by Robin Stanback

The cost of everything related to raising and caring for horses, from hay and feed to fencing and farm equipment, has shot up as the economy has struggled to find an even footing. As a result, many horsemen have adopted a conservative approach that is reflected in the prices paid for horses and the land on which they are raised.

Franklin D. Roosevelt said of real estate: "Managed with reasonable care, it is about the safest investment in the world." Arnold Kirkpatrick, president of Kirkpatrick and Co., a real estate firm serving the horse industry in Central Kentucky, Florida, and New York, said: "That is certainly true, and very accurate about Kentucky farmland."

In today's economy, the decision facing many horse owners becomes a choice between purchasing or leasing a farm, or boarding horses with someone else. For Russell Gray of Central Kentucky AgCredit, the answer is simple. "It is very mathematical," he said. "How many horses do you have? You take the number of horses and multiply it by the cost of boarding the animals, and then see if that result is more than it would cost to own or lease a farm. Let's say you have 20 mares, and you can find a place that will board them for $20 each a day. That is $400 a day, $12,000 a month."

A bit more math is involved, to be sure. Gray cautioned potential owners to consider that owning the farm means paying taxes on it and having the resources to cover insurance, labor, maintenance, feed, and utilities, among other costs.

All of that is figured into the cost of boarding the horses, which on most Central Kentucky farms is a bit more than $20 per day. Prices vary depending upon the facility, the horse, and the care that animal requires. Broodmare board, for example, can range from $30 to more than $50 per day.

By any mathematical equation, investing in Thoroughbreds is not for the average fellow who might have gotten caught up in the subprime lending debacle that has captured the headlines in the past months.

Maximum of 85%

Gray has worked in the Farm Credit System for more than 27 years. His company is part of a nationwide system that has provided financing for farm owners since 1917.

"The subprime problems are almost exclusively in the housing market," he said. "Institutions that provide loans for farms would not loan out 100% or more of the value of the property. The maximum we would offer would be 85%, and that is not any different today than it was last year or the year before.

"What we are looking for is cash flow. Cash flow is king. I learned in the mid-1980s when we had a similar decline in the farm market that a positive cash flow makes all the difference between obtaining a loan and being declined. Even if you have more liabilities, a positive cash flow will help you to weather the storm."

Joe Riddell of Riddell Realty in Lexington has been involved in every facet of the horse industry since he began hot-walking horses at Keeneland Race Course as a boy. He began selling Central Kentucky farms in 1985, and he sees cash flow as a prime concern right now.

"The results of the sales this year at Fasig-Tipton Kentucky and Saratoga are off [from last year]. If that [decline in total sales volume] continues through the September and November sales, there will be a lot of people taking losses on their horses just to get out from under the expenses," Riddell said. "Overall, I believe there will be a revenue decline for people selling horses of about 25% at the end of the year. This will affect their ability to make ends meet. I think this will be reflected in the number of horse farms on the market by early next year."

Kirkpatrick agreed that more farms might be coming onto the market in the coming months, but neither he nor Riddell expects to see many properties priced in the bargain category.

There are a number of reasons for this, beginning with the beauty of the area.

"One of my clients put it best when he said, 'Central Kentucky is the world's largest privately owned park.' It is," Riddell said. "I don't know of anywhere else in the world where so much land is kept so beautifully manicured. Then there is the land itself. We have the best soils for growing strong-boned horses. Nowhere else in the United States except for a small area around Ocala has land with such high concentrations of phosphorus."

Development costs

Soils are the foundation of the farm, but the infrastructure—barns, run-in sheds, fencing, and utilities—are important as well. Some people may see a bargain in buying a farm with good soils that has not yet been improved for horses, but the cost of developing that land and building the necessary structures can quickly eat up capital.

"A lot of people like to develop their own facility, but the costs of building that infrastructure are going up by the minute," Kirkpatrick said. "You would expect the costs to soften because the building business has slowed so much, but it really has not. It is much more economical to buy a place that has already been built up for horses."

In the Bluegrass region, more developed horse farms are on the market today than have been for sale in a number of years. Riddell and Kirkpatrick agree that, while the market feels a lot like it did in the mid-1980s when the commercial bloodstock market crashed, this particular slump will be shorter in duration.

One factor propping up support is the 2010 Alltech FEI World Equestrian Games, which will be held at the Kentucky Horse Park in Lexington. "Everyone is saying that the World Games are the reason Kentucky farmland is going for such a high dollar. Not exactly," Kirkpatrick said. "The Games are only two weeks long. They are really a secondary force driving the market. What's making the big difference is the infrastructure being put in at the Horse Park.

"By the time they finish preparing for the Games, they will have the finest year-round equine facility in the world. It will attract more impressive events, and more people in the show horse industries—be it driving, jumping, eventing, what have you—will want to have a presence here. It is their participation in the market that will keep farm prices inflated."

That certainly was the case when Gracefield, Ben Walden Jr.'s 310-acre property near the Horse Park, sold earlier this summer. Robert and Louise Louire, who own Spy Coast Farm in New York and Sweet Oak Farm in Wellington, Florida, purchased the Kentucky farm because of its proximity to the Horse Park.

The Louires own a variety of breeds that compete in show jumping competitions.

"Gracefield is not a farm I wanted to sell, but I am a businessman," Walden said. "The couple who bought Gracefield are excited about it and the World Equestrian Games, and they offered a price I could not turn down."

Caution in market

Gray has seen both buyers and sellers taking a cautious approach in today's farm market. "There are more farms for sale right now than there have been in a number of years, but I cannot say that prices have softened," Gray said. "Everyone is being careful, and, from a banker's point of view, that is wise."

If prices stay the same or fluctuate only slightly, will purchasing still be the best option or would leasing be a better bet? Riddell is cautioning potential buyers to sit tight and wait for the right farm at the right price. He believes that it will be easier to find that farm in the spring. Even if prices remain high, more places will be available. Sitting tight might mean finding a short-term lease.

Kirkpatrick estimated leasing prices in 2005 at 3% of the value of a farm per year. On a $1-million property, the cost to lease would be $30,000. Today, Kirkpatrick said the price of leasing that same $1-million property would be closer to 5% to 7%, or $50,000 to $70,000. "There are two problems with leasing a farm, as I see it," he said. "The first, from a standpoint of the leaser, is that most people in the horse business want to do things their own way. Working by someone else's rules is hard on them.

"Secondly, the farm owner has to consider that, for the person leasing the farm to make money on it, he has to use it hard. You can write a very strong lease agreement that will protect the buildings and fencing, but the land will be used up if that horseman is to make any money on the lease."

Good deals on leasing may come if Riddell's expectations for a softer market next year become a reality. If more farms are on the market than can be sold, those people coming in for the World Equestrian Games who are not looking for a permanent place in the Bluegrass may have a choice of places to lease. "There is going to be good, short-term money to be made, especially on the smaller farms," Riddell said. "I don't see these people leasing larger farms of 100 acres or more with 60 or 70 stalls. The smaller operations of ten, 20, even 40 acres, with a nice ten- to 20-stall barn, especially if they have an indoor arena, might be very appealing to these people."

For the Thoroughbred owner with those 20 horses, the prevailing opinion is that buying the land to support them is better than leasing or boarding. Few money managers would recommend investing in the Thoroughbred business as a reliable safe haven for those who are economically cautious. But farmland is a different story. "Land prices may fluctuate a bit in either direction, but over time, the price eventually always goes up," Kirkpatrick said. "At the end of the day, you have a commodity that can be sold."

Robin Stanback is a freelance writer based in Versailles, Kentucky