Banks come a cropper, as farmers buy back acreage at a fraction of the price they sold it for.
Past American recessions call to mind images of poor farmers forced off their land by heartless bankers. But this time, instead of "Grapes of Wrath" migrations or Farm Aid concerts, farmers around Chicago are buying back the land — at rock-bottom prices — from shell-shocked banks.
Ask Don Werner. Late last year, he bought back his 106-acre family farm from Bank of America Corp. at a quarter of the price a developer paid him just two years earlier.
"It's all about timing," says Mr. Werner, 52, who grows corn and soybeans on his southern Will County farm. "It's not that we're smarter than anyone else. Sometimes things just work out."
Mr. Werner's coup near far south suburban Manhattan, where his family has been farming since the late 1800s, may become a common one as farmland in exurban Chicago that was rapidly paved over for tract housing for much of the 2000s now is going to seed — literally. Farmers in Northern Illinois who only a few years ago were making plans to move their operations Downstate or closer to Iowa now have a rare opportunity to reclaim land sold to developers, at a fraction of the price the homebuilders paid.
The sellers are struggling banks, from giants like B of A to mid-sized commercial lenders like Chicago's Cole Taylor Bank and Itasca-based First Midwest Bank, digging out from real estate loans that have led to big losses over the past two years.
With a resumption of exurban homebuilding years away, corn and soybean farms will continue to dot the outer fringes of metro Chicago, making the woes of homebuilders and banks a source of opportunity for local farmers who want to bulk up and cheering critics of suburban sprawl.
Banks are only in the early stages of foreclosing on land developers bought with bank loans and then disposing of it. Prices for raw land outside of Chicago have plummeted to around $10,000 an acre from $50,000 an acre or more during the peak of the housing boom. In the Werners' case, they sold their property for $42,000 an acre and bought it back for a little over $10,000.
A spokeswoman for North Carolina-based Bank of America, which is digging out of a large residential construction loan portfolio inherited when it acquired Chicago's LaSalle Bank in late 2007, declines to comment.
Cole Taylor CEO Mark Hoppe says his bank will hang onto land that looks like it will rise in value for as long as five years, but land in remote rural places might not fit that description. "There's property we'll sit on for a long time," he says. "And there's property we'll be motivated to sell quickly."
For banks, "vacant land is at the bottom of the food chain," says Susan Tjarksen, managing partner in Chicago at Stabilized Asset Resources LLC, a consultant to banks on distressed assets. "That's sold at the biggest discount."
She pegs banks' losses on raw land at 65 cents on the dollar.
And for banks that lent heavily to residential developers, there's a lot of raw land on the books. Case in point: First Midwest Bank, with $7.7 billion in assets, had $113 million in seriously delinquent residential development loans as of Dec. 31; nearly $33 million, or 29%, of that was secured by raw land, according to an investor presentation the bank made in February.
Overall sales of foreclosed property increased to $14 million in the fourth quarter from $8 million in the third quarter and $7 million in the second, CEO Michael Scudder told analysts during a Jan. 12 conference call. Bank executives didn't return calls requesting comment.
Aurora-based Old Second Bank — about a third First Midwest's size at $2.5 billion in assets — had $25 million in seriously delinquent land loans as of Dec. 31. The bank has foreclosed on five land parcels "suitable for farming or development," worth a little over $3 million, according to a recent Securities and Exchange Commission filing. Bank executives didn't return calls.
The real estate carnage could reverse a decade-long drop in farm acreage in Northeastern Illinois. Acreage for corn and soybeans, the two largest local crops, in the 10-county region, dropped 10% to 1.79 million acres in 2009 from 2 million acres in 1999, according to the U.S. Department of Agriculture.
Local farmers, who a few years ago were buying farmland outside Northeastern Illinois as they prepared to be pushed out by homebuilders, are staying put.
Robert Gehrke, 52, who farms 1,400 acres west of Elgin in Kane County, says, "We were getting so pushed with the urban edge that we didn't know how long we could stick around." Now he's eyeing "a 500-acre development site I'm looking at from my kitchen window. It's only 10% built out."
His 87-year-old father-in-law, who owns a portion of the tract that the family farms, rejected offers of $50,000 an acre during the boom because he didn't want to move and leave his friends, Mr. Gehrke says. Today a bank is selling a nearby parcel for $11,000 an acre. "If it would move down a little bit more, I'd be pushing a pencil on that," he says.
Mr. Werner says he's happy to be farming the same land and living in the house his grandfather was born in. The family used the proceeds from the 2007 sale to buy 960 acres south of the Kankakee River and now has expanded its operation.
If the housing market ever recovers, Mr. Werner says, "I do have a new goal in life: I'd like to sell the same farm for development twice."
[This story first appeared in Crain's Chicago Business, a sister publication of InvestmentNews.]
