exception of Caroline County, which only recently enacted its agricultural zoning ordinance, the other five counties have had zoning in place for more than a decade. Maryland has over 450,000 acres of restrictive use lands in Arkne Arundel, Baltimore, Carroll and Montgomery Counties alone .Wee Tables_..! - 4 in Appqndix). Agricultural zoning is a land management technique wh'ich - attempts tO protett" farmland-from sprawl development. It works by designating .an area for agriculture, and then re- stricting the density of residential, and co~ercial develop- ment in the agricultural zone. The intent of agricultural zoning is to pro~eCt both the land base and~ infrastructure of farming by making it difficult to develop agricultural land for non-farm uses. However, this goal aside, farmers are concerned that re- strictive zoning will depress the value of their land, reduce their equity and ~pair their ability to borrow money. Some banking institutions have indicated they agree with farmers that zoning res=fictions will affect land values and a farm- er's equi=y. This study will determine if restrictive zoning influ- ences the value of agricultural land in Maryland. The study will also explore the influence zoning has on farm equity: and whether o~ not it impairs the. ability of farmers to bor- row money. The analysis will rely on data from Maryland counties which have enacted zoning ordinances. In addition, two counties, without agricultural zoning, will be used as "control" counties to determine if farmland values varied ~ig?ificant!y between agriculturally zoned counties and those ]urlsdictions which permit low density development within their agricultural areas. OVERVI EW For many years local policy makers and farmers have been working to ensure that agriculture remains a strong componen% of the economy. Protecting farmland and farm related infra- structure has proven to be an essential part of local plan- ning efforts. Of all the available methods to protect farm- land, zoning is by far the most common. The National Agricultural Lands Study, conducted'in 1980, found that 270 local jurisdictions had implemented agricultural zoning ordi- nances. A recent update of this study found that jurisdic- tions using agricultural zoning had increased to ap- proxLmately 500 counties and municipalities. Of all the land management techniques available to pro- tect farmland, zoning has been most effective in terms of the quanti~y of land it ha~ protected. It's estimated that more than 60 to 70 million acres of farmland ~ covered by agri- cultural_zoning nationally. Agricultural zoning is most effective when used in com- bination with other land management techniques. Agricul- tural zones are often combined with urban growth boundaries, co~uunity facility planning and other resource protection programs. In addition, agricultural zoning is frequently used in conjunction with economic incentives, such as the purchase or transfer of development rights, agricultural dis- tricts and various tax programs. By combining land protec- tion techniques, decision makers can ensure that agriculture will be a strong part of the local economy. pLrRPOSE OF AGRICULSK/RAL ZONING Co~munities have adopted agricultural zoning for a vari- ety of reasons. These have been clearly articulated in the ordinances and plans written by the local jurisdictions. The following is a list of purposes extracted directly from. lo- cal zoning ordinances. "To preserve commercial agriculture as a viable perma- nent land use and a significant economic activity within the cozmnunity." Washington County, Minnesota "To maintain a sufficiently large scale of agriculture to assure the economic feasibility of necessary supporting services to the agricultural sector." Whatcom ' County, Washington -2- "To protect agricultural operations from disruptions as- sociated with neighboring n~n-agricu!tural development." Pitkin County, Colorado "To maintain, preserve and enhance agricultural lands." Boone CountY, Illinois Agricultural zoning recognizes that farming is a b~si- ness -- one that requires contiguous acres of land and is free from constraints of non-farming activities. In sunuuary, zoning provides an economically viable environment for farm- ers to-make a suitable return on their investments. MZTHODOLOGY Sales data of land sold wi=hin the agriculturally zone~_ districts of Anne krundel, Baltimore, Carroll, and Montgomery Counties have been examined tO identify the existence of a relationship between restrictive zoning and land" p~ic~s. Frederick County data was not analyzed due to.difficulty in obtaining land records. Caroline County's restrictive zoning was adopted in 1990; therefore, not enough data was avail- able for a comparative analysis. Sales data were collected from the reports of agricul- =ural land sales from Rufus S. Lusk and Sons, Inc.. The sales price, acreage involved and location was noted for all land sales of twenty acres or more within.the agriculturally zoned areas. Data was collected for three years before re- strictive zoning and for a number of years after. The infor- mation was compiled into charts to show any trends in land values before and after restrictive zoning was established. In addition to actual land sales, other supporting data were examined, including Agricultural Census information, lo- cat assessment and tax data, lending institution land values and the fair market appraisals of farmland undertaken by the Staue Easement Acquisition Program. Lending institutions were contacted to determine how lending policies were affected by'the imposition of agricul- tural z~ning. The lending institutions contacted included the Farm Credit Banks of Baltimore, U.S. Department of Agri- culture, Farmers Home Administration in Delaware, which ser- vices Maryland as part of its district, and a number of com- mercial banks which provide some agricultural financing. -3- GENEKAL ECONOMIC INFORY_ATION Economic conditions and governmental actions in the/ 1970s and early 1980s greatly affected farm land values. This was a period of fluctuating land prices, and a major re- alignment in the agricultural conuuunity. Following the sale of grain to the Soviet Union in the early 1970s, agriculture undez-went a period of rapid expan- sion. This was particularly true for major commodities such as wheat, feed grains and soybeans. International exports of these coam~odities reached unprecedented heights and by 1980 U.S. export sales had reached a. record $40 billion. In re- sponse to bullish commodity sales, farmers aggressively pur- ckased land. ks-a result of this demand, farmland prices rose s'~eadily th~o-~gh the la~-1970s to th~ early 198~. However in the' early'1980s a world wide' recession'~ oc=i cuffed, accompanied in the U.S. by high interest rates and double digit inflation. International markets for agricul- tural exports slumped. In addition, from 1979 to 1981, the Federal Reserve Board raised interest rates to over 20% to · combat inflation. Az a result, it was more expensive to buy land and sales slowed (See Table 5 in Appendix). However, agricultural production continued at high lev- els. By the mid-eighties the farm economy was reeling from one of the worst recessions in years. Prices for most com- modities dropped sharply precipitating a steep decline in farm land prices. In the .Midwest prices for farmland dropped by as much as 60% from record high prices in the late seven- ties. This decline in land prices also occurred in Maryland as average prices dropped from $2,530 in 1981 to $2,197 in 1986. However, this decline was much less severe since land values were buttressed in the region by development pres- sures. AGRICLrLTURJE ZONING AND FARM OWNER EQUITY The argzunent most often raised in opposition to land use restrictions' is that new zoning will reduce the fair market value of agricultural land, thereby reducing the borrowing powe= of farmers who need to secure both real estate.and op- erating loans. By reducing the market value of their farm- land, farm owners and operators will have less collateral availa_ble to secure loans. It is also argued that once aqri- c~i~ural zoning restrictions are in place, lenders w~li ~ca±l -4- i~" outstanding loans and actually force farmers out of busi- ness. This argument is very powerful, for if correct, it would severely weaken the financial stability of farming which is a capital intensive enterprise requiring the use of loans on a fairly frequent basis. As part of our' study, major farm lending institutions were contacted to assess how bankers viewed the method of restric- tive zoning on land values. The Farm Credit Bank of Baltimore is part of the Farm Credit System. It is a private lending institution and the largest single agricultural lending institution in the coun- try. The Farm Credit Bank of Baltimore ser~e~ a large dis- trict'in the mid-Atlantic region including Ma~-yland, Pennsyl- vania, Delaware, West Virginia, Virginia and the Caribbean basin. In this region, it has made over three billion dol- lars in loans and has about 47% of the agricultural lending -market in M~-ryland. The Fafmn Credit~afuk has ~o divisions, the Federal Land Bank Division which makes real estate loans, -and -the ' Production Credit division -which makes operating loans. -- Farmers Home Administration is a federal agency located within the U.S. Department of Agriculture. It provides both real estate and operating loans to farmers and holds about 23% of the agricultural loans in Maryland. Co~u~ercia! Banks provide a combined total of about 30% of the state's agricultural loans. However, most commercial banks do not have more than two or three percent of their to- tal portfolio in agricultural loans. The following issues were discussed during interviews with the lending institu- tions: (z) (2) ('3). (4) (5) The overall eligibility criteria of the lend- ing institution for making both real estate and op- erating loans; The most important'factor in making a (both operational and real estate); farm loan How the fair market value of detel-mined; agricultural land is The affects of agricultural zoning and other land use restrictions on eligibility decisions; and Other important policy. factors which influence lending Tkis informal survey revel!ed that similar policies ex- ist among lending institutions regarding agricultural loans. The management ability and experience of the loan appligant ~ are important considerations in evaluating any loan request. However, the Single most important factor in granting an ag- ricultural loan, stated by all institutions, is the ability of the farm. enterprise to repay the loan. The collateral value of the farmland is not as important in determining whether or not a loan will be granted. The collateral value of the farmland is used to set the maximum amount of money available to the farmer. The Fazm Credit Bank will loan up to 85% of the fair market value of the farm under consideration. Farmers Home Administration can loan up to 100.~ o_f the appraised fair market value of the farm~ Com- mercial banks on the other hand will not go higher than 70% and U.~ual~y stay within the 60 to 70% range of fair market value. When asked how agricultural zoning might affect loan making decisions, most of the lending institutions referred back to the ability of the farm enterprise to "cash flow" in order to repay the loan. However, Farmers Home Administra- tion did indicate that the potential development value of the farmland was important since the agency will loan up to 100% of the fair market value of the land. The Chief of Farm Pro- grams for Farmers Home Administration, .located in Dover, Delaware, gave his personal opinion that if the proposed one dwelling unit per twenty acre restriction was. implemented statewide, the fair market value of farmland could decline. However, when asked, he could not provide any documentation of a loan being denied in any Maryland county with restric- tive zoning. In addition to the lending institutions contacted by RMCI, the Chesapeake Bay Foundation also contacted- lending institutions in Howard, Queen.Annes and Talbot counties and an administrator with the Farmers Home Administration. These findings corroborated ours -- that farm loans are based pri- marily on the ability of the f'arm enterprise to repay the loan. Our findings in Maryland were corroborated in a study by the Department of City and Regional Planning at the Univer- sity of Pennsylvania for the Mid-Atlantic Regional Office of the National Park Service. The study surveyed agricultural zoning programs tb_rougbout the countz-f~ to determine what ef- fect they had on the ability of owners to obtain loans. The -6- study also surveyed lending institutions in the Pinelands re- gion of New Jersey to obtain information on loan practices and policies. ' In the nationwide survey of communities with agricul- tural zoning ~currently in place, 65% of the counties and townships surveyed said that concerns about the ability to obtain farm loans in agricultural zones had never been raised in their jurisdiction. Another 28% of the connn'unities sur- veyed stated that the issue had been raised, but they had not received any complaints after the zoning ordinance had been adopted. Despite the fact that l~nding institution in the Pine!ands regions of New Jersey expressed some concern over agricultural zoning restrictions and the fair market value of farmland, they reported no situations wher~ farmers were unable to obtain farm loans as the result of the agri- cultural zoning. The study also noted that the state of Hawaii enacted agricultural, zoning sev.era~ years ago, along_with a statute which "conditionally waives" the zoning restriction if the- agricultural zoning is the sole reason a land owner is un-' able to obtain credit. There have'been no requests for a waiver since ~mplementation of the legislation. A SURVEY OF LA_ND VALUES FOR SELECTED MJkR~ COUNTIES The following illustrations provide a comparison of land values before and after agricultural zoning was adopted in: Anne Jkr~ndel, Baltimore, Carroll, and Montgomery counties. To provide a comparison of general price trends in Maryland dur- ing the s~e time period, Cecil and Howard counties were also studied. It should be noted that the raw Lusk data does not separate actual land prices and the cost of houses or other improvements on the land in the sales price provided. In ad- dition, there is no indication in the Lusk data of the pur- pose the buyer has for the land' and whether or not the sale was made between fa~i!y m~bers. The extreme high and ~low end sales have been eliminated in an attempt to remove the effect inter-family sales and other unusual cases would have on deters, ining on accurate average sale price for the county. Findinqs: The data indicates no specific trends in land values as a result of the establishment of restrictive zoninq ordi- nances. -7- ¢icultural Mhd Sales Anne Am-undel county Agricultural Land sales Sumnnary stats. Stats. F~ p~iCE/ACRE LOW Sm=mazy - VG - NUMBEK HIGH .... 1978 $2,442 17 $991 1979 $9_,292 22 $,6,250 $895 1980 $2,706 '9 $5,318 $2,706 1:20 agricultural zoning enacted in 1981. 1983 $2,007 10 $5,128 $469 1984 $2,364 '13 $5,833 $343 1985 $3,055 12 $5,603 $862 1986 $3,006 13 $5,122 $365 1988 $4,504 6 $5,640 $2,692 The Anne A-~undel County .1978 General Plan, as part of the:~ Co=nt~'s Growth Management Program, listed as one of its land use goals, the preservation of farm land and the _ ........ omi of a viable agricultural industrY. The plan t suited for called Ior directing growth away from areas bes agriculture and for programs presez-~ing agricultural land. Anne Am-undel found that its original zoning restrictions of dwelling unit per two acres was not supporting its goal of preserving farmland, so it amended its ordinance in 1981 to allow for only one dwelling on twenty acres. -8- Baltimore Co. . ficultural' Innd Sales 1977 1974 BALTIMOP~E CO. Agricultural Land Sales Suuunaz~ stats. Sur~m~r~; Stats. - SALE PRICE/ACRE YEAR AVG. NUMBER HIGH LOW 1973 $1,347 26 $3,636 $249 1974 $1,974 14 $2,455 $94 t975 $1,975 27 $3,958 $301 * 1:20 agricultural zoning enacted in 1976. 1977 $2,305 11 $4,583 $665 1978 ~1,822 8 $3,063 $412 ** 1:50 agricultural zoning enacted in 1979. 1980 $1,540 21 $3,125 $182 1981 $2,089 17 $3,667 $250 1982 $2,369 13 $3,519 $1,589 1984 $2,190 15 $4,569 $476 1986 $2,073 13 $4,545 $590 1988 $2,C2~ ~ $3,519 $635 Baltimore County adopted a residential density of one dwelling unit per 20 acres in the agricultural zones in order a master plan goal of fostering and protecting agricultural. after finding that the 1:20 1Lmits were not achieving the goal the County raised the agricultural zoning restriction to one dwelling unit per 50 acres --9-- Carroll Co. Agricultural Land. Sa es C.A.1R_P~O T ,T, CO. Agricultural Land Sales S~ary stats. S~ary Stats. - AVER3~GE SALE PRICE/ACRE ~ AVG. ~ER ~HIGH LOW 1975 1976 1977 1:20 '1979 1980 1982 1984 1986 1988 $1,303 20 $938 $667 $1,392 20 $2,520 $435 $1,541 11 $2,857 $640 agricultural zoning enacted in 1978. $1,699 21 $3,000 $494 $1,372 20 $2,723 $97 $2,019 11 $2,903 $549 $1,893 10 $2,640 $1,143 $1,623 8 $3,063 $327 $1,140 5 $!,952 In 1978 CArroll County established an agricultural distri and restricted building to oine dwelling unit per 20 acres. Carroll County's 1978 Master Plan expressed concern that duri the 1960's and 1970's signinficant amounts of prime agri- cultural land was being taken out of production, and that de- centralized development was putting a strain cn public servic -10- Montgomery Co. Agricultural Land Sales 1977 MONTGO~fE RY CO. Agricultural Land Sales Su~m~ry stats. Summary Stats. - S~T,~. PRICE/ACRE TEAR AVG. NUMBER ~IG~ LOW 1977 $1,753 8 $2,529 $977 1978 $2,306 3 $2,727 $1,723 1979 $4,325 .3 $5,493 $2,502 1:25 agricultural zoning enacted in 1980. 1981 $2,748 8 $4,967 $806 1983 $2,460 9 $4,959 $1,200 1984 $3,029 9 $6,552 $1,667 1986 $3,624 8 $6,694 $943 1988 $3,989 5 $4,982 $2,480 in !980 Montgomery County strengthened its agricultural protection policy by establishing an agricultural reserve area to include the majority of remaining working faz-ms in the County, as well as other land that support these farms. The development density in this area is no more than one residence per 25 acres. Montgomery County has stated that its agricul preserva%ion program is one element in a comprehensive growth managemen~ program. -!1- Co. Agriculturel Lend Soles CECIL CO. Agricultural Land Sales S~-~ry stats. S~mary Stats. - SALE PRICE/A~RE YEAR AVG. NI/MBER EIG~ LOW 1975 $1,215 5 $1,686 $695 1976 $1,843 4 $3,160 $958 1977 $1,427 5- $3,250 $854 1981 $2,252 4 $3,027 $1,590 1982 $1,253 4 $1,500 $1,000 1984 $2,143 5 $2,978 $844 1986 $2,750 5 $4,354 $1,828 1988 $3,281 10 $9,746 $1,526 1990 $3,095 24 $9,896 $490 Cecil County was included in this analysis for purposes of comparison to counties having agricultural zoning. Cecil County currently allows for a minLmum housing density c one dwelling unit per one acre in the agricultural zones. -12- Howard Co. Agricultural Land Sales 19~5 19~ ~980 ~962 19~ 19~ HOWARD CO. Agricultural Land Sales Summary stats. Su~ma~-y Stats. - SALE PRICE/ACRE %~EAR AVG. NUlfBER HIGH LOW $2,518 14 $6,311' $126 1976 1977 $2,761 19 $5,309 $441 1978 $2,376 6 $3,500 $794 1979 $2,673 5 $3,200 $2,109 1980 $2,527 10 $4,204 $470 1981 $2,187 8 $4,091 $542 1982 $2,641 " 5 $3,000 $2,076 1983 $1,461 6 $2,432 $130 1984 $4,072 !1 $5,521 $865 1986 $5,251 11 $9,347 $2,525 1988 $2,462 2 $2,974 $1,950 Howard County was included in this analysis for purposes of comparison to counties having agricultural zoning. Howard County currently allows for a minimum housing density one dwelling unit per 3 acres in the agricultural zones. -13- Harford Co. Agricultural Land Saes 1§74 19"~ 1!i~7~ 191K) 1984 1~8 1¢5 "1 ¢,U 1972 1~1E2 1985 EARFORD CO. Agricultural Land sales S~ary stats. S,~ ...... ~ry Stats. - S~T.F~ PRICE/ACRE ~ AVG. NUMBER 5IG~ LOW 1974 $1,62t 10 $2,500 $950 1975 $962 25 $2,167 $190 1976 $1,868 10 $2,864 $524 1:10 agricultural zoning enacted in 1977. 1978 $1,784 29 $3,995 $447 1979 $1,977 18 $6,000 $290 1980 $1,707 16 $4,738 $325 1982 $2,001 9 $2,703 $1,098 1984 $3,249 11 $6,304 $998 1986 $2,681 20 $6,607 $341 1988 $2,460 7 $3,243 $1,802 1990 $4,640 9 $7,500 $893 In 1977 Harford County enacted an agricultural zoning ordinance allowing for a development density of no more than c residence per 10 acres. -14- OTHER SUPPORT'ING DATA Farmland valuesr Maz-v!and Counties and the U.S.: The AgricUltural Census Data tracks average farm land. values every five years. Included below is a listing of land values for the six counties studied, as well as for Maz-yland as a whole and the United States. Findincs: The data generally show an increase in agricultural land values in the four counties studied from 1974 to 1987. Data from the U.S. Department of Agricultures Economic - Research Service also show Chat landvalues in_these counties and the rest of Maryland outpaced increases in land values for-the U..S. ,~as a whole -15- "Census of agriculture" Farmland Vatues Source: U.S. Census Bureau. 