Assets You Can Touch

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Jon Norstog is not your typical banker. Along with his financial background, Norstog grew up on a cow/calf and grain farm in western North Dakota, has a degree in agriculture from North Dakota State University and spent several years as a county extension agent before joining the Specialty Asset Management Group.

 

He’s one of many Specialty Asset Managers at The Private Client Reserve who has the unique scientific, agricultural and property expertise to help clients manage the tangible assets that might make up a significant portion of their wealth.

 

“We’re boots-on-the-ground managers,” says Norstog, who currently oversees numerous farms across his region on behalf of clients. “We talk to tenants, negotiate leases and help with transitions as families pass properties to the next generation.”

 

In the past few months, Norstog assisted a retired farmer in securing new tenants to increase her rent per acre, and he helped a family improve farming practices to increase yields so they could raise rents. He also helps oversee management of farms, including situations in which owners live in other states.

“Clients don’t always think about the bank when they need someone to manage their real estate assets or when they need an oil and gas expert,” says Ed Cowling, Director of the Specialty Asset Management Group at The Private Client Reserve. But that’s exactly what Norstog and the rest of the Specialty Asset Management Group are trained to do. Learn about our Specialty Asset Management Group in this video.

 

Unlike stocks and bonds, specialty assets are privately held, tangible properties owned by the investor or a small, limited group of owners, and are not tradable on the open market. They can include real estate, farm and ranch land, timber properties, mineral and oil rights, and closely held assets, such as private businesses and limited liability corporations.

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“Specialty asset management is more than just crunching numbers,” Cowling adds. It’s about combining financial and industry training to help clients attempt to get the best value for their investments, mitigate risks, and work with their tax advisor to help secure the greatest tax advantages possible.

 

Real Estate Investments: Market Rebounding Overall

The real estate market tanked during the recession, but it’s rebounding. Home prices in the United States jumped 12.1 percent in May 2013 compared to the same period a year prior, according to a June report from CoreLogic, a real estate industry analytics firm.

 

This rebound also is spurring commercial investment activity. “Prices and interest rates are still relatively low compared to historic rates, and rents and occupancies are trending upward, which may create an opportunity for investors,” Cowling says.

 

Weighing the Pros and Cons of Specialty Assets

 

 

Apartments have been one of the strongest categories in the past few years and are still a

good investment opportunity, though the

strength of the trend might not remain much

longer. The April Urban Land Institute (ULI)/Ernst

& Young Real Estate Consensus Forecast

predicts that while the apartment sector will

remain a leader for 2013, rental growth rates are expected to decline to 3 percent in 2014 and 2.8 percent in 2015, as more units are placed on the market.  

Industrial space also is increasing in value as manufacturing picks up in the United States. The ULI/Ernst & Young forecast predicts:

 

  • Warehouse rental rates will increase 2 percent in 2013, and 3 percent in 2014 and 2015.
  • Retail rental rates are projected to rise by 1 percent in 2013, and 2 percent in 2014 and 2015.
  • Office rental rates, on the other hand, are expected to decline by 3.5 percent for 2013, before rebounding in 2014.

 

Keep in mind that real estate investments can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties. “Commercial real estate is improving, but since it’s an inefficient, illiquid market, these investments should be made for the long term,” Cowling says.

 

Our Specialty Asset Managers don’t simply help you with local real estate trends and developments. They can also help manage leases, identify tenants, obtain insurance, determine the value of property and facilitate the process of changing ownership. Learn more about real estate management in this video.

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Farm and Ranch Investments: Gaining Popularity

Farm and ranch properties are growing in popularity among investors interested in potentially capitalizing on the rising value in this property category. “We’ve seen farmland values across the Midwest almost double in the past five years,” says Jim Myhra, Managing Director of Farm, Ranch and Timber Management for The Specialty Asset Group. “Families that have owned farmland for many years have enjoyed the income-earning potential, the stability farmland has provided through turbulent economic times and the passing of a tangible family legacy amenity from one generation to the next.” Of course, past performance isn’t a guarantee of future results.

 

The increasing global demand for food and ethanol, coupled with high commodity prices and low interest rates, means farm and ranch owners may, in many situations, be able to generate a steady income from these properties while their land appreciates. Farm holdings also may help reduce volatility in a portfolio of assets. At the present time we are experiencing a downtick in commodity prices; the future will determine if supply exceeds demand and we see a changing land value environment. Commodities can be at risk of market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors.

