Wisconsin farmland values rose an average of 11% in 2022, according to the Seventh Federal Reserve District Ag Letter. The 2022 increase came on the heels of a 22% increase in 2021, and was the second largest in the past 10 years.
Let’s explore what effects this increase will likely have on Wisconsin farmers.
Obvious Benefits: The Good
Higher land values increase net worth. This, in turn, can help farmers access and obtain credit. Farmers will get more money when they sell their land. Farmers who rent out their land should receive higher rents.
The Downside: The Bad
Newton’s third law of motion – for every action there is an equal and opposite reaction – applies in this situation as well.
First, while farmers who are landlords will benefit, those who rent land will pay more.
Then, higher land values will result in higher property tax assessment and correspondingly higher real estate taxes. Higher land sale amounts will result in higher capital gain taxes. Farmers looking to expand their farming operations may be limited in their ability to do so.
Bankruptcy Effects: The Ugly
The world of insolvency is often inside out and upside down from the way we normally think. The law and tactics employed in that arena often are not intuitive, but they do make sense once we think it through.
Increased land values should be good for farmers in debt and struggling, right? The answer is “yes,” if they intend to quit farming and are selling out. But, most farmers want to keep farming.
An increase in asset value only helps when you sell that asset, or use it as collateral to borrow. Financially struggling farmers are not selling and are not likely to be borrowing.
There are two main areas where increased land values can make it more difficult for farmers, or any business owners, who are struggling.
Cramdown
Cramdown is the legal process in a bankruptcy reorganization by which a secured creditor is forced to accept the value of its collateral rather than the full amount of its claim. It is a basic premise in any reorganization, in that secured creditors must receive at least the present value of their collateral.
This means that the value of the collateral must be paid, with interest, over a reasonable amortization period. This is true in chapter 11 (11 U.S.C. § 1129(a)(7)), chapter 12 (11 U.S.C § 1225(a)(4) and (5)), and chapter 13 (11 U.S.C. § 1325(a)(4) and (5)).
What this can mean is that, as land values increase, farmers in a reorganization will have to pay more to their secured creditors, at least those secured by the land. Because increased land values do not directly increase revenue, struggling farmers may need to pay more to keep their assets, but without any additional income to fund those higher payments.
Best Interests of Creditors Test
A second basic premise in all reorganizations is what is known as the Best Interest of Creditors Test. This test requires that any plan of reorganization must provide creditors with at least as much value as they would receive if the debtor were liquidated under chapter 7.
Let's look at this example:
Assets: Land, $600k; livestock, $100k; equipment: $100k. Total asset value: $800k.
Debt: Secured: $800k; unsecured: $200k. Total: $1 million.
In a reorganization, whether under chapters 11, 12, or 13, the farmer can cram down the secured claim to the value of the collateral – $800,000. At today’s interest rates, we could expect the farmer to pay 8.5% on a 20 year loan with a payment of $6,940 per month. The unsecured creditors would receive nothing unless the farm operation is profitable.
Over the last two years in Wisconsin, good farmland values have been increased by roughly one-third. If we apply that increase to our situation, compare the new figures to those above:
Assets: Land, $800k; livestock, $100k; equipment: $100k. Total asset value: $1 million.
Debt: Secured: $800k; unsecured: $200k. Total: $1 million.
Now, because of the increase in the value of the land, our struggling farmer must pay all creditors in full. The monthly payment on the secured claim is now $7,377 and the unsecured creditors, even without interest being paid, must receive $4,167, for a total payment of $11,540 per month for our struggling farmer.
Just because the value of land goes up does not mean that cash flow does. This could well be a situation that forces our farmer to liquidate, or to proceed under a more expensive form of bankruptcy reorganization.
The Unintended Consequences
Everyone likes to see that their assets are going up in value, and Wisconsin farmers are certainly seeing that. But sometimes the unintended consequences can be dire. We as lawyers need to consider those consequences all the time.
Want to know the value of farmland last year in your county? Visit the U.W. Extensions page, Wisconsin Agricultural Land Prices 2022.
This article was originally published on the State Bar of Wisconsin’s Solo/Small Firm & General Practice Blog of the Solo/Small Firm & General Practice Section. Visit the State Bar sections or the Solo/Small Firm & General Practice Section webpages to learn more about the benefits of section membership.
