Ranch Valuations with ER Factor
The “ranch template” is available when you launch ClickForms (File/New From Template) and represents only an Executive Summary to demonstrate how to use AUMs as the Sales Comparison Approach (SCA) “effective units” via the ER land-mix procedure with the 2020 SCA Grid. The three (3) traditional are included, but abbreviated. Most ranches, where AUMs or the carrying capacity is the only reason for acquisition, contain large “non-deeded” components such as State and Federal grazing privileges. The state leases or federal permits are viewed as “possessory interests” much like a “contract right” in the private sector, i.e., no ownership but the right to graze during specified times of the year for a published contract rate which is below market rates.
At first glance, mixing AUMs and acres within the ER Factor (land-mix analysis) seems problematic or wrong to most. But upon further examination, the “mathematics” are NOT concerned about “labels” (acres or AUMs). What is occurring is converting a mixed property to a mathematical expression or composition rating (ER Factor). The percent change (Δ %) between each sales’ rating and the subject (not the % difference) is the same as the “original land-mix procedure” that has been part of ASFMRA’s rural valuation procedures since the mid-1980’s. The ER calculation for the subject is described in the SCA section or available in the HELP/DATALOG section of AgWare’s website.
Price allocation ratios in this market have been studied for several decades. Relationships change slightly over time, but extensive research and documentation for the ratios applied must occur for consistent data analysis and valuation reliability. For this example, the ratios were rounded and applied as:
Pasture 100.00% the standard for ranches
Low Utility 10.00%
Dry Crop/Hay 150.00%
Meadows/Dry Creek Bottoms 175.00%
Subby (Naturally Wet) Bottoms 200.00%
Forest Grazing Privileges (federal) 15.00% /AUM (via acres)
State XX Leased Grazing Privileges 13.75% /AUM (via acres)
BLM Grazing Privileges (federal) 6.13% /AUM (via acres)
(NOTE: while rounding ratios has been the norm for years, AgWare recommends only rounding to the nearest percentage for all categories below 100%)
The subject’s allocation for the state and federal grazing privileges will be discussed later, but some relationship must be stated for the subject in accordance with the “pasture” at 100% to evaluate or assign a rating to the subject. For now, assume the “privileges” ratios are a “given”.
Subject’s Mix or ER: Based on acreages and the ratios above, its ER Factor is 206%.
Four unimproved ranch sales included for the land component. The price allocations for “pasture” the base in this market, or the 100% land shown on the “top row” of the sales analysis is deemed the “standard”. Pasture exists on every sale and the subject.
Briefly, the only “adjustment” to the cost approach is time (market conditions). This is based on the procedures set forth in ASFMRA’s basic courses. The four (4) sale pasture allocations, after time, varied from $497.50 to $515.40/acre --- most near $500/acre. Using the ratios, and depending on the subject’s quality in each category, the values assigned for the land portion of the cost approach, are:
Low Utility 50.00 /Acre
Dry Crop/Hay 750.00 /Acre
Meadows/Dry Creek Bottoms 875.00 /Acre
Subby (Naturally Wet) Bottoms 1,000.00 /Acre
Irrigated 1,500.00 /Acre
Forest Grazing Privileges (federal) 300.00 /AUM (via acres)
State XX Leased Grazing Privileges 250.00 /AUM (via acres)
BLM Grazing Privileges (federal) 175.00 /AUM (via acres)
The ranch headquarters were “operational” but modest with a house, machine shed/shop, barn, and corrals that contributed approximately $300,000. Total Cost Approach indication was $3,797,000.
The subject’s carrying capacity was calculated on page 6 at 3,400 AUMs. Market rents in the area extremely consistent at $30/AUM. Expenses and/or expense ratio are highly dependent upon the amount of state and federal grazing privileges. However, the “below market AUM cost” for those privileges reduces operating costs and accelerates the capitalization rate above other ranches with a higher percentage of deeded land capacity. The 2.0% cap rate applied to the net income of $78,450 produces a value of $3,923,000 by this approach.
Sales Comparison Approach (SCA)
The “land-mix” procedure traditional applied has been shorted via ASFMRA’s ER Factor calculation. This procedure is fully explained on AgWare’s Website under HELP/DATALOG/3 Ways to Calculate ER. The subject’s ER is 206% for this approach --- the mathematical expression of its composition and mixture based on the acreage within each land type.
The key to this procedure is the subject’s capacity of 2,881 AUMs (page 2 of UAAR report) with an ER of 206% (6,000 deeded acres ÷ 3,400 AUMs = 206%).
The exhibit report shows both the unimproved and improved sales in two separate SCA grids. Normally, only the improved sales would be displayed. However, the adjusted indications are similar after the unimproved sales were adjusted by ~$100/AUM for buildings, or about 9% of the total. Hence, the conflict between the cost and sales comparison approaches (typical for ranch market sales influenced by non-deeded grazing privileges).
Use of AUMs as the “effective unit of comparison” only applies to a small part of the total rural community, but prevalent in parts of NM, WY, UT, NV and eastern OR and WA. As a general rule, when the total capacity from federal and state privileges is more than 50% of total capacity, AUMs tend to prevail. Acres can still work mathematically, but the variation of adjusted indices tends to be wider.
The final adjusted range varied from $1,042 to $1,192/AUM but the four improved sales supported a narrower range from $1,099 to $1,192/AU. Three (3) of four improved sales varied only $20/AUM from $1,170 to $1,190/AUM. $1,180/AUM was applied to the subject.
Cost Approach $3,797,000
Income Approach $3,923,000
Sales Comparison Approach $3,910,000
Appraiser’s Allocation (based on Conclusion above & likely different than any one specific approach)
Pasture 5,300 Acres x $525.00 = $2,782,500
Low Utility 100 Acres x 52.50 = 5,250
Meadows/Dry Creek Bottoms 440 Acres x 918.75 = 404,250
Irrigated 160 Acres x 1,575.00 = 252,000
State XX Leased Grazing Privileges 176 AUMs x 250.00 = 44,000
BLM Grazing Privileges (federal) 988 AUMs x 175.00 = 172,900
Land Contribution = $3,660,900
Building Contribution = 239,100
Rounded Total = $3,900,000