Note: This article is a sidebar to this issue's feature story, "Who will take over the ranch?"
If most people looked at the Adobe Ranch, they’d see a meadow with a creek and willows running through it and sagebrush grasslands rising to pine forests. But Carl Palmer sees a distressed asset that he and his partners were able to pick up for a good price, with undeveloped revenue streams, and a potential return on investment that could rival the stock market.
The Adobe Ranch is on the east side of the Sierra Nevada in California, in a volcanic landscape called the Inyo Craters near Bishop and Mammoth Lakes. It’s within 50 miles of Mammoth Ski Resort, so it’s on the edge of development pressure. But it’s still pretty far out.
And it’s a pretty lonely place to find a newly minted MBA from the Stanford Graduate School of Business staking his claim as a cowboy. But Palmer is also a conservationist at heart, who believes economics and ecology can work hand-in-hand. And he’s trying to prove it on the Adobe Ranch.
The ranch is the first project of Greenbridges, a company Palmer formed right out of school, which seeks "to yield returns for investors while also conserving natural resources, biodiversity, and open space." Whether he succeeds or fails, his approach illustrates a way to look at ranching economics and ways for ranches to survive, even if they move beyond ranching. Palmer met his partners, traditional farm and ranch real estate investors, through a classmate. They have put "several million dollars" into the property, and they want to double their money in five years. That’s roughly equivalent to a 14 percent return each year. It’s about what a reasonably savvy investor can make in the stock market in a good year. And it’s the kind of return investors demand when they put their money into fairly risky ventures.
So when Palmer looks at the ranch, he thinks ROI — return on investment. ROI is a fraction, and like all fractions, it has two components, he says. "You have a numerator, which is the revenue stream. And the denominator is the asset value, or your principal in the property if you don’t take into account appreciation." The denominator is also sometimes called the "basis," or how much capital you have invested in the asset.
There are two straightforward ways to increase ROI, Palmer says. You can increase the numerator: that is, get more revenue out of the ranch, by producing more cattle or generating fees through hunting or fishing. Or you can decrease the denominator: Decrease the amount you have invested in the ranch by getting some of your capital back, either by selling off pieces of the ranch or by selling easements. "If you take out half of your capital," Palmer explains, "you double your return."
Palmer wants to do both on Adobe Ranch. To reduce the denominator, he hopes to put the ranch’s core riparian areas along Adobe Creek in the federal Wetlands Reserve Program, which pays for the agricultural value of the land in exchange for a permanent conservation easement. The program also pays for restoration, which will help; the ranch’s creeks were hit hard by a previous owner, who increased the numerator by grazing more cattle than the ranch could support.
Palmer also hopes to enter into a land exchange with the Forest Service. The ranch has some isolated meadows up in the forest fringes that can’t really be used because the previous owner lost the ranch’s grazing permit on the national forest. In such a deal, the ranch would offer the private parcels to the Forest Service in exchange for public land near Mammoth, which needs land for a hospital and expansion of the growing town, currently hemmed in by public land. That land would be sold and the money would go to the ranch.
Palmer also plans to sell off a couple of parcels. One is a 40-acre parcel right on Highway 120 that is currently listed for $340,000 — almost 10 times the price per acre that Greenbridges paid averaged over the entire ranch.
To increase the numerator in the ROI equation, Palmer plans to open the ranch to recreational fishing for German brown trout on the restored creek running through the property. He plans to charge $100 for a half-day of fishing to start, and increase the fee as restoration improves the fishing. "The recreational revenue stream will very easily exceed the ranching revenue stream pretty quickly," he says. He will continue to graze around 300 to 400 cattle on the ranch — the ranch is currently leasing grazing to a neighbor. But he doesn’t expect to really be able to improve the ranching revenue stream. "We’re lucky to generate a 1 to 2 percent return," he says. "It’s not an economic return on what is a valuable asset."
Palmer hopes that bringing people who fish and love the outdoors to the ranch might also play into his end game: selling the core of the ranch, with a conservation easement on it, to a conservation buyer, someone who will value it for its many layers of value, and not just as a ranch.
He figures if Greenbridges can get 80 percent of the value back before the Wetlands Reserve Program and the land exchange, he won’t have to get "an astronomical price for the residual value." He’ll just have to find someone willing to buy a restored and protected ranch for around the price that Greenbridges paid for a distressed ranch.
Can this approach work for a ranching family that wants to stay on the land? The same principles of ROI apply, says Palmer. "For a ranch on the edge of a booming metropolis, this won’t work, unless there is someone with deep pockets" — such as an environmental group or the government — "willing to pay for an easement," Palmer says. But "for ranchers who have a really low basis on their property, the returns from a nontraditional approach like this can be comparable to a traditional approach," he adds.
By "a traditional approach," in this case, Palmer means subdividing and selling the land in 40-acre parcels with a house, which he says would be "an awful outcome."