1974 ~9'78 -16- MAR~D AGRICULTURAL LAND PRESERVATION PROGRAM The Maryland Agricultural ~and Preservation Program was authorized by the Maryland Agricultural Land Preservation Foundation Act of 1977 and went into operation in 1979. It has been one of the most successful statewide Purchase of DeveloPment Rights (PDR) programs in the country. The pro- gram gives farmers the option to sell their development rights at the time of their choosing and at the same tLme re- tain ownership of their land. As of 1990, a total of 91,448 acres of easements had been acquired under this program. About 43% of the easements were purchased in the five counties that have initiated re- strictive agricultural zoning during the past ten to fifteen years. It is important-~ examine '~h% Maryland eRsement acqui- sition program since the cost of the easements track the fair market value.-of farmland. - Since the program--started;, ease- ments ha~e been acquired in a majority of Maryland ~counties. This has generated a significant amount of information avail- able on the average per acre easement value. Determining the value of an easement is a multi-step process. First the fair market value of land is established. This is based on the higher of two appraisals; one conducted by the state, and the other submitted by the landowner. Cur- rently the agricultural land value is determined by a formula based on land rents and soil productivity.' Eowever, prior to 1991, the agricultural value of the farmland was derived by comparable sales of land for farming purposes within the county. These two values determine the easement value (ap-. praised fair market value minus the agricultural value equals the easement value). The appraised fair market value per acre for farmland in Frederick, Carroll, Anne Am-undel and Baltimore Counties have been strong since 1982. In mgst cases land values have in- creased over the past eight years despite restrictive zoning. This suggests that the fair market value of farmland has not been negatively affected as a result of agricultural zoning. The. fair market value of agricultural land in all of these counties, based on state appraisals as part of the easement acquisition program, provide a good comparison with actual land sales examined as part of this analysis. This data corroborates the conclusion of this study which is, that farmland values did not d~inish following the enactment of ~cultu~ ~ ..... al zoning. -17- Anne ~rundel Co. Md. Agricultural Land Preservation Prog Baltimore Co. ~d. Agricultural Land Preservation Prog Md. Agricu ture CC]FrO Land CO,' Preservation 1c~ 1~0 Prog Frederick Agricultural Land Coo Preservafion 1_q8~ Prog LENDING INSTITUTI©NS'AND.EASEM~--NT PRoGRA/~S Two major lending institutions in Maryland, Farm Credit Banks and Far, ers Home Administration, strongly support the concept of easement acquisition. They see no significant problems in making loans to farmers where the development rights on the farm have been sold. The following remarks were made by Robert E. Egerton, Jr., a manager of a Farm Credit cooperative, delivered at a conference on farmland preservation in Farch of 1990. "The most significant aspect, of farmland pres- ervation to a-lender-would be use--restrictions that - would affect the value of collateral. The sale of development ~rights is just such a- program. .Farm .._ Credit has had experience for several years financ- ing land in Connecticut, Massachusetts, Long Island and Pennsylvania where development rights have been sold. in Lancaster County, PA, approximately 25% of the land mortgaged to Farm credit has some type of use restriction. Based upon our experience, I can offer the following: "Borrowing against land with restrictions on use is very co~on and, in fact, encouraged as a voluntary program. As a lender we would be very concerned about the confiscation of rights without due compensation. With a use restriction, the maximum loan will be reduced connnensurate with the reduced value for agricultural use only. 'This is not a problem, however, because loans are made in relation to the earnings capacity to repay the loan. On agricultural land with high values re- sulting from alternative demand, the size of the loan will be limited by the earnings generated from the land long before the total value is reached. Lower land values, based upon a~ricultural use only, would result in smaller loans with no offset- ting effect on the earnings potential of that land. Thi's would likely enhance the farmers' repayment ability." This point is further illustrated by the following quote from Everett 'Paluska, State Director for the Farmers Home Ad- ministration in Connecticut, Rhode Island and Massachusetts. -20- "Requests for credit on restricted farms poses no special problems as a creditor. In fact, re- · stricted farms are preferable. The land value has been reduced to' where the return on assets reflects a justifiable investment on the operators part. Land to be purchased or rented can be obtained within the net earnings capacity of the property." Mr. Paluska also stated that "the various state land preservation programs help maintain a strong farming community". These quotes support some of the findings of this re- port: First, 5hat both of these agriculturally oriented lending institutions' which make loans principally on the -ability-of the farm.enterprise to_rep~y, Second~._ that ~nd-. ing institu{'ions clearly' understand the relationship between the fair market value of farmland and the agricultural value. It should be noted however that BaltLmore Farm Credit Bank does require some "pay down" on farm loans when the owner sells his easement to the state. The amount of this "pay down" depends entirely upon the size of the loan. CONCLUSIONS Based on our findings we can~conclude that zoning ordi- nances that restrict the-amount of non-farm development on agricultural land do not lower land prices or otherwise negatively affect farm equity. Fluctuations in farmland prices are more influenced by general economic trends, such as interest rates and prices for agricultural products. In addition, lending institutions do not make or deny loans on the basis of a parcel's development potential, but rather on the ability of the farm enterprise to repa~ its loans'. -21- BIBLIO~P3~PHY Barrows, Richard L., and David M. Hennebezry. -Capitaliza- tion of Exclusive Agricultural Zoning into Farmland Prices." Land Economics Vol. 66, No. 3 (August 1990), 249-258. Case studies on State and Local Programs to Protect Farmland. Washington, DC: National Agricultural Lands Study. 1981. Coughlin, Robert E. The Effects of Agricultural Zoning on the Ability of Farmers to Borrow Money. Pkiladelphia: Uni- versity of pennsylvania, 1984.. Coughlin, Robert E. et al. The Protection of Farmland: A --Reference Guidebook for State and ~_ocal Governments. Wash- ington, DC: National Agricultural Lands Study. Eg~rt6n, R°bert'E~ Jr. ~mar~s Delivered to the Farm Credit B~nk of Springfield Annual Meeting. Springfield. (20 March 1990). Lancaster County, Pennsylvania 1989 Farm.Sale Analysis. Lancaster: Lancaster County Agricultural Preserve Board, 1989. Maryland Agricultural Land Preservation Foundation, Annual Report. Annapolis, MD: Maryland Department of Agriculture. 1990. Monty, Luc and Francois Vaillancourt, "The Effect of Agricul- tural Zoning on Land Prices, 1975-1981." Land Economics Vol. 61, No. 1 (February 1985), 36'42. Paluska, Everett C. (5 December 1989). Swackhamer, Gene L. Agribusiness Club. Letter to the American Farmland Trust, Remarks Delivered to the Carroli County Westminster' (7 February 1991). Toner, William. Inventory of Na~ionat Agricultural Lands Study Jurisdiction With Agricultural Zoning. Governors State University, tunpub!ished)· Wright, James D. Protecting Farmland Through Purchase Devel- opment Rights: The Farmers' Perspective. Amherst, MA: Univer- sity of Massachusettsf Washington, DC: American Farmland Trust, 1988. -22- LITERATURE. SEARCH A literature search was conducted to find out if studies on the issue of agricultural zoning and land have been conducted in the U.S. In addition to the cited above, following is a listing of reports and w~itten on the issue. Anderson, John E., and Howard C. Bunch. erty Tax Relief: Tax Credits, Tax Rates, Land Economics Vol. 65 (February 1989), similar equity studies studies "Agricultural Prop- and Land Values." 13-22. Gleeson, Michael E. "Effects of an Urban Growth Management System." Land Economics Vol. 55, (August 1979), 350-65. Knaap, Gerrit J. "The Price Effects qf'__Urban Grow-th Bound- aries in Metropolitan Portland, Oregon." Land Economics 61, (February 1985), 26-35. Peterson, George E. "The Influence of Zoning Regulations on Land and Housing Prices." Washington, DC: Land Use Center Working Paper. No. 1207-24. The Urban Institute. 1974. -23- ACKNOWLE DGME NT S Resource Management Consultants, Inc. wishes to acknowl- edge the siqnificant contributions of a number of individuals who made the preparation of this report possible under an ex- tremely short time table. We would like to specifically note the assistance of Ken Noble, of the Ma~-y!and Office of Planning, in helping to analyze the land sales and other data. We also like to thank Larry Duket and his staff, Gary Schlerf, Mike Northrop and others for their efforts in putting the land sales informa- tion tog~t-~er. Rol~J~-English, E~ Thomas and-J~m Noonan, of the Office of Planning, were extremely helpful in providing additional '-dath and general guidance throughout-the conduc~ of this study. Henry Riley, Maryland State Department of Assessments and Taxation, provided us with data on land sales and other information relating to the agricultural transfer tax from his office. Bill Powel!, from Carroll County and Mike Cirino from Anne A_~undel County, provided us with additional information on the location of land sales within their counties. -24- TABLE III Pofdon of County tn A~c. Zone 1D~elling unit/20 acres 192,898 Acres. 66.9% Other 95,284 Acres. 33.1% TABLE IV ~on%~eU C~. Portion of County in Agria Zone 7---Other 204,925 A~r~s. 35.2% 64.8% PRIME RATE Percent 1970 i972 1974 1976 1978 '1980 1982 1984 22 1986 2O 18 16 14 12 1990 10 1988 REPORT TO ~ VALLEYS PL.4_NNING COUNCIL ON ~ TRADING VALUE OF RC-2 ZONED LAND COMI>AR_ED WITI{ RC-4 ZONED LAND IN NORTHFJRN BA_LTI'VIORE COLrNTY APPLIED DATA RESO URCE'S, INC. Litigation Support Economic and Financial Consultants SUMMARY The effect of restrictive zoning on land value has been the subject of intense discussion in areas that propose to institute so-called "effective agricultural zoning'", generally held to be on the order of 1 subdivision per 25 or more acres. In Baltimore County,' Maryland, a large jurisdiction that stretches between Baltimore City and Pennsylvania, a very restrictive form of agricultural zoning - at a density of 1 house per 50 acres - had been in place on 130,000 acres of land since 1979. This land was adjacent, in many places, to a zone that allowed 1 house per 5 acres. Anecdotal evidence, however, appeared to show that land in the very restrictive 50-acre zone was of equal or greater value per acre than land zoned for 1 lot per 5 acres. A' statistical study was performed in order to test the troth or falsehood of this ~bservation. Tax-parcel maps covering approximately 90,000 acres were surveyed for parcels ofland in both zoning classifications; most maps contained both. Maryland Office of Planning and State Department of Assessments and Taxation'data were used to fred the prices at which these parcels sold, the year of sale, whether the parcel was improved or unimproved, the zoning of the parcels, and whether the parcels were "arms-length''. (Only. unimproved parcels were used in the study, to avoid confounding effects of improvements,) Corrections were made for geographical area, accessibility, school district, and year of sale .... , .. The result of cross-tabulations and multiple regression'analysis was that there'.was n__o. statistical difference between the per-acre value of RC-2 land and of RC-4 land. That is, in the ~eas tested in Baltimore County, Maryland, there appears to be no difference in the value of land in the.5-acre zone and in the 50-acre zone. Several hypotheses are advanced to explain this intriguing result, which should be of interest to those desi~ning or working with rural zoning proposals. In April 1996, Applied Data Resources, Inc. (ADR) was retained to co.nduct a study of the /mpact of RC-2 zomng (one house per fifty acres) Versus RC-4 zoning (one house per five acres) on the trading values of unimproved parcels of land in Baltimore County. The study area was con_fined to that portion of the County north of the Urban Rural Demarcation Line. The time horizon included the period 1986 thzough 1996, encompassing a full decade of purchases and sales, including a period of rapid growth in Baltimore County land values (1985-89) and a period of slower growth (1990 to the present). Data on all sales of unimproved parcels of land five acres in size or greater falling'in tiffs portion of Baltimore County during ti-tis time period were analyzed for PUrposes of this studyz. The goal of the study was to determine whether land zoned RC-2, the most restr/ctive, or AgriculmraI Protection zoning, has kistorically traded at a discount to RC-4 land zoned less restrictively. The study, in addition, attempted to account for other various' factors which might '.m.flUence trading values: One'view, which is widelYheld,.is that highly restrictive zoning may lower the value of parcels ofland falling therein, because it deprives the current and future owners of a possible use, namely development for sale in small/esidential plots. According to this view, a decreased yield of subdivision lots should translate into lower value for the land. The counterva/ling view is that restriction on subdivision, wkile admittedly diminishing the number of possible uses, may ma/ntain or enhance land values by preserving the likelihood of high-valued uses. Put another way, the scarcity of available house sites created by restrictive zoning may cause the fewer, but larger blocks that have permitted house sites to enjoy a premium in value. . ..... In considering these two competing theories, it is worth noting most counties'in Maryland provide a so-called "minor subdivision" process for subdivisons of few lots, wkile subdiv/sions of many lots usually have to go through the more arduous "major subdiv/sion" approval route. 'Therefore, under most local ordLnances, subdivision of a farm into many smaller lots may be a long-drawn-out and expensive process, while subdivision into several large lots may be relatively simple and inexpensive. The price of raw land will be very likely be affected by this "development cost", factor. Certain sales meeting these criteria were not included in the statistical analysis for various reasons, including trades not made at arms length (typically involving sales for one dollar.) 3 Both theories of value have merit from a purely logical perspective. Anecdotal evidence from Baltimore County seems to indicate, however, that the second view is 1Lkely to be correct in this area; i.e., that the more restrictively zoned land suffers no decrease in price from this zoning. Our analysis was geared to provide a statistical answer to this question. II. Methodology Working in conjunction with staff of the Valleys'Planning Council, ADR collected data on al/land sales meeting the criteria outli~ed in section I above. Land areas judged suitable for the survey spanned approximately 90,000 acres in the 'northern portion of Baltimore County (from the Balt/mor.e Beltway north to Pennsylvania). ' Two types of analysis were conducted on this information. First, cross-tabulations of the data were calculated showing the average price per acre of transactions grouped into mutually exclusive categories based on variables of interest2'-A cross-tabulation.was performed for each variable of interest. The purpose of the c. ross-tabulation was to identify consistent trends in sales price wkich would lend support to one or the other of the theories presented above. The result of each cross-tabulation is provided in Tables I through 5 at the. end of tiffs report. A summary and interpretation of the findings for each of these tabl'es is provided/n the following section of this report. After cross-tabulations were calculated, a regression analysis was performed. The purpose of regression analysis was to identify trends in sales price after accounting" for variations in certain important characteristics. This is amore sophisticated type of analysis than simple cross tabulation, and allows for greater precision in conclusions to be drawn." III. Results of the Cross Tabulations Tables 1 through 5 below provide results of the cross-tabulations. Table I shows how pr/ce per acre of the completed sales varied, in four separate t/me periods, over four size groups. The time periods were 1985-8'7, 1988-90, 1991-93 and 1994-96. The size groups included in the analysis were 5-10 acres, 10-20 acres, 20-50 acres and 50+ acres. The result of these cross-tabulationi, is that, for trades in the same group, and for all transactions viewed as a whole, the price per acre was often (but not always) higher in the more restrictive, RC-2 zoned land than in the corresponding RC-4 group. In several other cases the difference in the reported prices was minimal. 4 For example, for the period 1994-i996, the price per acre in mil three size categories (10-20 acres, 20-50 acres, and 50+ acres) was h/gher for RC-2 (agricultural preservation) zoned land than for RC-4 land. S/milarly, in the period 1988-I990, two out of three prices computed were either higher Or very similar. There is evidence that RC-2 land can trade at a distinct premium in the largest size category2. In each of the four time periods, a common trend was observed in that the sale price per acre declined with size of transaction. This was as expected, and was true for both land under RC-2 zoning and land under RC-4 zoning. For example, in the time period 1985-87, the mean pr/ce per acre declined from $7,424 per acre for the smallest plots included in the study (5- i0 acres), to $6,479 for the largest plots. For land under RC-4 zoning, mean price per acre fell from $8,844 for the smallest plots to $6,264 for plots fa/ling into the 20-50 acre category (there were no trades in the largest size group in RC-4 zoned land in this t/me period). As shown in Tables 2 through 5, other factors systemafical/y affect sa/es price as well. Table 2 shows that the rate of growth of land values has migrated northward from the beltway over the past decade. In the years I985-87, the highest per acre prices were drawn by lots 5-I0 mi/es above the beltway in both RC-2 and RC-4 zoned land. By 1988-90, lots I0-15 m/les from the beltway had closed some of the gap, and by the period 1994-96, lots more than 15 miles above the beltway were rivaling areas 'closer in for the top' average pr/ce. There was less ora pattern in the trading values of land by distance from highway. It appears that only the north-south distance, and not the east-west distance from major transportation routes has ififluenced prices in the conservation area over the last decade. As shown in Tables 4 and 5, prices have varied significantly across elementary and high school districts; however, there has been no consistent "winneg' or "loser" in either category. Dulaney School District commanded significantly higher prices than any 0f'fSe'0ther areas in the period 1985-87, but-fell to second place in RC-2 zoned areas in the period' I988-90, jumped back to first place in RC-2 zoned areas in 1991-93 and fell to last place in the per/od 19941996. This apparently coincided w/th movement northward of the price growth in the entire region. In RC-4 zoned properties, however, Dulaney retained its price edge even into the latest t/me period. There was little consistent 'variation across elementary school districts Jacksonville school district has appeared at or near the top among RC-4 except that throughout the entire time period, zoned land .