February 5, 2010

In times of economic uncertainty, investors seek ways to line their portfolios with hard assets – gold, silver, and other commodities. The term “hard assets” is used somewhat differently by investors than what a business lists on the left side of its balance sheet. From an investment point of view, there are several fundamental meanings for the term, hard assets: Hard assets are tangible assets, meaning you can actually touch them. Hard assets have "intrinsic value" which means their worth cannot go to zero (as can, for example, a stock or bond investment or a financial obligation.) And hard assets have "use," a use which in and of itself can produce value.

Gold is a prime example of a hard asset. It is tangible. It is in demand as both individuals and sovereign states seek to own it while at the same time it is limited in supply. And it can be used to produce things. Silver copper, iron, and coal are hard assets. In this same line, land uniquely qualifies as a hard asset. In fact, ownership of land may offer many advantages over other hard assets.

Hard assets are often purchased by investors as a hedge against inflation. Inflation is the continual rise of the cost of goods and services in a given economy. Higher cost is another way of saying that the value of an economy’s currency is lower. As the value of the U.S. dollar decreases, hard assets function as a “hedge” against this inflationary phenomenon. Land purchased in today’s market may have appreciative value in the future, not only as a result of the real estate markets recovering but also as a result of inflation and its effect on our nation’s currency. In other words, all things being equal with regard to a hard asset’s "intrinsic value," if the dollar declines in the future, more dollars will be required to purchase the same hard asset.

"Intrinsic value" is tied to "use" and use-ability of a tangible asset. Clearly metals and raw materials have various economic uses. The usability of land has been basic to human beings since the beginning of civilization – land is essential for the production of food and water and the domestication of livestock. Obviously in this day and time, few Americans derive their food and sustenance needs directly from their own land. Likewise, few Americans wire their home from copper they mined personally. But "intrinsic value" is tied to this potential. In this regard, even in this day and age, a suitable piece of land could have the potential to provide an American family with crops and livestock , water, the space for wind towers to generate electricity, and the list goes on.

Land banking is a term used to describe the practice of buying and holding land for future appreciation. Just as gold is becoming more and more difficult to find and extract, land is also becoming a rare and hard to find commodity. Ranches and large tract of acreage are becoming more and more difficult to locate – an endangered species.

Unlike hard assets such as gold, copper, and silver, the use and usability of land varies greatly depending on topography, location and climate, water resources, and accessibility. Also the usability of land is effected by governmental ordinances, rules and regulations imposed by local, county, state and national agencies. This leads us to the subject of what ownership really means, and the various levels of land ownership.

Many nations throughout the world do not allow private ownership of land. Instead, the right to occupy land, or to farm or work the land is arranged by a kind of leasehold interest from the government. The United States Constitution provides for protection of private property ownership, and the particulars of property ownership are set up at the state level, usually by a state constitution or bill of rights. Property ownership is, in effect, the ownership of various rights of use.

The highest and most absolute form of land ownership of land in the United State for U.S. citizen is “fee simple absolute” ownership. Fee simple ownership is second only to governmental or “sovereign” ownership in terms of the rights of land use that goes with it. In the U.S. fee simple ownership gives the owner the right to use the land, to encumber the land, to sell or transfer the land, and pass the land to intended heirs upon the owner’s death.

But “absolute” is a misnomer because government retains the right to tax land owner and governmental tax leins are superior to all other liens. Local governments (primarily county governments for larger acreage properties) can, and do, impose a myriad of retrictions on land use including regulations on construction of homes and improvements, grading, waste disposal, livestock management and more. Some state governments restrict water usage for land owners. And, in that all land is a habitat for some kind of living species, the federal government limits and regulates land uses that disturb or disrupt the habitats for sensitive species. Such limits and regulations can range from mitigation practices to banned farming and other land use intensive activities.

Fee simple ownership of land is typically guaranteed by a title insurance policy issued when the purchase is made. One thing buyers should keep in mind is that land ownership does not necessarily also imply the ownership of minerals, oil and gas that are beneath the surface of the land. A title policy will often show that the rights to such minerals have been reserved for another party. This is a typical situation that stems back to the oil boom days of the 20th century.

Another restriction to unfettered use of land can be the existence of easements, water rights and other deeded or dedicated rights of use of the land by an outside party. For example, another land owner may have the right to access his property by way of an easement road through the subject property. The owner upon whose land the easement road exists does not have to right to use his land in such a way as to block the access afforded by the easement.

Finally, when one purchases land using financing from a bank or other lending institution, that lending institution holds an ownership interest in the land. In this day and age, we are all too familiar with the foreclosure process that causes the bank to become the new real estate owner. The principle of leverage afforded by financing may be an important consideration for profitable trading but it does not give the land owner the greatest or most absolute possible ownership of the land.

Of course in reality, no one actually “owns” the land at all. We are simply passing through; our time on this planet is a brief sojourn that rarely lasts 100 years. As land owners, we are at most temporary stewards of a multi-billion year old place. But this right to be a steward and to “own” land is one of the greatest treasures of US citizenship. Whether it is one acre, one hundred acres or one thousand acres, owning a piece of land is a way of exercising this inalienable right ….. and is an investment in the hardest of hard assets.