There are risks that come with farming. Weather patterns, environmental problems, soil productivity issues, market fluctuations and economic concerns can all impact the profitability and value of farmland. To potentially minimize the risk, Myhra suggests investing in more than one region or property, if feasible, and working with an expert to assess the land, soil quality and drainage, capability of the tenant farmer, and markets for the subject commodities.

 

“Choosing the right land and operator is key to making sure you’ve got a good farm investment,” he says.

 

Watch this video to learn about our Farm and Ranch Management group.

 

Timber Investments: Focus on the Long Term

Timber properties may not generate the kind of steady income you might get from a farm or ranch, but they still may be valuable investments. Timber Specialty Asset Managers can help identify potential risks and investment opportunities.

 

“The issue with timber is you get your big payment at harvest, but that may only come every 20 to 25 years,” Myhra says. “You’ve got to be an investor with long-term vision, and consideration of income needs and timing is critical.”

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The potential benefit of timber is that it can naturally grow in value with little effort on the part of the owner. “Give it sunlight, water and time, and the trees will keep getting bigger,” Cowling says. “You don’t get that with an apartment or a warehouse, but you have to manage the timber. You need a selective and trained eye, regular thinning of trees and regular forester consultations for good stand development. Not only does thinning produce cash flow in the interim, it’s good management for the overall growth of the stand.”

 

Owners might further mitigate financial risks by investing in multiple properties with different harvest schedules. “When you spread the investment over several timber tracts, the magnitude of the financial peaks and valleys may be reduced,” he says.

 

As with other real assets, there are risks and tax treatments that must be considered and managed.

 

Closely Held Assets: Planning for the Future

Closely held assets generally refer to privately held businesses that are not publicly traded. Typically these businesses are owned and operated by an individual or family through a legal entity such as a corporation,LLC or partnership.

 

Our Closely Held Specialty Asset Managers act asadvisors, helping owners plan for the future rather than run the business.

“We work with owners and their other advisors on their wealth planning, succession planning or, in some cases, a sale of the business for liquidity,” says Gary Williams, Managing Director of the Closely Held Group. Watch this video to learn about the management of closely held assets.

 

Such planning can be critical, particularly among aging baby boomers preparing to retire and either sell or pass their businesses to the next generation. “Owners need to think about their succession plans and what they can do to minimize the impact on themselves, their family, their estate and the business during the transition,” he says.

 

The risks for closely held assets are impacted by the industry they are in, the current market environment, the management team in place and the desires of the next generation. “Passing on a business may eliminate the need to sell, especially in a difficult market, but that move is reliant on children’s or beneficiaries’ interest in taking over,” he says.

 

Selling a business requires owners to identify potential buyers, the best time to sell, the best method of liquidation and what they will do with the proceeds after liquidation. “You need a plan that can minimize the impact on what you worked so hard to build,” Williams says.

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Oil, Gas and Mineral Interests: Knowledge Is Key

 

The upsurge in oil shale developments in North Dakota, Texas and other states is causing land and mineral owners to take a closer look at potential leasing opportunities. However, this sector can be very volatile and uncertain. From an investment standpoint, this is a highly speculative arena.

 

In recent years, some mineral owners have secured significant royalty payments for development of their mineral rights, Norstog says.

 

Sand Barons

 

Securing these leases, however, requires tough negotiations. “Once leases are signed and there is production, there is little that can be changed,” he says. “They are governing documents as long as that well is producing.”

 

Additionally, many of the mineral leases in NorthDakota, Texas and other states already have been secured. Some owners are looking for the next big development location,potentially the New Albanyshale deposits in Southern Illinois.

“The payoff in this area may be substantial, but there is no guarantee,” Norstog says, noting that land and mineral owners need to be prepared to negotiate their terms specific to their ownership, either land surface or minerals.

 

“We don’t encourage our clients to pursue mineral rights without land,” Cowling says. “If you’re interested solely in oil and gas exploration, it may be better to invest in energy stocks or a pipeline company.”

 

A Personal Matter

Just like any other investment, specialty assets can carry risks and rewards. And just as with any other investment, working with an advisor may help you weigh potential risks versus rewards in the context of your unique situation and goals. 

 

Because your non-financial asset is likely highly unique to you — both in the form it takes and in the role it plays as part of your portfolio — our experienced team of Specialty Asset Managers focuses squarely on your personal needs and takes into consideration a wide range of issues that are specific to your life.  

 

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