=Note the h/gh per acre price of the single trade falling into this category in the period 1994-96. IV.: Results of the Multiple Re~ression Analysis The purpose of multiple regression analysis is to identify the influence of certain factors called independent variables (for exarnple~ lot size) on other factors called dependent variables (for example, price per acre), after accounting for the simultaneous effects of other independent variables. As shown in the previous section, there are numerous factors, or variables, which affect the per acre sales pride of land in the protected area of Baltimore County. Size oflot is one, but distance from the beltway is another, and school district is potentially another. It is difficult to conclude on the basis of simple cross-tabulations, therefore, whether we can hold lot size accountable-for price variation. Presented in Tables 6 through 9 are the results of multiple regression analysis, wherein the dependent variable was price per acre and the independent variables reflected the other relevant characteristics of the traded plots, including size of plot, distance from beltway, distance from highway, elementary school district and high school district. The central question of the multiple regression analysis revolved around the coefficient on the variable "RC-2." A "statistically significant" coefficient on this variable in any o? the four regressions would have indicated that zoning, in and of itself, materially affected the sales price after accounting for the effects of the other variables in the regression. A "statistically insignificant" coefficient would indicate that zoning had no material effect. The statistical significance of the coefficient is measured by the "t valud'~given in the fight-most column. A '!t-value" of approximately 1.6 in absolute value (i.e., greater than +1.6 or less than -1.6) would have been required to establish minimal significhnce for the coefficient est/mate. Note that a number of variables did achieve this degree of sig-nificance, including, as expected YEAR 1 and YEAR 4, indicating that prices in the first period (1985-87) and the fourth period (1994-96) were materially: different from prices in the regression's base period of 1988-90. Statistical Significan~e' Few factors other than chronology (above) even came close to statistical significance, including zoning. 7trot is, RC-2 zoni.hg did not systematically lower the trading value Sf lots in the various size groups. It is worth noting further that the conclusion that zoning had no significant impact on trading value is supported further by the fact that the estimated coefficient on the dummy variable "RC-2" was positive in two regressio, ns and negative in the other two. Therefore, the "sign" 0fthe effect, even if it was accepted as insignificant, is itself. in doubt, further underscoring the likelihood that zoning had any consistent material effect" across the lots that were traded during th_is time period. V. Conclusion Statistical analysis of 90,000 acres of land in Baltimore County shows that there is no significant difference between the value of land in the RC-2, or Agricultural Protection zone, and in the RC-4, or Reservoir Protection zone. The study was carefully controlled for several confounding variables, including distance from Baltimore City and from major roads, varying school districts, accessibility, and date of sale. " This is a striking result, because the RC-2 zone only allows subdivision at the rate of 1 house per 50 acres, while the RC-4 zone allows subdivision at the rate of 1 house per 5 acres. That is, the RC-4 zone allows, on the average, 10 time as many subdivisions as the RC-2 zone. Nevertheless, this extra lot potential does not seem to lead to extra value for the "raw land" owner. ' The reasons for this are unclear. However, several hypotheses may be advanced: 1. As noted above, it is expensive and arduous, in general, to perform an RC-4 subdivision, with many small lots, because of the complex "major subdivision" process required by Baltimore County ( like most other counties in the State). Therefore, the cost of development is kigher in a "small-lot zone" like RC-4, than in KC-2, with its fewer, larger lots. (This may apply in other areas of the State as well,) Indeed, almost ail owners of raw RC-4 land, other than those whose profesgibri is land development, choose to."option" their land to a develop)er,, rather than perform the major subdivision process themselves. Tkis necessary and logical use of a "middleman,, or several middlemen, appears to lower the value of the raw land considerably. 2. In Baltimore County, as in many pans of Maryland, there is a considerable demand for large lots or farms on the pan of affluent buyers. Indeed, with the spread of subdivisions over the countryside in the larger metropolitan areas, lands that are protected from subdivision by zoning may sell at a premium. In other words, buyers appear to be willing to spend more for protection from development. This is what the KC-2 zone appears to offer. 3. It may be that the absorption rate for a subdivision of many lots is slower than for a subdivision of only 2 or 3 lots. 4. l~blic-works standards, for multiple-lot stibdiv~sions are generally much higher, hence more expensive, than for minor subdivisions. Many counties, for example, do not requ~..e ,, paved roads for subdivisions of under 3' lots. 5. There is .often significant community opposition to multiple-tot subdivisions; public heazings, Board of Appeals proceerti~gs, extensive delays, and high legal fees are common. This is rarely, if ever, the case with subdivisions of just a few very large lots La the Ag;dculmral zone. 3 3roup [1987 990 993 k1996 _TABLE 1_ RC2 & ROY Land · Summaries of Price PerAcre By Levels of Acre S~.e and tear Groups R__CA IVlean Price Number of Mean Price Acre Size Per Acre .Tran~acti0m; Per Acre 10-20Acres $ 6,376.40 18 $ 4,972.25 20-50Acres $ 5,034.75' 9 $ 6,264.70 50+ Acres $ 6,479.18 4 $ 0.00 10-20Acres $ 9,728.16 15 $ 9,534.70 20~50 Acres · $ 9,040.37 20 $11,132.44 50+Acres $ 6,908.67 8 $ 7,162.51 10-20 Acres $12,931.1 t 10 $10,645.98 20-50 Acres $ 6,504.93 12 $ 8,053.53 50+Acres $ 6,339.16 4 $ 7,973.71 10-20 Acres $14,413.84 1 $14,228.89 20-50 Acres $13,009.81 3 $ 8,79'~.-2_~ 50+ Acres $ 23,392.86 1 .... $ 4,823.10 Number of Transactions 6 5 0 I2 4 2 5 22 4 RC2 & RC4 Land Summaries of Price Per Acre by Levels of Belr3vay Distance and Year Group Year (3rouE I985-1987 1988-1990 1991-1993 I994-1996 Distance Mean Price Number of _Per Acre, ~ 0-5 Miles $ 0.00 0 5-10 Miles $ 7,498.95 12 10-15 Miles $ 6,825.65 23 15+ M/les $. 6,221.27 26 0-5 Miles $ 6,802.06 2 5-10 Miles $ I0,608.32 17 10-15 Miles $11,512.66 24 15+ MSles $ 7,437.93 19 0-5 Miles $ 0.00 0 5-10 Miles $17,1t6.77 8 10-15 Miles $ 8,339.74 11 15+ Miles $ 7,733.10 18 0-5 Miles $ 27,000.00 1 5-10 Miles $13,561.30 3 10-15 N'[iles $17;500.76 3 15+/rilles $13,995.02 7 Mean Price _Per Acre Number of 7,206.04 11,726.24 6,637.94 4,425.06 5 11 9 9 13,855.54 15,754.14 1'0,876.69 9,997.42 7 16 12 I2 5' 0.00 10,725.56 11,886.96 11,t87.66 0 12 13 9 $ 15,467.65 $ 10,526.18 · $ 9,45~.05 $14,503.44 2 9 4 8 RC2 & RC4 Land Summaries of Price Per Acre by Levels of Highway Distance and Year Group 1985-1987 i[988-1990 991-I993 1994-I996 Distance To Highway Mean Price Number of ~ ..Tran~action~ Mean Price Per A¢~ 0-5 Miles $ 6,320.46 50 $ 5-10 M/les $ 8,427.97 11 $ I0-15 Miles $ 0.00 0 15+ Miles 0-5 Miles $10,537.42 53 5-10 Miles $ 5,898.55 9 10-15 Miles $ 0.00 0 15+ Miles $ 0.00 0 0-5 Miles $ 9,149.13 28 5-10 Miles $12,235.59 8 10-15 Miles $13,806.71 1 15+ M/les $ 0.00 0 0-5 M/les $15,672.11 13 5-10 Miles $ 14,413.84 1 10-15 Miles $ 0.00 0 15+ Miles $ 0.00 0 Number of 8,225.42 5,712.34 0.00 0.00 28 6 0 0 12,787.93 12,4.90.25 0.00 0.00 42 5 0 0 $ I1;323.80 $10,952.84 $ 0.00 $ 0.00 31 3 0 0 $11,461.73 $15,435.45 $ . .-~3.00 $ 0.00 19 4 0 0 RC2 & RC¥ Land Summaries of_Price Per Acre by Levels of High School District and Year Group Year 1985-1987 1988-1990 1991-1993 1994-1996 High School .District Mean Price .Number of Hereford $ 6,447.23 49 Dulaney $ 9,046.97 3 Loch Raven $ 7,778.35 2 Franklin $ 7, t59.81 7 Owings M/ils $ 0.00 0 Hereford $ 9,444.90 39 Dulaney $10,801.57.. 7 Loch Raven $. 5,500.59 1 Franklin $ 11,423.33 13 Owings Mills $ 6,802.06 2 Hereford $ 8,262.89 26 Dulaney $17,286.20 5 Loch Raven $ 16,834.39 3 Franklin $ 5,365.95 3 Owings M/lis $ 0.00 0 Hereford $ 13,713.84 9 Dulaney $ 9,920.00 1 Loch Raven $14,413.84 1 Franklin $ 23,464.29 3 Owings Mills $ 0.00 0 RC4 Mean Price Number of 6,430.95 22 11,000.51 10 0.00 0 6,550.00 2 0.00 0 11,232.94 30 16,010.93 13 0.00 0 14,511.11 3 10,880.83 1 $11,446.07 28 '$ 10,101.86 4 $ 0.00 0 $ 1~,8o3.~0 1 $ 9,195.40 1 11,825.27 15 13,910.51 -- 7 0.00 0 4,761.90 1 0.00 Year Group I985-1987 RC2. & RC4 Land Summaries of Price Per Acre by Levels of EIementary School District and Year Group : RC2. RC4 Elementary School Mean Price Number of Mean Price District Per Acre. Transactions. Per Acre Sparks $ 6,675.33 13 $ 8,094.92 Owings Mills $ 0.00 0 $ 0.00 5thDistrict $ 8,868.42 8 $ 5,840.42 Prertyboy $ 4,542.34 10 $ 4,367.28 7thDistrict $ 5,526.92 8 $ 3,965,63 Carol Manor $ 7,778.35 2 $ 0.00 Franklin $ 6,827.33 8 $ '6,550.00 Kingsville $ 0.00 0 $ 0.00 Pot Spring $ 7,500.00 1 $ 7,206.04 Pine Grove $ 0.00 0 $ 0.00 Jacksonville $ 7,608.16 11 $13,046.42 1988-1990 1991-1993 Sparks $11,386.82 10 $11,545.01 Owings MilIs $ 6,802.06 2 $ 0.00 5th District $10,619.90 5 $12,630.64 Prettyboy $ 6,846.98 6 $ 6,571.96 7th District $ 7,438.06 8 $11,239.80 Carol Manor $ 0.00 0 $ 0.00 Franklin $ 11,246.69 20 $ I4,5t1.11 Kingsville $ 0.00 0 $ 0.00 Pot Spring $ 0.00 0 $16,820.98 Pine Grove $18,229.17 3 $10,880.83" Jacksonville $ 6,348.85 8 $14,330.63 Sparks $ 9,945.54 5 $12,023.20 Owings Mills $ 0.00 0 $ 0.00 5th District $ I5,906.25 2 $10,288.10 Prettyboy $ 7,590.91 6 $ 12,263.82 7thDistrict $ 7,682.51 8 $11,695.87 Carol Manor $18,348.24 2 $ 0.00 Franklin $ 8,286.42 6 $10,468.17 Kingsville $13,806.71 1 $ 0.00 Pot Spring $ 12,128.57 2 $ 7,570.18 Pine Grove $ 24,166.67 I $ 8,894.58 Jacksonville '$ 7,66'8.97 4 $12,335.56 Number of Tran~action~ 8 0 5 6 1 0 2 0 5 0 7 16 0 6 3 5 0 3 0 9 1 4 12 0 3 6 2 0 4 0 2 2 3 TABLE 5 (Oont.) RC2 & PC4 Land Summaries of Price Per Acre by Levels of Elementary School District and Year Group _Year Group I994-1996 Elementary School _District Sparks Owings M/ils 5th District Prettyboy 7th District Carol Manor Franklin Kingsville Pot Spring Pine Grove Jacksonville Mean Price Number of .Per Acre Transacti0n,s $ 13,135.00' 2 $ 0.00 0 $ 6,989.97 2 $ 17,075.01 4 · $ 12,397.29 2 $ 14,413.84 1 $ 23,464.29 3 $ 0.00 0 $ 0.00 0 $ 0.00 0 $' 0.00 0 Mean Price _Per Acre Number of Transactions 7,015.77 0.00 9,075.18 10,000.00 17,657.85 0.00 8,714.29 0.00 8,895.I4 6,725.00 21,321.06 3 0 5 1 5 0 2 0 3 1 3 i0 Mula'~le Regression with Price Per Acre as the Dependent Variable Includes Acre Sire 5-10 Independent RC2 Y-EAR1 YEAR4 B05 BS10 B15 14510 Independent Variable Definition_ Dummy variable indicating whether the land was RC2 (1 -- yes, 0 = no) Dummy variable indicating whether the year of sale is between 1985 and 1987 (1 = yes, 0 = no) Dummy variable indicating whether the year ofsale is between I988 and ~990 (1 - yes, 0 = no) Dummy variable indicating whether the. year of sale is between I994 and 1996 (1 = yes, 0 -- no) Dummy variable indicating 'whether the distance to the beltway is 'greater than/ equal to zero and less than/equal to five miles (1 = yes, 0 = no) Dummy variable indicating whether the distance to the beltway is greater than five and less than/equal to ten m/les (1 = yes, 0 = no) Dummy variable indicating whether the distance to the beltway is greater than fitSeen miles (1 = yes, 0 = no) Dummy variable indicating whether the distance to the highway is greater than five and less than/equal to ten m/les (1 = yes, 0 = no) Be~ -936.oo6 -6164.322 -338.081 2729.208 -174.922 306.064 -2778.952 -1256.829 .t. value -.979 -4.676 .261 1.667 -.058 .195 -1.551 -.854 HSDIST2 HSDfST4 ELDIST4 Multiple Regression with Price Per Acre as the Dependent Variable Includes Acre Size 5-I0 Independent ~e Nam_xe !ndepen~ ~ ~ valu_e Durmmy variable indicating whether the 1154.998 .497 land is located within the Dulaney High School District (1 = yes, 0 = no) Dummy variable indicating whether the 2409.531 .683 land is located within the Franklin High School District (I = yes, 0 = no) Dummy variable indicating whether the -1111.104 -.607 land is located within the Prettyboy Elementary School District (1 = yes, 0 = no) ELDIST5 ELDIST6 ELDIST7 ELDIST8 ELDIST9 Dummy variable indicating whether the land is located within the 7th District Elementary School District (1 = yes, 0 = no) ~524.926 -.267 Dummy variable indicating whether the land is located within the Carol Manor Elementary School District (1 = yes, 0 = no) 3632.424 1.012 Dummy var'able indicating whether the land is located within the Franklin Elementary School District -- (1 = yes, 0 = no) -1102.615 ..... 4.68 Dummy variable indicating whether the land is located within the Kingsville Elementary School District (1 = yes, 0 = no) -964. t79 -.180 Dummy variable indicating whether the land is located within the Pot Spring Elementary School District (I = yes, 0 = no) 499.627 .179 12 TABLE 6 (Cont.) Multiple Regression Mrh Price Per Acre a3 the Dependent Variable Includes Acre Size $-I 0 Independent yafiable Name ELDIST l 1 CONSTANT I~ndependent Variable Definitio~n Dummy variable indicating whether the land is located within the Jacksonville Elementary School District (1 = yes, 0-= no) Kegresslon ~.n'tercept , B et____._~a t value. 951.412 .504 15400.827 11.775 13 Independent Variable Name RC2 YEA_R1 YEAR4 BS10 B15 HS10 HSDIST2 HSDIST4 TA'BLE 7 Multiple Regression with Price Per Acre as the Dependent Variable Includes Acre Size 10-20 Independent Variable Definition · Dummy variable indicating whether the land was RC2 (1 = yes, 0 = no) Dummy variable indicating whether the year of sale is between 1985 and t987 (I = yes, 0 = no.) Dummy variable indicating whether the ' year of sale is between 1988 and 1990 (1 = yes, 0 = no) Dummy variable indicating whether the year. of sale is between 1994 and 1996 (1 = yes, 0 = no) Dummy variable indicati.ng whether the distance to the beltway is greater than five and less than/equal to ten miles (1 = yes, 0 = no) Dummy variable i. ndicating whether the distance to the beltway is greater than fii%een miles (1 = yes, 0 = no) Dummy variable indicating whetlTer the distance to the highway is gre.ater than. five and less than/equal to ten miles (1 = yes, 0 = no) Dummy variable indicating whether the land is located within the Dulaney High School District (1 = yes, 0 = no) Dummy variable indicating whether the land is located within the Franklin High School District (t = yes, 0 = no) 14 Beta 633.562 -5462.730 -2825.619 1'563.559 5758..579 21t6.733 -685.296 1634.800 -685.212 t value · .449 -3.582 -1.908' .618 2.835 1.026 -.406 -.141 Independent Variable Name ELDIST4 ELDIST5 ELDIST6 ELDIST7 ELDIST9 ELDIST10 ELDIST 11 CONSTANT TABLE '7 (Cont.) Multi£[e Regression ~ith Price Per Acre as the Dependent Variable Includes Acre Size 10-20 Independent Variable Definition Dummy variable indicating whether the land is located within the Prettyboy Elementary School District (1 = yes, 0 = no) Dummy variable indicating whether the land is located with. in the 7th District Elementary School District (1 = yes, 0 = no) Dummy variable indicating whether the land is located within the Carol Manor Elementary School District (1 = yes, 0 = no) Dummy variable indicating whether the land is located within the Franklin Elementary School District (1 = yes, 0 = no) Dummy variable indicating whether the land is located within the Pot Spring Elementary School District (1 = yes, 0 = no') Dummy variable indicating whether the land is located with/n the Pine Grove Elementary School District (t = yes, 0 = no) Dummy variable indicating whether the land is located within the Jacksonville Elementary School District (1 = yes, 0 = no) Regression intercept ..Betg -1153.474 -361.266 -1859. I08 2697.229 1619.638 1462.112 -760.566 9002.541 i5 t value -.520 -.180 -.327 .571 .442 .441 -.362 5.065 Independent Varialpl¢ Nam~ 1KC2 YEAR1 YEAR4 B05 BS10 BI5 H510 TABLE 8 Multi, de Regression with Price £er Acre as the Dei~endent Variable Includes Acre Size 20-50 Independent Variable Definition Dummy variable indicating whether the land was RC2 (1 = yes, 0 = no) Dummy variable indicating whether the year of sale is befween 1985 and 1987 (1 = yes, 0 = no) Dummy variable indicating whether the year of sale is between 1988 and 1990 (1 = yes, 0 = no) Dummy variable indicating whether the year of sale is between 1994 and 1996 (1 = yes, 0 = no) Dummy distance equal to miles (I variable indicating whether the to the beltway is greater than/ zero and less than/equal to five = yes, 0 = no) Dummy variable indicating whether the distance to the beltway is greater than five and less than/equal to ten m/les (1 = yes, 0 = no) Dummy variable indicating whether the distance to the beltway is greater than fifteen miles (I = yes, 0 = no) Dummy variable indicating whether the distance to the kighway is greater than five and less than/equal to ten miles (1 = yes, 0 = no) Beta -1508.591 -140.194 2947.380 55O5.255 -10965.665 -3743.445 -511 ..909 -3835.314 t value -1.138 -.087 2.055 2.897 -2.047 -2.398 -.176 -.998 i6 Illl--- TABLE S (Cont.) Multiple Regression ~ith ]>rice Per Acre as the Dependent Variable Includes Acre Size 20-50 Lndependent Var/able Nam_e. HSDIST2 HSDIST4 ELDIST2 ELDIST4 ELDIST5 ELDIST6 ELDIST7 . ELDIST9 Independent Variable Definition Durmmy variable indicating whether the land is located within the Dulaney High School District (1 = yes, 0 = no) Dummy variable indicating whether the land is located within the Franklin High School District (1 = yes, 0 = no) Dummy variable indicating whether the land is located within the Owings M/ils Elementary School District (1 = yes, 0 = no) Dummy variable indicating whether the land is located within the Prettyboy Elementary School District (1 = yes, 0 = no) Dummy variable indicating whether the land is located within the 7th District Elementary School District (I = yes, 0 = no) Dummy variable indicating whether the land is located within the Carol Manor Elementary School Disl~rict (1 = yes, 0 = no) Dummy variable indicating whether the land is located within the Franklin Elementary School District (I = yes, 0 = no) Dummy variable indicating whether the land is located within the Pot Spring Elementary School District (1 = yes, 0 = no) Beta 2957,044 -294.788 6954.522 391.268 -1320.599 10048.567 4497.919 6720.795 t valu e~ .755 -.132 1..004 .118 -.414 ,.2.628 1.993 1.528 17 TAB~ l¥[ultiple Regression with Price Per Acre as the Dependen't Variable Includes Acre Size 20-50 Independent YarSa~ Independent Variable DefinitiQ~ ELDIST10 ELDtST11 CONSTANT Dummy variable indicating whether the land is located within the Pine Grove Elementary School District (I = yes, 0 = no) 7201.410 Dummy variable indicating whether the land is located with.in the Jacksonville Elementary School District (1 = yes, 0 = no) 1678.551 Regression intercept 6157.04 1.656 .783 4.293 18 ~ TABLE 9 Multiple Regression with Price Per/fcre as the Dependent Variable Includes Acre Size 50+ Independent Variable Name RC2 YEA_R1 YEAR4 B510 B15 H510 HSDIST3 HSDIST4 Independent Variable Definition Beta Dummy variable indicating whether 2958. the land was KC2 (1 = yes, 0 = no) Dummy variable indicating whether the year of sale is between I985 and 1987 (1 = yes, 0 = no) Dummy variable indicating whether the year of sale is between 1988 and 1990. (1 = yes, 0 = no) Dummy variable indicating whether the year of sale is between 1994 and 1996 (1 = yes, 0 = no) Dummy variable ind[cating~whether the distance to the beltway is greater than five and less than/equal to ten miles (1 = yes, 0 = no) Dummy variable indicating whether the distance to the be[tway is greater than fifteen miles (1 = yes, 0 = no) Dummy variable indicating whether the distance to the highway is greater than five and less than/equal to ten miles (1 = yes, 0 = no) Dummy variable indicating whether the land is located with/n the Loch Raven School District (1 = yes, 0 = no) Dummy variible indicating whether the land is located with/n the Franklin High School District (1 = yes, 0 = no) ~9 -5021.863 -3244.032 2422.542 -2445.597 -8400.371 2181.1-65 -1155.296 -1863.605 valu~ .037 -1.226 -1.328 .871 -.883 -1.162 .494 -.165 -.499 Independent _Va~able Name ELDIST2 ELDIST4 ELDIST7 ELDIST9 ELDISTI0 .ELDIST11 CONSTANT T_ABLE O (Cont.) · £ulriple Regression ~vith Price _Per Acre as the Dependent Variable Includes Acre Size 50+ Independent Var/able Definition Dummy variable indicating whether the land is located within the Owings M. ills Elementary School District (i = yes, 0 = no) Dummy variable indicating whether the land is located within the Prettyboy Elementary School District (1 = yes, 0 = no) Dummy variable indicating whether the land is located within the Franklin Elementary School District (1 = yes, 0 = no) Dummy variable indicating whether the land is located within the Pot Spring Elementary School District (1 = yes, 0 = no) Dummy variable indicating whether the land is located within the Pine Grove Elementary School District (t = yes, 0 = no) Dummy variable indicating whether the land is located within the Jacksonville Elementary School District (1 = yes, 0 = no) Regression intercept _Berg 5O36.853 9899.288 5516.384 1304.951 8837.669 1937.756 5268.059 I vatue 1.071 1.134 1.820 .331 2.149 .478 2.397 2O PINAL REPORT A STUDY OF THE ECONOMIC IMPACT OF rAND USE REGULATIONS ON THE BUSINESS OF FARMING IN MARY[A2~D Prepared for: TH~ MARYLAND FARM BUREAU, INC. Randallstown, Maryland Prepared by: 1 .F~GG MASON REALTY GROUP, INC. 7 E. Redwood Street, 2nd Floor Baltimore, Maryland 21202 January, 1993 BRC 1008 TAB~.~. OF CONTEN~ Pag~ SECTION ONE: INTRODUCTION ..................................... 