I've been looking at this ad (below) on a website and running the numbers... it looks like with FCRP and turbines it should produce a minimum of 1.5m profit over 30 years. Is there something I'm missing? Also what exactly is "arrears"?
Approx 1,100.00 acres
Asking Price 500,000
One and three quarter sections of flat, fertile farmland. Presently growing grass and enrolled in the Federal Conservation Reserve Program which pays the land owner $39,188 per year through 2015 for allowing the land to remain "idle". Buy and hold type property where the government direct deposits your payment once a year in arrears. 1/2 mile highway frontage on the west, and 1 mile of county gravel road frontage on the east. I am currently negotiating a wind lease for as many as 28 turbines. Lease suggests $1000/year/turbine minimum to $7000/year/turbine maximum.
I don't know much about land deals, but...
"arrears" means that you are dealing with the prior year. So you let the land sit idle for 2005 and you'll get paid in 2006. It's a cash flow thing.
Based on the numbers your seller suggests you could earn anywhere between 10% and 47% rate of return. This has to be taken with a grain of salt though because the seller is currently negotiating for the turbines which means that nothing is finalized yet. If the seller doesn't finalize before you buy the land then you'll have to do your own due diligence on the turbine thing (because that's where most of the value is in this deal). The FCRP only provides about 6% of the total return.
One thing about TX land, we have PLENTY of it. And lots of it is usable for wind farms.
I always look at any deal on a "cash on cash" basis.
You pay $500K now, and you earn $150K over 30 years.
Figure that out based no a "rule of 72s". The $500 doubles to $1MM in 15 years and doubles again to $2MM in another 15 years. I'm kind of stupid on math today but wouldn't that be about a $3.6% return.
Why is this a deal for you?
I'm not exactly sure where you pulled the $150K from
FCRP for 10 years = 391,880
28 Turbines x 1000 (min) per yr x 30 years = 840,000
^^^^ That's what I get also. In fact I went 3 steps further and mapped out 4 scenarios in an Excel spreadsheet if anyone is interested. In fact I am working on getting a copy of this document online so you all don't have to email me directly and ask for the document. In any case, the value in this deal boils down to 3 factors and they are (in order from most important to least important):
1. Income from Turbines
2. FCRP payments
3. Residual Value in 2035
Income from the Turbines is the most variable of your factors, but it is also the most important factor. It can add 35-39%.
The FCRP is moderately important. Because it affects your near term cash flow (the first 10 years) it can boost your return by 4-7%.
The residual value is so unimportant that you could appreciate 10% each year for 30 years... and it still pales in comparison to the income from the Turbines. Not sure how hot land is in TX, but based on what all cash said above you're probably looking at 2-4%.