1 I. Nature of the Problem ...................................... 1 II. The Purpose of this Study ................................. 2 ,ill Work Undertaken by .Legg Mason Realty Group, Inc ............... 3 IV. Definition of Terms ........................................ 4 V. Comments on Scope of the Study ............................. 5 VI. OrganizatiOn of th~ Report ' 6 SECTION TWO: KEY CoNCLusIONS .................................. 7 SECIION THREE: THE BUSINESS OF FARMING ....................... 11 Current Nature of the Industry .............................. 11 Farming As Land Use ..................................... 13 Farming As Business ...................................... 13 Financing Agriculture ................ ' ..................... 15 Farm Value and Debt ..................................... 16 Conclusions ............................................. 16 SECTION FOUR: THE PROCESS OF CREATING LAND VALUE ........... 19 I. Highest and Best Use ..................................... 1-9 Il. The Land Development Process .............................. 20 I51. The Role of Farmland in the Development Process ............... 24 sECTIoN FIVE: TH~ ROI.F. OF LAND VALUE IN THE BUSINESS OF FARMING ....................................... 26 Capital for the Farm Business .................... '..'. ......... 26 Supporting Farmer Equity and Welfare ....................... 30 Conclusions ............................................. 32 · TAB! F. OF CONTENTS (CON'rINUE~D) Page SECTION SlX: THE IMPACT OF GROWTH CONTROLS ON AGRICULTURAL IA.ND VALUES ......................................... 34 The Growth Issue ' . .................... 34 Techniques for Controlling Growth ........................... 37 · Farmland Values ......................................... 41 The ImPact of Growth Controls on Agricultural Land Values ........ 44 APPE2qDIX A: BIBLIOGRAPHY .................................... A-1 APPENDIX B: INTER~WS ....................................... B-1 SECTION ONE INTRODUCTION The purpose of this initial section of the report is to describe the background to the study undertaken by LEGG MASON REALTY GROUP, INC. (LMRG) under contract to the Maryland Farm Bureau. This background is important because the study itself is somewhat unusual and because one of the broad topic areas within which the study fits, establishing growth management policy, tends to be highly charged and to generate strong opinions. Consequently, there is a need to place the study within the context of the interests of the Farm Bureau and "the "growth management community." L NATURE OF THE PROBI Over the past couple of decades the citizens of the state of Maryland, their elected representatives, and their administrative leaders, have become particularly sensitive to environmental concerns. This heightened awareness has led to the establishment of many programs having the .goal of improving the state's environmental quality. Such programs are extremely wide ranging--from testing of automobile emissions to recycling solid waste; improving the quality of sewage treatment .to controlling the nature, scale, and location of the development of land. Maryland's farming community is deeply involved in this environmental improvement effort. Farmers have addressed environmental concerns related to agricultural activity in many different ways, including those listed below. Utilizing "no till" cultivation; Changing the nature and amount of herbicides and pesticides used in farming; i Reducing the application of nutrients; Adhering to guidelines with regard to grazing and feed lot practices; Adhering to best management practices in environmentally sensitive areas; Participating in the state's agricultural land preservation program; Adhering to local zoning and other regulations affecting disposition of and development of agricultural land. As estimated in a study prepared for the Maryland Office of Planning, the mount of land in the State of Maryland in 1990 in agricultural use, exclusive of forestry, was 2,551,598 acres or 28.28 percent of the state's total land area. This agricultural land, along with land used for forestry purposes,' land in various state; federal, local, and private parks and reserves, marsti land and other highly hydrous Iands, and otherwise vacant and undeveloped land, is generally regarded as "undeveloped." While this term as applied to farmland is inaccurate, since the land is actually "developed" for farming, there is genera/agreement that the land is essentially "unimproved" (meaning that the bulk of it does not have structures on it) and that at some point in the future it could be "developed." In general, farmland is the least expensive land that can be purchased which Iends itself to non-agricultural development of one sort or another. The soils are usually easy to prepare for construction, roads probably exist in the area, and, given other necessary ingredients such as the existence of a market, the land can be built upon relatively easily. Given this underlying fact, many of the various recently .enacted local, state and federal regulations aimed at controlling development have particularly affected Maryland's farmland because it is not already "developed" and typically includes areas of above average environmental character. The agricultural community has tended to work closely with organizations establishing environmental policy and environmental programs. Nevertheless, farmers feel that recently enacted and proposed restrictive land use controls are worldng a hardship on them and on the business of farming that goes beyond the agricultural community's "fmir share" of the burden of improving the state's environment. In particular, agricultural land owners are concerned that limitations on their ability to sell land for development are beginning to affect their ability to do business and, consequently, may be hurting the very existence of traditional farming, which most of the proposed regulations are designed to help, not hinder. Because of the vast amount of land involved, regulations affecting the use and disposition of agricultural land i~pact very large portions of the state of Maryland and large numbers of la.nd owners. This fact is one of the more appealing w/th regard to the application of growth controls from the standpoint of the environmental community, but the agricultural cornmun/ty feels that it unreasonably targets one land owner group -- farmers. TI-IE PURPOSE OF THIS STUDY The Maryland Farm Bureau believes that the interests and the land ownership rights of the farmer are not being given appropriate consideration in the process of establishing land use poli~y at the local and state levels. Specifically the officers, management, and members of the Farm Bureau believe that the agricultural community's opposition to certain types of growth controls has been characterized too narrowly as simply "farmers trying to get the most for their land so they can get out of farming and spend the money elsewhere."' In point 2 Df fact, members of the agricultural community believe, the situation is quite different. It s their contention that there is a direct relationship between the value of agricultural land md the future viability of Maryland's agricultural industry. The farm community believes hat agricultural land values play a more central and intricate role in the agricultural adustry than is generally recognLzed. But farmers also know that this particular position las not been researched nor has it been well 'articulated to land use planners and [overnment officials. The purpose of LMRG's study is to conduct research into the slafionship between land values and the business of farming and to determine the extent ~ which, as growth controls impact land values, they impact the v/ability of farming. essence, the study is intended to address some of the following questions. What is the role of the value of a farm's land in the business of farming? What is the relationship of development to the value of agricultural land? · To what extent do growth controls impact agricultural land values? To what extent do growth controls impact the business of farm/ng? If agricultural land values are important to the business of farming, and if growth controls negatively affect'such values, how can farmers work with policy makers to gain more equitable consideration as land use policy is designed and implemented? WORK UNDERTAKEN BY I.F. GG MASON REALTY GROUP, lNC. In carrying out this study, LMRG performed the following work. Discussed the assignment with officers and members of the Farm Bureau, particularly its property rights subcommittee. Discussed the assignment and various aspects of the relationship between growth controls and farming with Maryland farmers at their armual convention in Ocean City. Interviewed bankers at private banking institutions and at the region's Farm Credit Associations'to establish the relationship between lending policies and the value of agricultural land. 3 InterViewed developers who actively develop in rural/suburban areas to establish the role of farm/and in development in such area. Interviewed real estate agents who sell farm land and who represent residential developments in rural and suburban area. Obtained information on the status of Maryland's agr/cultural industry fi.om the Maryland Department of Ag'r/culture, the Maryland Farm Bureau, and various published sources such as the Census of Agriculture. Obtained information on the subject matter from the American Farm Bureau Federation and pursued sources of information at the United States Department of Agriculture and other national level sources. Obtained and reviewed stud/es done by the Maryland Off/ce of Planning and others with regard to the relationship between various types of development regulations and the value of agricultural land. Researched the spec/ftc experience., of the Maryland Agricultural Land' Preservation Foundation Mth regard to purchase of devel0pment rights/2 Maryland's agricultural districts. · Interviewed real estate appraisers who have been active in the appraisal of land in connection with the MAIPF program. · Intervie. wed senior planning officials in selected Maryland counties to establish the extent to which farmland is being converted to developed uses in those count/es. · Prepared this report presenting the results of our research and analysis. _ DEFINITION OF TERMS Several terms related to farming and agriculture are used throughout this report. Defi. rfitions of these terms are set forth below. These definitions are those of LMRG and do. not necessarily reflect the way they might be defined in other analyses. The terms that will be used to most frequently in th/s study are farm (the physical fac/l/t-y) and farmer, which 44ll imply ownership of the farm. A_m'/cutture: Agriculture (the agricultural industry, agribusiness) is the industry that encompasses farrrfing and the processing, distribution, and other aspects of handling the products that result from farming. Farming: Farming is the activity of growing/raising crops and products. It may be land intensive as with corn, or not, as with the raising of poultry, horticulture, or tobacco. For the most part, however, the assumption is that a relatively large amount of Iand is used in "farming" and that this activity is land dependent. There is a presumption that there is an unbreakable link between farming and the land. Farm: There are two definitions of a farm. One is a business center which aims to make a profit from farming. The other is the physical facility, comprised of land, buildings, fences, roads, and other improvements/investments, which accommodates the farm business and the acfiv/ty of farm/rig. Farmer: The senior person/people involved in farming at any given farm. This person/people may or may not own the farm but is the operator. A corp0rat/on, either owned by the farmer or by outside investors, is also considered a "farmer." The most senior person on a farm may be the farm manager. Less senior people working on the farm (paid hands, machinery operators, contract labor) are participating in farming and might generally be thought of as being farmers, but are not inctuded in the definiton of farmer for the purpose of this study. COM2d~NTS ON SCOPE THE STUDY Farm{rig businesses are impacted by an extremeiy wide range of regulations, most of which affect the use of land. This study focused exclusively on land use regulations that affect the nature of the development that can occur on the land and the' density of such development. It does not address the impact on farming of regulations of a primarily environmental nature, such as those addressing wet/ands preservation, sensitive areas, waste runoff and so forth. While the affect of both categories of regulation on the business of farming may be similar, the scope of this work was purposely limited to the land use/density issue. The issue of land value tends to be related primarily to those farming operations that involve large amounts of land; i.e., are land intensive. While such farms account for the bulk of all land being farmed in Maryland, the number of smaller farm operations, many of which use relatively Little land, such as poultry farms, is significant. This study is most applicable, therefore, to the larger, land intensive farms, though it is relevant to all farms. 5 VI_ ORGANIZATION OF THIS REPORT This report consists of five sections in addition to the introduction. Section Two is the ExeCUi:ive Summary in which key conclusions are presented and the principal findings upon which those conclusions are based are summarized. In Sect/on Three, the business of farming is described. An overview of how land value is created is the subject of Section Four. The role of land value in the farming industry is presented in Section Five, while growth controls and their impact on agricultural land values comprise the concluding section, Section Six. SEGIION TWO KEY CONCLUSIONS The purpose of this section of the report is to summarize the key conclusions established by LMRG on the basis of our work and to identify the principal findings derived from the research and analysis that support those conclusions. CONCLUSION ONE The value of a farm rests primarily in the value of the land comprksing that farm. Farms are basically sold ~by the acre~. The value is a mix of the agriculture earnings potential, development potential, and residential use .value. Supporting Findin_gs The success of farming operations, particularly those involving the growing of crops, can vary substantially over short periods of time. They are affected by weather, world markets, public polic/es, and many other factors. As a result, a farmer's business can go from terrific to lousy in a very short period of t/me. In addition to the capability of the farmer himself/herself, and h'nprovements built on the land, the only constant in this process is the land itself. The quality of a farm as a business enterprise is important, but the worth of that enterprise is best reflected in the value it imparts to the land. The value of the farm as a business, absent the land, is minimal because of the highly uncertain nature of the business and the fact that it is usually highly personalized to a specific farmer/farm family. CONCLUSION TWO The value of re, al estate, especially the land, plays an impomant rOle in the financing of the farming business utilizing that real estate. Supporting Findings Most agricultural businesses take on a substantial amount of debt in the course of annual operations and many carry mortgages. The loans that result in that debt are made pr/madly on the ability of the agricultural enterprise to pay interest and repay principal from annual operations. Nevertheless, most financial institutions require that the loans be collateralized using the borrower's equity in his/her real estate. Consequently, the value of that real estate affects the willingness of the lender to make a loan and the size of that loan. CONCLUSION THI~E The value of land and the ability to sell it in order to renli?e that value play a role in' the ability of an agricultural enterprise to survive over the longer term. Supporting Findings The value of a farmer's land and the ability to convert that land into cash helps to support the farmer's business in several ways. Selling off a portion of the land in a time of financial need can help to assure that a given farmer retains his/her property. The value of the farm and the ability to convert that value into cash plays a role in the ability of the farm family to meet gift and estate tax obligations. The ability of the farmer to develop residences on the farm for members of the farming family and tenant operators of the farm helps to assure the presence of a pool of individuals who are willing to work on the farm. The value of the farm and the ability to convert that value into cash constitutes the principal retirement fund for most farm families. CONCLUSION FOUR Growth controls and various forms of development regulation affect the value of farmland, tending to lower the value relative to less regulated land in most cases. Supporting Findings Most development regulations affecting farm/and are aimed at malting certain that the farmland remains in agriculturaI use, or is as lightly developed as possible. The agricultural use value of land tends to be the lowest "productive use" of land (in contrast to agricultural, woodlands, and other generally "unproductive" uses of the land.) In most instances the princip,al non-farm development likely to occur on the land is residential, and the lower the density of the permitted residential development, the lower the value of thi land on a land per unit basis. Consequently, the application of development regulations such as agricultural use zoning, or low-density permitted development (for example: one unit per 20 acres; one unit per 50 acres) tends to place farmland in the category of lowest potential value relative to areas with fewer land use restrictionS. CONCLUSION FIVE Application of growth controls and deVelopment regulations directly affects only a relatively small amount of farmland acreage in a given year but ail ., farmland as a class and every farmer in the long run. Supporting Findings The number of acres of farmland that is actually taken out of production and converted to "development" in a given year is only a small percentage of the state's total Iand being farmed. Thus, in a given year, only a few farmers would actually be denied access to the higher land values that might result from less regulation. However, imposition of regulations has a ripple effect that impacts ali of the state's farmland to some degree. In addition, there appears to be a strong negative psychological impact on ail farmers as a class, even though most recognize that in any given year, for any given property, the likelihood of actually realizing the sale of land for development is minimal. These two impacts tend to negatively affect the business outlook of farmers and their willingness to stick with a business that is not easy to begin with. CONCLUSION SIX The principal value of most farmland is related primarily to its agricultural productivity. Zoning, development regulations, and other government based actions influence the non-agricultural value. Supporting Findings The great bulk of all farmland does not'fall within a reasonable geographic definition of areas likely to be developed in the near term. Consequently, when a farmer moves to realize the value of his/her farm, that value is going to reflect primarily the ability of that land to support productive agricultural activity, plus the value of improvements such as buildings,'fences, and so forth. Except, in certain specific and unusual instances, however, all farmland has some non-agricultural value. Consequently, while land use controls tending to limit development may have relat/vely little net impact on the value of most farms, they may have a more significant impact on the ability of a given farmer to sell ali or part of the farm in any given year for the maximum possible value appropriate to that particular land. 9 OVERALL CONCLUSIONS Zoning and other forms of land use regulations and growth control measures reduce a farmer's options with regard to disposition of his/her land at optimum value. This is actually what they are designed to do, but such actions affect farmers and farming in several ways. Farmers lose some amount of current value when subjected to restrictive zoning. Appraisals of farmland undertaken in connect/on with ~e Agricultural Land Preservation Foundation program support the fact that there is some developrnent value in all agricultural land. That value is capable of being diminished by land use regulations when development options are reduced. I Restrictive land use regulations cause farmers to lose financial flexibility, particularly with regard to the disposition of the Iand when required to generate funds to cover a short term farm business or personal need, or to settle a long term obligation such as gift, inheritance, and estate taxes. Options available to lenders with regard to provision of loans are reduced, particularly with regard to the size of ioans. While the underlying rationale for the loan is the agricultural business itself, the value'of the farmer's land, including the development value of that land, can make the difference in the willingness of the lender to make the loan and/or the size of the loan. On balance, therefore, those agencies undertaking programs that reduce the developability or potential development intensity of farmland can negatively affect the welfare of the state's farmers as a class over the longer term and the welfare of certain specific farmers, especially those close t6 developing areas and those needing to realize maximum cash value for the farmland, in any given year. These impacts should be taken into account in the course of preparing and implementing such regulations. I0 SECTION THREE THE BUSINESS OF FARMYNG The purpose of this section of the report is to provide a brief overview of the business of farmin~ and to introduce the relationship between that business and the land. CI_IRtkENT NATURE OF THE INDUSTRY The overall size of the agricultural industry in Maryland, involving ali of the many components of agribusiness, cannot be determined from available data. It is known to be large, however, and includes those firms that process agriculture 'products as well as those /.nvolved in transport, servicing farms, and other components. For many parts of the state agriculture is the principal driver of the local economy. The Iinkage between successful farms and a healthy agricultural industry is clear. The latter cannot exist without the former. The agriculture industry uses more land in the state of Maryland than any other industry. The business of farming takes place on approximately 28% of the state's land, and no other business comes close to using that much land as a factor in its operations. In fact, farmland comprises more of the state's tand than ali of its residential areas. As can be seen in Table 1, farming in Maryland encompasses an estimated 15,200 farm operations. The Maryland Department of Agriculture estimates that 2,250,000 acres of the state's land is in farms, most of which is being actively farmed at the present t/me. This results in an average farm size of 148 acres. Gross farm income per farm was estimated at $98,197 in 1991. Dividing this by the average size of a farm results in gross income of $663.50 per acre. Farming continues to evolve in Maryland as farm products serve society's diverse interests and needs. Of necessity, farming today reflects the pragmatics of operating 'a business enterprise in the business, political, community, and governmental contexts that ex/st at the end of the 20th century. Farm Ownership in Maryland remains strongly oriented toward the family, but the family farm may now be incorporated. There are some absentee owner farms, but the trend toward such operations peaked in the mid-1980's. There seems to be an increasing amount of land being farmed on a leased basis. The trend has been toward a greater number of acres being farmed per farmer, but not necessarily in bigger farms. The impact of the poultry, industry and of the poultry industry and of such spec/alt}, farm operations as sod, bott/culture, Christmas trees, oriental vegetables, garden vegetables, and so forth has tended to make some farms operations smaller. These kinds of operations reflect high value products of more intensive farming catering to urban markets. 11 TABLE 1 NUMBER OF FARMS AND ACREAGE MARYLAND AND THE UNITED STATES 1979-1991 Maryland Tota~ Land # of Avg. Acres in Farms Year 'Farms* per Farm (']'h. Acres) 1979 1980 1981 1982 1983 1984 1985 1988 1987 1988 1989 1990 1991'* 17 000 1'7 5o0 18 200 18 000 18 000 17 800 17 500 17 000 16 500 16 000 15 600 15.200 15,400 United States # of Total Land Farms* Avg. Acres in Farms (Th. Farms) per Farm (Mil. Acres) 159 2,700 2,4.37 428 1,042 157 2,750 2,440 426 1,039 154 2,800 2,440 424 1,034 153 2,750 2,407 427 1,028 150 2,700 2,379 430 1,023 152 2,700 2,334 436 1,01 8 149 2,600 2,293 441 1,012 147 2,500 2,250 447 1,005 148 2,450 2,213 451 999 147 2,350 2,197 453 995 147 2,300 2,171 457 991 148 2,250 2,140 461 987 148 2,250 2,105 467 983 Source: Prior to 1975 a farm was considered any place with less than 10 acres having sales of $250 or more or places of 10 acres or more with $50 of sales. In 1975, the farm definition became a place that sells or normally would sell $1,000 of agricultural products Preliminary 'Maryland, Agricultural Statistics"-1991. As can be seen in Table 2, several counties stand out in terms of agricultural production. For seven ident/2ed agricultural commodities, Caroline County is first in three classes and sixth in another. Frederick is first ha two classes and fifth in two others. Queen Anne's is second in three classes and third in another. Other high rank2ng counties in terms of production are Kent, Dorchester, Carroll, Washington, and Harford. It is interesting that of the five counties involved in tobacco production (St. Mary's, Charles, Calvert, Anne Anmdel, and Prince George's--in order of production), none ra.n~ in the top seven in any other commodity category. This is partly indicative of the k/nd of soils tobacco grows in, with such soils generally being much less productive for other kinds of crops, as well as the fact that these counties tend to be in the vicinity of the expanding Washington metropolitan area. 1I. FAtDdYNG AS 1.2kND USE The description of agriculture set forth above emphasizes the business and operational nature of the industry. The typical resident of the state of Maryland however, often has a' very different 'dew of "farrrfing". With over two million acres of the state's land in farms, many state residents pass a farm in their everyday activities. To them the farm is, probably, an attractive area of pr/marily open land that, most of the time, looks unused. Farrrfing as a land use is, therefore, important to the state's residents and to its public officials far beyond the level of economic activity that actually occurs on the farms. As a land use, farming generates a pleasant recollection of past times for many people. It is frequently regarded as "open space". This misnomer reflects a lack of understanding of the business use of the land. One of the reasons there is conflict between farmers and government officials is that the role of the farm as a pleasant, "open" land use may conflict with what the farmer wants to do with the land. Fanning is a serious, large, important business in Maryland. At the same time, most of the state's cit/zens know liitle about the business of farming and relate to it primarily as a land :..:. use. For most Maryland residents farming is viewed as a pleasant, open land use. It is :-. important that the farm use of land be looked at in its true and accurate sense, as an asset ;~.- underpinning a business, and not just as Pleasant open space. FARMING AS BUSINESS Farming is a business. Farms are not "undeveloped". They are developed for the business of farming. Farming is a !and use, not a substitute for open space. Farms may be classified in plaTns as a type of open space, but they are first and foremost, an operating business. As noted earlier in this report, the business of farming takes many different forms, but regardless of its form, it is a business activity the purpose of which is to make a profit. 13 TABLE 2 SIGNIFICANT AGRICULTURAL COUNTIES STATE OF MARYLAND 1990 Rank Corn Grain So_o_o_o_o_o_o_o_o_?~beans Counties Ranked by Production b~/Commodi_l~__ Barley Wheat Tobacco 1 Kent Caroline Caroline Caroline St. Marys 2 Queen Anne's Queen Anne's Dorchester Queen Anne's Charles 3 Carroll Dorchester Queen Anne's Dorchester Calvert 4 Frederick Talbot Carroll Kent Anne Arundel 5 Harford Wicomlco Frederick Frederick Pr. George's 6 Caroline Worcester Washington Carroll .__ 7 Baltimore Kent Howard Wicomico _._ All Hay Milk Frederick Garret[ Carroll Washington Harford Baltimore Cecil Frederick Washington Carroll Harford Garret[ Kent Cecil Source: Maryland Department of Agriculture, compiled by Legg Mason Realty Group, Inc. While profit is the objective of the farm operation, it is also clear that many people participate in farming because they enjoy the lifestyle. They gain positive "psychic reward" fi-om farming. There is no way to quantify such reward, and it is certainly no substitute for real money when it comes to having to buy the necessities of life. Likewise, farmers receive a certain "imputed income" from occupying their residences on the farm. This is recogn/zed by the Bureau of Economic Analysis in its armual tabulation of income. In 1989 all farmers in Maryland received $152,818,000 as "imputed income and rent received" from their operations. Among other things, this indicated value by BEA illustrates the tight intertwining of the personal and business lives of the farm family. IV. FINANCING AGRICULTI. JRE As with any industry, financing is critical to the success of agriculture. One of the most. important facts to understand about financing agriculture is that agricultural loans are viewed ms commercial loans. Consequently, even the mortgage on a farm dwelling is likely to be .regarded as a commercial credit by the lending institution. This means that commercial criteria are applied to the making of such loans. Loans.to farmers are provided by a wide range of lending institutions. The most important, however, are the Farm Credit Associations associated with the Farm Credit Bank of Baltimore and the commercial banks located primarily in agricultural communities. The Farm Credit Bank provide credit to farm Bank borrowers in the five-state reg/on of Delaware, Maryland, Pennsylvania, Virginia and West Virginia. The Bank provides 44% of all of the borrowing done by farmers in this area. The .proportion is believed to be slightly higher for Maryland itself. Commercial banks provide the remainder. The Farm Credit Bank makes loans primarily through the various agricultural credit associations having responsibility for specific counties in Maryland. The system of which the Farm Credit Bank and its associations are member was established by the Farm Credit Act of 1971. Eligible borrowers of funds at the farm credit associations: Bona fide farmers and ranchers and producers or harvesters of aquatic products; Persons furnishing farmers and ranchers with services directly related to their on-farm operating needs; Owners of rural homes; and · Rural residents. 15 The Bank is authorized to make loans to other banks engaged in Iending to farmers and to corporations engaged to lending to producers or harvesters of farm products. A wide var/ety of types of loans are made by banks lending to farmers. These include: " Production loans to enable the farmer to plant a crop or otherwise produce products for sale, with such loans normally being secured primarily by the crop/product being produced; .Mortgages on farm property including land, dwellings, farm buildings, utility unprovements, and such needed to operate the farm and enable farmer to Eve on it, with such loans normaliy being secured by the value of the land and improvements; Equipment loans for large pieces of farm equipment needed to plank grow, harvest, and on-site process crops. The distribution of loans made by the Maryland Farm Credit associations is set forth in Table .3. As noted previously, most farm loans are mortgages and are regarded as commerciM in nature. That means that the lender assumes that the principal way of liquidating them is through earnings ga/ned from farm activity. However, essentially ail lenders require that the farm operation provide additional collateral as secur/ty gains possible failure of the crop or production of activity with the farm itself usually serving as that collateral. The trend has been toward slightly larger loans as individual farm operations grow and the corporate structure becomes more common. At the same time, while maintain the requirement for backup collateral, criteria for making a loan have tended to focus increasingly on the ability of the business to repay the loan out of income from operatSons. V. FARM VALUE AND DEBT According to the 1987 Census of Agric,alture, the average farm was worth $366,788 in 1987, or $2,261 per acre. (In 1992 dollars those values would be approximately $44,000 and $2,700.) The Census data indicate that 39.5 percent of all farms had interest as an expense, meaning that about 60 percent were debt free. The interest paid by those farms with debt .averaged $6,892 in 1987. While total debt is not indicated, assuming a 10 percent rate of interest, the average loan for farms w/th debt would be about $69,000, or $83,000 in inflated 1992 dollars. The average farm with debt, therefore, was carrying debt equal to about 19 percent of its value. 16 TABLE 3 COMPOSITION OF LOANS HELD BY 'FARM CREDIT ASSOCIATIONS SERVING MARYLAND FARMERS 1989-1991 Dec. 31 ($ooo) 1989 1990 1991 Change 1989-91 $ % Long-Term Modgage: Central Maryland $158,335,000 $173,854,000 $199,878,000 $41,543,000 26.2% Chesapeake $72,984,000 $81,383,000 $93,660,000 $20,676,000 28.3% Mawa $61,'161,000 $63,806,000 $73,211,000 $12,050,000 19.7% So.bern Maryland $44,663,373 $50,289,401 $51,127,827 $6,464,454 14.5% Total Dollars $337,143,373 $369,332,401 $417,876,827 $80,733,454 23.9% Short-Term lOANS: Central Maryland Chesapeake Matra Southern Maryland Total Dollars W. Va., Garrett, Alleg. Total Mortgages $96,142,000 $110,268,000 $109,954,000 $39,110,000 $46,129,000 $47,171,000 $23,810,000 $24,912,000 $28,027,000 $10,275,887 $111,684,982 $12,515,196 $13,812,000 14.4% $8,061,000 20.6% $4,217,000 17.7% $2,239,309 21.8% $169,337,887 SI1,000,000 $517,481,260 $292,993,982 $11,679,000 $674,005,383 $197,667,196 $12,014,000 $627,558,023 $28,329,309 16.7% $109,062,763 21.1% - Source: Maryland Farm Credit Associations, compiled by Legg Mason Realty Group, Inc. VI. CONCLUSiONs Farming is a major business activity in the state of Mm-viand. While the industry goes through relatively severe cycles based on weather and markets, over the long term farming a~ a b~iness at the state level has grown during the past several decades. The state has over 15,000 farms and over 2,000,000 acres of land in those farms. Farming operations are financed through a relatively few banks that spedalize in agricultural loans. Over the past decade these banks have been tightening their criteria with regard to lending. The shift has been toward making certain that loans can be paid back out of operations vice requiring the sale of' real estate. At the same time, regardless of how "production oriented" a loan might be, the lender Usually requires that collateral be posted and the farm real estate is the collateral most frequently used. 18 SECTION FOUR THE PROCESS OF CREATING LAND VALUE The purpose of this section is to explore the process of creating land value. Given its breadth and complexity, the subject area cannot be definitively covered in these few pages. We can, however, address those key points of land value creation that most directly affect the farmer. The farmer's concern is that land use regulations negatively impact the value of his/her land. In order to be lost, however, that value has to get into the land in some way. This study is about the g/ring and taking of actual (cash) or unrealized value in agricultural land. Understanding how that value gets there in the first place and how it can be removed, is essential tO exploring the impact that land use regulations have on the value of a farmer's land. HIGHEST AND BEST USE In the best of all pOssible worlds a given piece of land wilt always be valued at its "highest and best use". This term has a well deft_ned technical basis, being referred to and used in essentially every appraisal. Generally accepted reasonable definitions of highest and best Ese are: The reasonable and probable use that supports the highest present value of vacant land or improved property; The reasonably probable and legal use of land or sites as though vacant, found to be physically possible, appropriately supported, financially feasible, and that results in the highest present land value; 3. The most profitable use. In ascertaining the highest and best use of a given piece of farmland, as though available for development, it is necessary to analyze four factors: the legaiity of the use, the physical adaptability of the site to the use, the marketability of the use, and the profitability of the use. The analytical process involves a careful study of both the impact and the relationskip of each factor to the subject property. The best use conclusion reflects the optimal combination of them. Determination of value almost always entails knowledge of what business activities can occur on the land from a market standpoint, as well as what the "legal" (regulatory) conditions Mil permit. In the past, highest and best use was essentially determined only through .the economic viability of the actMty occurring on the land. While still important, the legally ~ use of the land, as determined by zoning and other land use regulations, is cdt/cal. 19 In the economic use context, the best use for most rural land is probably agriculture. (Or it could 'be no "use" at all when the cost of making the land productive for agriculture. exceeds the potential return from it.) The value is then a function of agricultural. productivity. But agriculture is not always the highest and best use of rural land. If that land is located near a source of non-agricultural development, and particularly if it is near a town or other urban senlement, the highest and best use could easily be non-agricultural. In these instances, the agricultural use must be mandated via the land use regulatory process, the assumption being that ff the regulations were relaxed, then the land would probably be "converted" to non-agricultural use. In snmmary, those who advocate the most free' and open market for land believe that highest and best use should be a function of economics-the most economically productive use of the land; i.e., the value of the land in a competitive supply and demand environment. In Maryland, however, essentially every jurisdiction has development regulations. These regulations dramatically alter the highest and best use value of the land. In essence, the zoning of the land is the principal determinant of its value with the economic use of the land within that particular zone playing a secondary role. That is why most developers and builders try to work only with land that is already properly zoned for the permitted use they want to develop, preferring not to get involved in the zoning change process. II TH]E LAND DEVELOPMENT PROCESS. The process of developing land establishes value and serves to cause highest and best use to be achieved on a given parcel. This land development process is analyzed here from two viewpoints--that of the broad context of market and public policy, and that of the more narrowly focused development of the land by, primarily, private interests. A. The Role of the Market Public policy as expressed through various types of land use, development, environmental, and other controls and regulations affects the location and, to some degree, the scale of development in a given area. But the actual volume of development is primarily a function of the market. One need only look at the real estate development situation in 1992 in contrast to, say the situation six years ago. In the mid-1980's a market was perceived to exist in Maryland for large volumes of residential units and commercial space. In 1992 the situation was almost completely the reverse, with only a moderately active resident/al market providing any real life to the development business. The situations both six years ago and in 1992 are probably inaccurate. The market of six years ago was perceived as being more positive than was warranted, while today it is undoubtedly being viewed as less positive than it should be. The point is that the market establishes the broad framework for development. 2O Farmland is as affected by market forces as any other type of land. However, for most farmland the principal market is undoubtedly that for farming, not for some other use. Most farming activity on rural land establishes the highest and best use of that land and dictates its value. If the farmland is productive and alternative uses for the land are minimal, then its value MI1 be a function primarily of its agricultural productivity. In instances where the land is in the vicinity of non-agricultural development, however, the market for housing or, possibly, for other uses may dictate its ultimate value. The market is governed by overall economic additions and the perception of individuals and businesses with regard to their future economic health. If they are optimist/c, then market pressures are likely to be greater. If they are pessimistic and investment in personal and business matters is minimal, then development pressures wiI1 be reduced. There is relatively little market generated pressure for development in areas where economic conditions are poor, investment is minimal, and growth absent. On balance, therefore, the land development process is a function of these broad market forces translated into investment in private residential and commercial real estate. B. The Role of Public Policy In the State of Maryland public policy with regard to development has been eXpressed in a very wide.range of land use, development, and environmental controls and regulations. In fact, Maryland is generally regarded as one of the most progressive states with regard to local and state level land use and environmental regulations. The State Land Use Act of 1974, the critical area legislation of 1984, and the Economic Growth, Resource Protection and Plarming Act of 1992, with their attendant regulations and procedures, along with many other state level land use programs, tend to put Maryland in the front rank of ten or so states (Florida, New Jersey, Oregon, California, and others) in implementing strong programs regulating land use. In Maryland these programs are carried Out primarily at the local government level, especially the county level (inclUding Baltimore City). Maryland is nearly unique in that it's counties have particularly strong powers. This permits public programs to be centralized and enables them to be large enough to have real power. Operating within guidelines established by the State, most Maryland counties have established extensive planning and development control programs using a very w/de range of implementation techniques from zoning to purchase of development fights. In essentially every Maryland jurisdiction, development is a highly orchestrated process with the government being a parmer nearly every step along the way. While much development is permitted as a matter of right under local zoning ordinances, even that development w/il likely require a number of approvals before investment in construction' occurs. 21 Consequently, government regulations dramatically influence the use that can be made of any given piece of real estate and, consequently, its developability, C. The Role of the Community In this imtance community is defined as residents and businesses living or operating in the vicinity of a proposed development. Even if market conditions are favorable and ali regulatory requirements have been met, it is possible that development can be .stopped. This occurs when community activists, neighbors, and other groups express their displeasure at a particular development. The land development process in the 1990's must take into accotmt community interests and concerns. It is not.unusual in this decade for a developer's Erst action to be to the adjacent community to test its reaction and to try to enlist its support for his project. D. The Owner The owner of land is a participant in the development process, whether or not he/she wants to be. In some instances the owner initiates the process of development by petitioning the local government for a zoning change that would permit a certain type of development. In other instances, those changes are made without the active participation of the land owner. Land owners, including farmers, have also been known to approach developers to see whether that particular developer is interested in developing on the land owner's property. The property might or might not already have the appropr/ate zoning. On balance, however, most owners of buildabte land are not actiTe participants in the development process. They are usually pulled along by the various governmental, community, business, and market forces affecting their land. Numerous examples to the contrary exist, but we believe that the great majority of land owners including owners of farmland, woodland, vacant and unused land, and other land generally outside of a community's already designated "envelope,', ~fit the description of limited participants in the land development process. E. The I._nd Speculator Speculation is a term that tends to have a negative connotation in our society. Speculators are frequently regarded as people who make money without making a positive, constructive, value adding contribution to a product. Nevertheless, in most markets speculators serve a useful .role. Speculators typically constitute the leading edge of the land development process. They identify land that has the potential for development at some t/me in the future. That land m/ght already have some of the approvals necessary to be developed, but it is more likely 22 to not have such approvals. Consequently, speculators frequently target farmland for thek activitieS. The process of obtaining appropriate approvals for farmland can drarnadca/ly increase its value. This is how the speculator obtains his/her return. At the same t~me it might not be possible to obtain the approvals and the increase in value might not occur. That is' what makes speculation a risky business. Speculators are not necessary to the process of causing development to occur on agricultural land. The presence of speculators probably causes some increase in land values in various parts of the state. Of course the speculation does not have to be in connection with development. Some speculation occurs in anticipation of other changes such as natural resource extraction (mining, petroleum drilling), building of a road, and so forth. In the case of otherwise undeveloped farmland, the speculator may serve as an intermediary between the land owner and the land developer. The speculator may or may not take an ownership interest in the property. The mere interest of the speculator in a piece of land can cause some increase in ia value, assuming that the speculator is not cloaked in the guise of another farmer or other person who would appear to be interested in the land only for its present use. The vast majority, of farmers do not speculate in land. Rather, they use the land for agricultural purposes. F. The Lartd Developer The land developer "wholesales" the land. He/she buys it from the original owner or a land speculator, obtains the necessary approvals, and sells it to one or more real estate developers. This is a high risk/high reward business. Risk is diminished where the land developer is working in a context of public policy that has made it clear where various types of development are to occur over a gven period of time and has backed up these policies by installing appropriate infrastructure. Typically, however, the land developer must acquire the approvals necessary to cause real estate development to occur. The gain for the land developer is in purchasing the land at the lowest possible dost and selling it at the highest possible value after making such improvements as are necessary to permit real estate development to occur. The land developer is not always a participant in the process since some real estate development occurs on land purchased directly from the original owner. A significant amount of Ia-ge development, however, occurs on land that has been prepared for such development by a land developer. G. Rea/Estate Developer The r~al estate developer completes the land value generating process. The value of the la.nd on which built projects sit is more valuable than vacant land, even when that vacant land has all of its approvals. A built project generates a "supportable land value" that can be mathematically derived based on the sales price of the development on it and/o~: the rent 23 stream generated by ~'ental projects as related to time. While the real estate developer is fi-equently regarded negatively by those entities wanting to preserve land in its undeveloped state, the developer is probably not the principal reason land is actually built on. In most instances, good real estate developers wili work only with land that has already received most oi~ its approvals. They are not land developers or land speculators. They make their money building, not antidpating future land value increases. In this regard, the developer is like a manufacturer; he/she "manufactures" built space on the land. Since the real estate developer causes the most visible physical changes to occur on the land, however, he/she is the most frequent target of those who oppose development. I-I. The BottomLine An increase in land value"i~ likely to occur at each stage of the development process. As noted prev/ously, because of the involvement of governmental entities in the process, there is usually extensive communication between developers and regulatory bodies. In theory, a profitable return is generated at each stage of this process to the entrepreneur taking the risk.. The position with the least risk is that of the original land owner. This assumes that the original land owner is able to support h/s/her cost of the land with the use occurring on the land when it was originally purchased. Some land owners become land speculators when they perceive increased future value and hope to receive that value by selling to a developer. Owners are truly playing the speculation game when' they borrow money on anticipated future value. At that point they become locked-in to having to sell the land for higher future value. Th/s has happened to some farmland owners, and the agr/cultural land preservation program has served as a means of generating funds for such owners. Losses in the land development process occur primarily when anticipated future value cannot be realized because the next higher level of development does not occur for whatever reason--market, community concerns, public approvals. While the land development business is often associated with great gains and creation of a large amount of wealth, which ~s the case in some instances, for many other people it is simply another business that creates a reasonable return. In fact, at the present time it is a very difficult business to be in for many who entered it in the last decade or so. THE ROLE OF FARMLAND IN THE DEVELOPMENT PROCESS Farming is a business use of land, as is active forestry, and other land intensive businesses. It is erroneous to think of agricultural land as "vacant" or unused or "open space". Because there is so much of it, and because farming use is a relatively low generator of income to the land, farmland tends to comprise the bulk of the land that will ultimately be developed. It can be assumed that a number of farms are sold each year in anticipation of development. However, this does not mean that development occurs on all such farms in the near term 24 or even in the long term. W'here the farm is large, or has special attributes, or is considered particularly strategic from the standpoint of its location/visibility, the "loss" of that farm to non-agricultural development is frequently highly publicized and may create a significant negative reaction. Most such transfers, however, probably are not publicized and are considered by the involved parties as simply a normal component of the process of urban/suburban growth. In many instances farming serves as an interim use in the development business. An actual case in Frederick County follows a ctassic pattern. An elderly farmer/landowner sold a farm to a speculator/land developer but continued to farm the land under contract. The land developer, with the concurrence of the County, which wanted to direct development to this general area, granted the land developer the necessary approvals. The land developer sold individual parcels to three different real estate developers for two residential projects and a commercial project. The farmer continued to farm the land throughout the entire process until development actually occurred on the various parts of the project. Consequently, the transition from farm to development was quick, clean, and acceptable to all of the parties involved. Probably the biggest issue with regard to creation of land value is its psychological impact on the farmer/landowner. As that class of individual controlling the greatest amount of potentially developable land in the State of Maryland, the attitudes of farmer/landowners with regard to development is critical. Given the ebullient development atmosphere of the 1980% many farmers perceived the likelihood of being able to make a substantial amount of money selling their farms to developers. The dramatic downward shift in the market, however, and increasingly rigorous public policies, have altered the environment for development in rural areas. Consequently, the likelihood that in any given year many farmers Mil be able to obtain any significant value from their land other than its agricultural value is 1/m/ted. Farmer,s tend to react as ~ Class, to these matters, h6x~7~ver: Consequently, as a class, farmers are concerned that increased regulations will diminish even further their oppornm~ty to obtain non-agricultural value for their land by limiting the market supportable highest and best use of the land through intervention in the development process described above. These concerns affect their long term outlook on the business of farming and have caused some to exit the business "while we can" or to consider doing so. 25 SECTION FIVE THE ROLE 'OF LAND VALUE IN TH~ BUSINESS OF FARMING Discussion of the merits' of various growth control techn/ques, particularly the growth management program proposed by the governor to the Maryland General Assembly in 1991 and commonly referred to as the "2020 Legislation", generates very different views on the importance of the value of farmland to a farmer's operations. The purpose of this section of the report is to evaluate that relationship. Farmers contend that they need reasonably high farmland values in order to support the business of farming as well as to prov/de a reasonable return on investment to support their long term welfare. Consequently, they say, it is necessary to permit market forces, as unconstrained as possible by regulations, to dictate the value of their farms. Conversely, those who support a policy of strengthening land use regulations applicable to farmland and its development say that such policies won't have much affect on farmland to begin with and, even if they did, that value is not needed by the farmer to pursue his business. The purpose of this section of the report is to analyze the role that the value of farm/and plays in supporting the farm operation and the farmer's personal welfare, and thus the business of farming. In the following paragraphs, the various ways in which land values support farm businesses will be analyzed. The analysis covers the role of land value in providing capital to farms. As will be seen, the value of the land comes into play in two principal ways: · As an important part of the value of collateral posted to obtain loans; As paid-in surplus to be extracted when necessary to support farming operations and/or the welfare of the farm operator. CAPITAL FOR THE FARM BUSINESS As with any business, a farm needs capital. That capital is provided in the form of equity invested by the farmer/farm family or stockholders of the corporation and in the form of borrowed funds from lending institutions. Most farms do not generate enough surplus ann~ual income to create a pool of funds that can be used to expand equity. Maintenance of a successful farm/rig operation w/ii usually create "paid-in surplus" by increasing, the total value of the property. Consequently, for initial purchase of the farm and for annual operations, borrowed fi.rods constitute the principal source of capitai. 26 Land value is a central element in many loams.used to generate and support the business of farming. In fact, it is the principal "hard" assetl '~hat the farmer can furnish to a bank in support of a loan. Various areas in the business of farming where land value plays a role are analyzed below. A. The Farm Mortgage A farm mortgage is essentially the same as a mortgage on a home or commercial property. Regardless of whether or not the farm is the primary residence of the farmer, however, banks providing farm mortgages consider these loans to be commercial in nature. This means that they assume that liquidation of the loan, the periodic payment of principal and interest, is directly related to an income stream generated from the property being mortgaged. Money borrowed through a mortgage can bg used to purchase land to be farmed, w/th or without buildings and other improvements. It can be used to fund the construct/on of improvements on the property. Because of its pr/madly commercial nature, the lending institution will tend to make certain that the funds are used primarily for business purposes. In Maryland, about half of ail farm mortgages are provided by the regionaI Farm Credit Associations that are part of the Farm Credit System. The composition of loans held by the Maryland Farm Credit Associations is shown in Table 3 in Section Three. In t991, over $366 m/Ilion of these loans were for long-term farm mortgages, or 65% of the loans in the portfolio of the associations. The Farm Credit System is a cooperative system established by Congress but completely private in nature and owned by the farmers themselves. This accounts for the high part/dpation by the farmers in the loan programs of the farm credit banks. The other 50% or so of mortgage financing provided to the farmers in Maryland is issued by.private banks, primarily those in rural areas catering to farmers. Private banks compete' with the Farm Credit Associations and many have established working relationships with farmers in their local areas. Interviews w/th bankers at both the Farm Credit Associations and with the private banks revealed the importance of the value of land to the quality of collateral underpinning the loan. The banks undertake an appraisal of the land in order to establish its value. The appraisal Iooks at comparable properties. The banks feel that in essence every property has some development value and that development value is reflected in the appraisal and thus in the quality of collateral and in the amount of money that can be borrowed against the collateral. It is interesting that for the most part, the house in a farm mortgage is incidental. The value of the land is in its agricultural productivity capability and its salabilityl 27 In a highly publicized situation that developed in the early 1980's, many mid-west farmers were unable to pay off loans on their farms and had their properties foreclosed on by lenders. Most of the loans were supported by the agricultaral value of the land. Farmland values grew steadily .i2 the late 1970's and into the 1980's. Then values fell predpitously. Bankers in Maryland note that the drop in farmland values that occurred in many parts of the nation at that'time was scarcely felt in Maryland.. The bankers believe that this was due to the fact that the potential for development exits on much of the land in Maryland, thus supporting its value. They also observed that many Maryland farmers can generate income by having one or more family members work off the farm. The bankers indicate that they lend primarily on market value as indicated in the appraisal, and would usually lend 75% or so (a range of 70% to 85%) on this value. Any development value in the land provides a cushion, although it is perceived as a difficult value to realize if liquidation is necessary. Nevertheless, the bankers indicate that perhaps 75% or so of their loans are secured in some way or other by real estate. In evaluating a loan, the bankers look first at the repayment capacity of the farmer, then at the .collateral position. This represents some change from the process of a decade or so ago. Now it is fairly common for the farmers to provide an income statement and for the land to serve as collateral. It is clear that current lending practices are more '%usiness" oriented today than used to be the case. Despite the efforts of bankers to move toward a primarily net operating income approach, however, it is not possible to isolate the land factor from the farming activity. The real estate remains an underly/ng asset. At the bottom line, the banks want to lend to viable businesses but to have the comfort of a strong collateral position, which is linked primarily to the value of the land. The bankers recognize that farmers see their real estate as their primary asset and that they try to build the equity in that asset over the years. It is dear, therefore, that the value of land is of critical importance in establishing the quality of collateral for a farm mortgage and that any development value included in the total value helps to enhance the asset. B. ~Operating/Product/on Activity As indicated in Table 3, the Maryland Farm Credit Associations, Farm Credit Bank of Baltimore as of the end of 1991 had over $197 million in short term loans outstanding. Most of these are production type loans. A production loan is made to a farmer to enable him/her to purchase seed, fertilizers, pesticides, and other items needed to develop a crop for sale. Repayment of these loans is absolutely linked to the future value of the crop. The Association will not usually require that a farmer collateralize his equity in his real estate to obtain, an operating loan. At the same time, the Association looks at the quality of that 28 real estate and is much more interested in providing the loan if there is some potentially realizable real value in that equity. In fact, it' is these loans that represent the biggest problem for the banks and for the farmers. The farming business is almost completely dependent on weather - and to an important degree on market Values far beyond the control of the farmer. A bad growing year or a weak market Can result in a default on a production loan. Since most farmers do not have enough liquidity to repay such a loan out of savings, they may have to sell some land to repay the bank. Bankers interviewed in connection with this study were able to cite numerous instances where this occurred. In some cases the farmers sold parcels to a neighboring farmer. In other instances parcels were sold for non farming purposes to individuals, or homebuilders developers. In such cases, while the loan is clearly one structured on the income generating merits of the funded farm activity, disposition of lan~ to pay off notes has saved many farmers and kept them in business. In this way all or most of the farm has been saved from possible sale for development. C Eq~pme~Loans Most equipment loans are secured by the equipment itself, with a high proportion of the funding being made by manufactures and dealers. Equipment today is much more expensive and much more complicated then it used to be. It is not unusual to find a piece of farm equipment costing over $100,000. The loan on such machinery is multi-year in nature. It should be liquidated out of income earned from the more efficient operations contributed to by the new machinery. That does not always happen, however. Consequently, as in the case of a production loan, the ability of a farmer to realize some value for land that might have to be sold to pay off an equipment loan is important. It is not generally taken into consideration by the lender when making such a loan, but, as with any business debt, liquidating an unrelated 'asset to generate cash to pay off the loan can save the business operation. D. Backup Funds For Operations The analysis above emphasizes borrowing funds to buy land, or produce a crop, or buy equipment. Some farmers will choose not to go into debt for these purposes. Instead, they might sell a portion of their farm to raise the capital necessary to pursue their business operatio.ns. For instance, a farmer might sell 10 acres of land viewed as having some development potential and thus bringing a relatively high price, in order to buy 50 acres of land in another area that would be used entirely for farming. Land might be sold to purchase a necessary piece of equipment, or to make improvements on the farm. This role of land as a source of backup capital is important to the farm business. Value fi-om the land can be realized up front with the money being used to fund operations, or, after the fact, 29 to liquidate a loan tha{ can.not be paid off out of operating income, or simply to reduce debt in general in order to make the business more viable. E. SmmnarY Lending practices to farmers have become increasingly strict. As one banker described it, they have moved out of the "good old boy" stage to one linked to operating statements and business acumen. In former times the reputation of the farmer and the value of his/her land were the principal elements underpinning the loan. Now it is the strength of the farm's operating statement and the performance of the farmer as a business-person. Even in this current environment, however, bankers and farmers both agree that practically every business move undertaken by the farmer translates into the value of the land a~.d is supported by the value of the land. That value includes the agricultural use' value as well as additional development value that results in its total fair market value. IL SUPPORTING FARMER EQUITY AND WELFARE The items covered above are relatively easy to document. The value of land as a contributor to the welfare of the farmer is less documentable, but it is in this area that the farmer feels most strongly that anything that reduces land value impacts directly on his/her welfare. Common to this concern is the fact that the farm business is, for the most part, a sole proprietorship. Most small, closely held businesses create value over time by increasing profits and growing the value of their stock. There is no stock in the typical farm, and the level of business operation is constrained by the amount of acreage being farmed. To a farmer, the land essentially represents the stock in the business. Different ways that' this value is used to enhance the v~elfare of the farmer and the farm family are described below. To most people on a payroll, even entrepreneurs owning small companies, this particular form of personal economj'c survival is almost completely unknown. A. L~nd As ~Paid-In Surplus" This has been referred to previously. Bankers interviewed in connection with this study emphasized that farmers reinvest almost everything they earn in the farm operation in one way or another. They will buy more land, improve farm buildings and infrastructure, buy bigger/better equipment. The typical farm gets its operating value primarily from the quality of the farm operation and thus the skills of the individual farmer. When this farmer leaves the scene, to be replaced by a family member or a farmer from outside of the f~rnily, the only constant in the equation is the value of the farm's land, buildings, and stock. This is the operation's principal form of paid-in surplus- If the farm is sold to outside interests, who will either farm it or groom it for development, what they pay essentially reimburses 3O the farmer for that p~aid-in surplus. farmer's savings account. Consequently the value of the farmland serves as the B. Payment Of Estate/Gift Taxes Preservation of a farm from generation to generation is made difficult by federal and state estate and gift taxes. This situation arises sometimes after the death of one spouse, but ilmost certainly after the death of both spouses of a sen/or farm family. At this time the rest of the family is faced with a sign/ficant tax liability. That liability has to be paid off in cash, but the biggest asset generating it is probably the farm itself. That means that the farm may have to be sold, in whole or in part, to satisfy the tax liability. At a recent Maryland Farm Bureau conference, it was shown how granting the development rights to a farm to a land trust will significantly lower its value for estate tax valuation purposes. This is one way to avoid the high tax liability. It also illustrates a recognition that there is probably some development value in all of these farm properties. Another approach would be to have the heirs to the estate sell a gott/on of the property. If that portion had relatively high value as a result of its potential for development, then this would enable the family to pay off the estate taxes and continue to farm the remainder of the property. C. Providing for Retirement This particular role of land value in the farm seems to be regarded with der/sion by non- farmers. Yet, it is truly important. It goes back to the fact that for most farmers the value they build into their farm operation is their principal pa/d-in surplus. Unlike selling stock for which there is a broad market, the market for farmland is relatively small. When time comes to sell that property to create money on which the husband and wife farmer are going to live for the rest of their lives, they want to obtain the max/mum amount possible. If that amount includes value created by potential development, so much the better. In any case, they at least want an open, competitive market and for a reasonable range of bidders to come forward to offer to purchase the farm. This market will be broadened if there is a lack of encumbrances and the greatest range of opportunity value /nherem in the real estate. By far the worst thing that can happen would be for the market ro be limited because of constraints placed on either farming or the non-farm development of the property and for the value to be dimin/shed because of overly restrictive land use regulations. Since this is the termination of the farmer's use of the land, the business aspects are no longer a factor. This is the time to cash in based on past performance, and the cash comet almost entirely from the real estate. The crops have to be created over again each year by the new farmer and obviously carmot be transferred, in most instances, by the retir/ng farmer ro the new farmer. The land represents the principal salable asset. D. M~tintnining The Farm Family And Labor Being able to build houses that would be occupied by family members and by the people working the farm can be very important to helping to maintain the farm. In this day farm f~mily members tend to disperse very easily. Good labor is di~cult to attract and retain. Providing a residence on the farm can help keep the farm family together on the farm and working on the farm. Providing residences for the farm manager and/or other laborers is also imponann Money may not exchange hands in the development of such housing, but it is important to maintaining the viability of the farm. Summary Businesses serving farmers note that farmers reinvest their income in their fax'ms rather than in personal financial investments. Indicative of this is' the fact that approximately 60 percent of Maryland farms have no debt. They also note that farmers have a strong respect for the land and for sound business practices. Farmers recognize that there is little to their operation except the land once they are out of the picture--through death, or retirement, or simply a desire to exit the business. Most current farmers purchased their farms, or inherited them, in a'period much less constrained by land use regulations than is currently the case. There is great concern that when the time comes for them to seI1 their property, there will be so many restrictions and limitations and conditions on it that the value will be diminished, or there will be no ready market, or both. To these people the value of their farm, a value which reflects both its agricultural use and its use for other purposes, is critical to the welfare of the current farm. operator and his/her family. 111_ CONCLUSIONS The value of the land comprising a farm plays a central role in financing the business of farming. While bankers hope never to have to be repaid from funds generated by liquidating all or part of a farm, they recognize that the land represents the ultimate ' collateral for loans, even those that are to be amortised pr/marily from income. Lenders don't care whether the value of the land is generated primarily through farming or through potential non-farm use; they are interested only in the quality of the collateral. The bottom line value of farmland is a composite of farm and non-farm use. Bankers have made it clear that regulations perceived as having the potential to reduce the value of land create problems for them, particularly in the short term when there might be a relatively sharp drop in values as new laws are applied. 32 Land value is also important to the welfare of the farmer as an individual and the farm family. The value of the farm constitutes the farmer's principal "savings account", and the value of this account, when liquidated, is used to support retirement, meet emergencies, and pay taxes. This is a situation nearly unique to the farming business. Almost all other types of sma/l, closely held business operations create paid-in surplus by increasing the value of the company's stock, good will, transferrable, technology, and so forth. In the case of farming, land in essence constitutes the "stock" of the farmer. Farmland values in Maryland are relatively easy to monitor through the Agricultural Land Preservation program. Appraisals undertaken in the course of this program clearly show that essentially every farm offering its development rights for sale to the Foundation includes a strong component of non-agricultUral use value. 'Overall, for any given acre appraised in the program, the non-agricultural use value, the value of the "development rights," is roughly 40% of the fair market value. Given the farmer's dependency on having a substantial land value as a basis for maintmining the farming business and protecting the welfare of the farm family, this is a significant amount that needs to be taken into account in any public po[icy actions that might affect such values. 33 SECTION SIX THE IMPACT OF GROWTH CONTROLS ON AGRICULTURAL LAND VALUES In previous sections various aspects of farming, development, 'and land value have been analyzed. That material provides a framework for assessing the impact of growth controls on agricultural land values. The purpose of this section is to review the broad subject of growth controls and to define the relationship between such controls, business aspects of farming, and the development of farms. The section concludes w/th an assessment of the impact that such controls have on the value of farmland. I_ THE GROWTH ISSUE Following the conclusion of World War ti Americans went on a suburbarfization binge. Prior to that time, we were a nation that ' undertook almost all of its development within dries and towns. Our rural areas were in farms and woodland or otherwise simply unused. Beginning in the mid-1940's, however, the socio-economic nature of the United States changed dramatically. Improved economic well being, affordable and reliable automobiles, major highways, more efficient housing production technologies, a greatly expanded economic base, the post war baby boom and a generally up-beat attitude toward life and Living caused Americans to dramatically change their lifestyle objectives, their actual life styles, and the configuration of their cities and the areas surrounding them. This was the period of the "tract house", the suburban shopping center, the interstate highway, large suburban schools and the realization of the "American Dream". As Amer/cans pursued that dream and shaped their national economy, and as their national economy shaped them, farm productivity increased dramatically and the need to actually maintain as much land in farms dropped significantly. At the same time, people were attracted from rural areas to urban centers where job growth was occurring at a dramatic pace requir/ng the need' for workers. The farms didn't need as many people to work them because they were much more efficient then they had been. In what could be viewed as a natural transition, farmland not required for the production of agricultural products was converted to residential use that was needed to house workers in urban and suburban business establishments. The greater effidency of farming resulted in increased competition and caused farmers located on higher value la_nd near expanding urban areas to become less competitive. The option of selling the farm for development provided a "way out" for impacted farms and effectively decreased competition for the remaining farms. As one analyst at the American Farm Bureau Federation has pointed out, if all farms that had not been purchased for development were still in production, the farm economy could be a disaster. 34 This process was regarded without particularly great concern by almost all parties through the Midilg00's. Beginning about 1970, however, and probably heightened by energy issue concerns generated by the first oil crisis in 1973, many Amer/cans began to react negatively to the emerging pattern of development. The term "suburban sprawl" became institutionalized and private organizat/ons and governments began to implement more rigorous oversight of development activity toward the end of trying to control development. Farmers had been, whether willingly or unwillingly, principal players in the suburbanization of America; Much of the nation's growth occurred on agricultural Iand in the vicinity of urban centers, and at some rural locations developed for recreational housing. Many farmers benefitted financ/ally from the opportunity to sell property for development. Others benefitted because of a general increase in the value of farmland generated by the expanded market for land to be used for development. The amount of land in farms in Maryland, according to the Census of Agriculture and as shown in Tabte 4, dropped from 3,897,000 acres in 1959 to 2,634,000 in 1974. During the decade 1959 - 1969 the amount of land in farms in the state dropped by about one-third. From 1974 to 1987 the rate of loss slowed dramatically to a total of 23%000 acres lost, or 9 percent of the 1974 total. The loss of farmland led' to efforts to slow development and to channel it to areas best suited to accommodate it. In 1974, for instance, the state of Maryland passed the State l_and Use Act of 1974. This established the Maryland Department of State Planning and a statewide critical area program, required the development of planning guidelines for the local subdivisions, provided for state intervention in local plann/ng and development matters, and generally strengthened the hand of the state with regard ro development. In 1977 the state set up the Maryland Agr/cultural Land Preservation Foundation program to help preserve agricultural land by establishing agricultural districts and providing for state purchase of development rights. In 1984 the state established the Chesapeake Bay critical area as part of a comprehensive set of programs to restore the environmental quality of the Chesapeake Bay. In t.991 legislation was introduced (the "2020 Bill") that would have set target densities for different parts of the state and required local jurisdictions to adhere to those densities in their regulation of development. Of particular concern to the agricultural community was the proposal that much of the state be placed in a "rural and resource area" with a maximum density of one dwelling unit per 20 acres. In 1992 the General Assembly passed the Economic Growth, Resource Protection and Planning Act, which was signed by the Governor. These various programs document a growing interest on the part of the state, mirrored to a significant extent by most of the counties, in controlling growth. One of the side effects of this process has been the identification of those responsible for generating this growth. Farmers are viewed as being among the principal beneficiaries of growth because they offer their land for development. Developers, politicians, bankers, and probably other classes of 35 TABLE 4 TOTAL ~LAND IN FARMS STATE OF MARYLAND 1954-1987 Pedod Change Year Acres Cf % 1954 3,897,000 t 959 3,453;000 (~,?,000) -11.4% 1964 3,181,000 (272,~) -7.9% 1969 2,803,000 (378,000) -11.9%, 1 g74 2,634,000 (16g, o00) -6.0% 1978 2,714,000 80,000 3.0% 1982 2,558,000 (156,000) -5.7% 1987 2,397,000 (161,000) -6.3% Source: U.S. Census of Agriculture; compiled by Legg Mason Realty Group, Inc. people are also viewedas part of the problem for their contributions to growth on the urban fringe. In point of fact, however, it may well be that none of these groups is to blame. For the most part, suburban expansion has been a function of supply and demand with the typical American household creatirig the demand for suburban homes and a suburban lifestyle and the providers of the homes and the space responding to that demand by building the appropriate structures. The State of Maryland and many of its jurisdictions are instituting increasingly rigorous land use control measures. Because farmland is usually relatively easy to develop, these programs aim to reduce the amount of farmland being converted to development. The means for doing this have created problems for the farm community. One result of this concern is this study, to analyze how the various forms of land use regulations (growth controls) impact agricultural land values and farming operations. 1I. TECHNIQUES FOR CONTROlrJJNG GROWTH A wide variety of techniques are available for controlling growth. The focus in this study is on land use regulations. One analysis of these techniques divides them into two broad categories -- command and control regulations and economic instruments. A_ Command And Control Regulatory Instn~ments Most "command and controI" regulations are permitted under the police powers of a jurisdiction. Zoning is certainly the most prevalent such device. Subdivision regulations are another frequently applied police power, but it is zoning that has the most far-reaching impact on land values. Zoning absolutely governs the use and intensity of land. That converts directly into value. Simple economic formulations that establish "supportable land value" clearly document how more intensive development and development oriented toward the commercial end of th~ range of uses support higher land values. Agricultural zoning is prevalent in Maryland with 20 of the state's 23 counties having enacted a zoning district for the stated purpose of preserving agricultural land or offering priority-to agricultural activities. The character of the agricultural zoning varies substantially, however, from the one dwelling unit per 50 acres permitted in Baltimore and Frederick counties to the one dwelling unit per half acre in Wicomico and Garrett counties. Consequently, agricultural zoning, per se, is too diverse to be covered by one definition. Low density agricultural zoning, however, generally defined to include densities of at least five acreg per unit and more likely 10 to 20 acres per unit, seems to have resulted in a reduced amount of residential development in rural areas. Counties with iow density zoning have tended to stick with it fairly aggressively and appear to have caused a reduction in the amount of residential development in areas so zoned. It also appears that, as the density 37 permitted in an ag~cultural zone increases, the value of the zone as a way to "preserve" agriculture is lost. Some opponents of zoning that severely limit potential development have begun to pursue the poSsibility of receiving compensation for the lost value created by a change from more permissive to less permissive zoning. With regard to zoning, that course of action has generally not been successful, although the number of cases involving this issue appears to be growing and the decisions, such as the recent one in connection with beach property in South Carolina are tending to favor the land owner. Traditionally, however, application of the pol.ice power (zoning) to land uses does not require compensation, and in our judgment it is unlikely that it will. B. Economic Instruments Another approach to land use control makes use of economic instruments rather than mandatory standards. The purpose economic instruments is to create monetary incentives so that land owners voluntarily give up their fight to develop and the economic reward that might come from development in exchange for some other economic value. Principal economic instruments used in Maryland are purchase of development fights and transfer of development rights. The Maryland Agricultural Land Preservation Foundation program is a Purchase of Development Rights (PDR) program. As shown in Table 5, the program has been responsible for preserving over 98,500 acres of farmland in the state through 1990. The state of Maryland has been a leader in using the PDR approach to preserving farmland. Most of the suburban and rural counties have participated actively in the program and have helped to contribute to its success. The Transfer of Development Rights (TDR) technique is also used in various locations in Maryland. Its record of success is less clear. Montgomery and Calvert counties have been particularly strong proponents of TDR's and have used this technique to compensate farmers and rural land owners who permit the development rights appropriate to their land to be transferred to receiving areas in other parts of the county and to be compensated for giving up their fight to develop at the rural location. TDR and PDR programs are essentially the same, except that in the ri'DR case the amount of development within the implementing jurisdiction does not change --just its location. The agricultural community has been a strong supporter of the MALPF program. It feels that the program is an equitable way of compensating farmers for giving up, forever, the development rights to their land. At the same time, those interested in pursuing "command 38 MARYLAND AGRICULTURAL LAND PRESERVATION FOUNDATION EASEMENT ACQUISITION PROGRAM - HISTORIC PERSPECTIVE APpRAISE~ VALUE~ ACCEFFED ASKINg3 PRICE ACQUISITION DI~ O~RS ~tAT ACCE~D C~ V~ ~L ~TAL A~GE FAIR MARKET AGRIC~L ~SEME~ Y~R A~ES FA~ ~!~ % TOTAL AVO PER A~E A~TIONS TOTAL A~. TOTAL AM~. TOTAL~. ~TAL A~. ~TAL A~, ~TAL A~. 1~14 3~/. S,71].OS s~. ~,212,6~ S13,417,761 S 7.~4 S5.7~.339 ~31,2~5 ~33.~4 I~lS ~]% 1,1~7.U47 s~ S 7,12S.SI~ SlI.S]~,6~ SlO.2g~ ~,246.827 ~.1]i.017 Sl,~.llO 1~16 ~o~i IO,~.~] 77 of 121 I~ sglg/a~ 1917 - ~% ! I,~1-037] - _ a~ 110,197,1~ 74% !0,]~.1767 a~ S ~,791,g20 S23,741,2~ Sl3,1~ S~,175,430 ~.191.19] Sl,677.217 ~ or I I I 141 SI 5]~n~ 1919 ~ - 9,~.92~ a~ S14.~.1~ S27,~.116 S14,]~ Si3,2~i6 SI I,~ I,~7,~4 cz~ ~ ~. ~2.~saosl C~ Two 5] ~ 6] 7~.7~S IN S2]17/,c~ i ~ B~ S~ ~.465, I ] ! S 9.41~ 13.~2.023 S12,63~.137 Sl,27~.433 ~TAL 672 ~ I.I!~ LESS: 86.1926 I~ lllS~m~ ~ 91,532.17~ a~ SI 16,~2,~ . S~44,326,S7~ SI 3f,39~ $1~,~33,634 ~ S12,171,3~ ~,212.751 39 and control regnlatign" of farmland feel that PDR programs are too expensive and do not cover enough area to be effective. C. Comprehensive Planning Plannihg itself is an excellent technique for guiding growth. Plans serve as statements of public policy, and cit~ens will typically abide by the resultant public policy. This occurs because the plans are frequently followed by implementation techniques, usually of the "command and control" type, but plans also direct infrastructure, which affects the location of development. The plan is important because for most jurisdictions it is derived as a result of communications between the affected parties - land owners, developers, community interests, political bodies. Plus it represents an approach that, while not necessarily particularly liked by anybody, is acceptable to everybody. Because it has its roots in the polit, icat process, citizens have a say in the derivation of the plan. D. Infrastructure Extensions Infrastructure consists of roads, sewer and water facilities, schools, and other public services provided to the community. To a greater extent than ever before, the extension of infrastructure is being used to ~ide development. Linkages between the ava/lability of 'infrastructure and permitted development, frequently wrapped into "adequate fadlities" ordinances, are beginning to fall into the command and control category of regulating development. Nevertheless, the rationale for linking development to public infrastructure is clear and tends to be reasonably well accepted by most parties. 'The problem from the standpoint of those desiring to restrict growth is that some development can occur without additions to public infrastructure. Septic systems can work in rural areas. Roads rrfight already ex/st. No new schools m/ght be required. But where mose facilities are not adequate, development can be constrained, such as the building moratorium proposed by county executive Hayd.en of Baltimore County in the Perry Hall area. E. 'Summary As Maryland and its constituent jurisdictions have increased the level of control exercised over the land, especially rural .land, such controls have played a bigger role in rural development activity. It is clear from the pattern of development occurring in those counties with low density agricultural zoning, that there are fewer opportunities for profitable development in those areas and that the pace of such development has declined. It is nqt clear where the development that is not occurring in those rural areas is going. It rn/ght not be occurring at all or it might be going to jurisdictions with less restrictive rural zoning. 40 The use of economic instruments to limit growth in rural areas h~s been very successful in Marylar/d, especially the PDR program. TDlq's, while less w/despr:ad and somewhat less successful, have still made their mark on the pattern of development in Montgomery and Calvert counties. Comprehensive planning has been successful in creating an agreed-upon environment for development in a number of jurisdictions. This has helped to channel development and growth to areas where the community wants to see such growth and away from areas that it wants to protect. This has been done after open and direct communication among the various parties. Linkages between the extension of infrastructure and growth have' increased and are now a major component of growth management policy. For the most part, the infrastructure issue has had a minimal impact on farmland, most of which fails outside of development envelopes intended to guide infrastructure extensions. In the best of all possible worlds, communities plan for their growth through the comprehensive planning process, extend the infrastructure to the agricultural areas in an orchestrated manner, and generate controlled conversion of farmland to development. III F~ VALUES As a group of businesspeople farmers are probably as sensitive to the value of land as any group. Only land speculators and developers might have more reason to be interested in the land. Farmers work w/th the same piece of land over an extended period of time, however, while developers make their money by possessing land for only a brief period of time. The purpose of this part of Section Six is to look at typical farmland values as a component of determining the impact that land use regulations might have on such values. Several caveats govern the value of land held in farms. Values can vary from year to year depending on the success or lack of success of farming in any given year. A poor growing season for whatever reason, particularly several'poor growing seasons in a row, can substantially depress the value of farmland. Likewise, strong growing seasons can raise farmland values. Farmland values vary considerably in different parts of the state depending on the qualiry of soils, the existence of an agricultural infrastructure in that area, the types of crops grown, and proximity to developing areas. 41 It is nearly impossible to isolate a "pure farmland value" in a fair market value appraisal because essentially every acre of farmland has an alternative use that is potentialIy a more vaiuabie use than agriculture. Farmland value is closely mon/tored in the state of Maryland primarily because of the extensive program of development easement purchases administered by the Maryland Agriculture Land Preservation Foundation (MALPF). Before buying an easement, the state obtains appraisals on the property. As the system currently works, the appraisers estimate fair market value, which is the total value of the land for whatever use. It used to be that the appraiser also estimated the agricultural value. That was changed a couple of years ago so now the agricultural use value is calculated by the State and subtracted from the fair market value. In our judgment the formula used to determine the agricultural use value provides a good indication of the agriculture value of Maryland farmland. Table 6 provides a summary of the use-value of Maryland farmland based on rents that farmers had to pay at the time of a study conducted in 1991. The resultant use-value shows that the a_.~cultural use value of farmland in Maryland varies from $927.00 an acre on the high side (Kent County) to $307.00 at the low end (Allegany County) for farm use. The h/gher values tend to be on the Eastern Shore, moderate values in the central part of the stare and lower Values to the west. The M_AI PF easement acquisition program gives, a good indication of the non-a~r/cultural value of farmland. For the life of the program, from 1977 to t990, appraisai's indicated that the fair market value of the land offered for easement sale averaged $2,480 per acre. This figure has been very constant, rising to nearly $3,000 in 1989 and $2,700 in 1990, but otherwise being between $2,100 and $2,350. Among other things, this rather constant fair market value would seem to indicate that much of the land being offered for easement sale has not been impacted by development to any geater degree toward the end of the period than it was at the beginning of the period. (See Table 5 on page 38). Looldng specifically at the value of the development easement as calculated by the appraisers, it can be seen that, in fact, the value of the development easement has changed very little until recent years. In those recent years, in 1990 in particular, the new agriculture use-value calculation was applied for the first time. This tended to raise the amount paid for the development rights. For the most part, however, appraisers estimated that the development fights were worth generally in the range of $850 to $1,000 per acre. In 1989 the calculated value was $1,426 and in cycle two of 1990 it rose to $1,866. For the life of the program the value of the development rights has averaged $1, t05 per acre. There is enough demand for farms for whatever reason, to cause many to be sold at amounts beyond what the current agricultural activity itself can support. This "extra value" 42 TABLE 6, CALCULATED RENTS AND USE-VALUE OF FARMLAND, BY COUNTY THE STATE OF MARYLAND Count' Allegany Anne Arundel Baltimore Calvert Carroll Caroline Cecil CharGes Dorchester Frederick Ga~rett Harford Howard Kent Montgomery Prince George's Q'ueen Anne's St. Mary's Somerset Talbot Washington Wicomico Worcester Calculated Use-Value Rent 7% cap rate (S/Acre) (S/Acre) $22 $307. $30 $4.33. $36 $508. $27 $381. $37 $536. $60 $855. $51 $73O $39 $557 $.34 $489 $37 $524 $27 $386 $44 $625 $40 $567 $65 $927 $39 $561 $33 $465 $57 $809 $44, $625 $36. $517 $56. $798 $40. $572 $53. $750 $52. $741 Source: University of Marytand Study of Farmland Use-Value 43 has tended to come down in recent years as a result of less interest by outsiders in purchasing land for farms as well as somewhat reduced interest by those speculating on future nonagricultural use value. It is also possible that imposition of more stringent land use and environmental controls in agricultural areas has impacted values. Maryland Department of Agriculture data provides a long term perspective on agriculture values. Its I991 statistical book provides data on farm real estate values. These data are summarized in Table 7. The average value per acre of land and buildings in Maryland farms has remained fairly constant in a range of $2,000 - $2,500 for the last 10 years. On a constant.dollar basis, which would reflect inflationary factors, and would tend to make recent values high relative to past values, "real" values have undoubtedly dropped. The total value of land and buildings and farms has also remained relatively constant ~- between roughly $5.0 billion to $6.0 billion, and the average value .of a farm operating unit has tended to remain in the range of $300,000 to $360,000 over this 10 year period. These data show that there has been relatively little increase in the value of farm real estate in the state of Maryland over the past decade, and that there has probably been a drop in such values when inflation is taken into account. IV. THE IMPACT OF GROWTH CON'I~OLS ON AGRICULTURAL LAND VALUF_~ Growth controls constitute a mechanism for directing development to various parts of a jurisdiction. Any technique of this nature must, by its allocation technique, affect land values. To the extent that higher density residential or higher value commercial development is limited in a given area, land values in that area will be diminished relative to areas that are not so restricted. This assumes that the other factors required to permit development, either existing infrastructure or the ability to obtain building permits, exist in .the area. A. Value of Devel6pable Land It is a generally understood fact that the value of land is a direct function of the type and amount of development that can occur on that land. Land that can be developed for commercial purposes and for higher density residential is almost universally worth more per acre than land that can only be used for low density residential uses. Consequently, zoning or other control measures that restrict the use of land to low density residential is likely to restrict the ability of that land to increase in value. Per aci-e values of developable land in typical Maryland metropolitan and rural locations are set forth in Table 8. These data were derived from the experience and records from Legg Mason Realty Group Appraisal Services Division and reflect the observations of the appraisers who work in the division. Several points can be derived fi-om the table. First, 44 TABLE 7 FARM REAL ESTATE VALUES MARYLAND 1983-1 992 Yeay 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 Total Value Value of Land & Buildings of Farm Avg. Value Total Avg. Dwellings per Operating (Millions) Per Acre (Millions) Unit $5 727 $2,121 $6 o38 $2,236 $5 711 $2,179 $5 057 $2,023 $4 921 $2,009 $5 313 $2,261 $5 663 $2,462 $5 445 $2,420 $4 941 $2,196 $5 073 $2,255 $1,151 $1,244 $1,319 $1,325 $1,363 $1,5o4 $1,557 $1,39t $1,211 $1,258 $318,100 $339,190 $326,348 $297,446 $298,238 $332,084 $362,987 $358,224 $,320,844 ,$,329,411 Source: 'Maryland Agricultural Statistics"-1991. 45 TABLE 8 PER ACRE VALUES OF DEVELOPABLE LAND IN TYPICAL MARYLAND METROPOLITAN AND RURAL LOCATIONS 1992 Value per Acre Use Metropolitan Rural industrial $100,0(~3 + $.50,000 Commercial (mb<ed) $200,000 $1 Residential (20 U/A) $75,000 $2.5,000 Residential (10 U/A) $60,000 $20,000 Residemial (5 U/A) $50,000 $20,000 Residential (2 U/A) $30,000 $15,000 Residemial (1 U/A) $20,000 $10,000 Residential (1 U/SA) $10,000 $5,000 Residential (1 U/2OA) $7,500 $2,500 Residential (1 U/5OA) $7,500 $2,500 Agriculture (1 O0 A field crop farm) $7,500 $'2,500 Note: Source: (U indicates number of units, A indicates number of acres) These values were estimates under the following assumptions: Residential uses are physicalty raw, unrecorded land. Land is buildable for the indicated use. Public sewer and water are available for all uses except residential with a density of I unit per 2 acres or less, in which case sewer and water would be on-site. The land is or can be zoned for the indicated use with no problems. The land is currently not built upon. Two location scenarios: a metropolitan county (Baltimore, Anne Arundel, Prince George's, etc...) and a rural county (Kent, St. Mary's, Dorchester, etc...) The development sites are in 'suburban" locations in each instance. This is near but not in 'urbanized" areas. Legg Mason ReaEy Group, Inc.-Appraisal Services Division. land in metropolitan areas is worth more than land in rural areas for the same use. Second, the value of land that can be developed for a residential density greater than one unit per 20 acres is roughly the same as the per acre value of agricultural land capable of supporting a field 'crop. These data make it clear that limiting the development of agricultural land significantly affects the value of that land. This farmland still has some developed value, but it is essentially frozen by the low density zoning. B. Development Values as Reflected in MAI PF data Maryland's agriculture land preservation program provides an excellent overview of development values in rural areas. In essentially every part of the state, no matter how rural, the appraisers working on the program have found that some potential development is possible at some reasonable time in the furore. Farming simply does not support the highest value of the land. It is mathematically possible to demonstrate how higher density resident/al development or commercial development increases the value of the land on which that development occurs. This assumes that the resultant development product is marketable at market rates. These values are always higher than the agricultural use value. C. Agricultural Zoning and Land Values In 1990 the firm Resource Management Consultants, Inc. (RMCI) of Washington, D.C. was retained by the Maryland Office of Planning to study'the relationship between agricultural zoning and the value of farmland. RMCI presented its report, '~l'he Effects of Agricultural Zoning on the Value of Farmland," in February, t99t. A major conclusion of that report was that the analysis of agricultural zoning showed "no evidence of decreases in land value as a result of downzoning over a period of 15 years." This was not to say there was not some decrease of value. Rather, the report concluded that "general economic trends and growth pressures affectland sale prices to a much greater degree "than the zoning." In our judgment that study did not tell "the whole story." The study focused on four counties, all in either the Baltimore or Washington metropolitan area, in which agricultural zoning was introduced in the late 1970's and early 1980's. A rev/ew of this report reveals, to our thinking, that the data are not conclusive. In Car-roll County, where agricultural zoning has been in place for a while, the average sale price per acre has steadily declined since agricultural zoning was introduced. In three of the four counties analyzed, the number of transactions (sales per year) as revealed through RMCI's research, dropped significantly indicating a less active market, possibly due to the new zoning. Oniy in Montgomery County did the number of transactions increase. And it is interesting that Montgomery County has one of the most effective programs for compensating farmers for transferrable development fights. In the other counties, the 47