A Definition of Heir Property: It’s Complicated
Families with assets experience greater financial stability and economic mobility as compared to families with the same income but without significant assets. These critical assets, notably savings, not only provide a cushion against economic shocks, facilitating financial stability, but can also provide the feeder capital necessary to get a college education, job training, or a home, factors associated with upward economic mobility.
There is, however, at least one asset type that often requires a significant secondary investment before families can use it for those purposes. Heir property is family owned, inherited land owned by multiple heirs with undivided interests. As such, it is also “the most unstable form of land ownership” in the United States. Families with resources have the means to hire legal counsel and avoid or remediate this complex and often untenable status. However families with low or moderate wealth are often unable to make the secondary investment in managing the land that would unlock its value, even though they are the very families that need it most.
Heir property has many, sometimes hundreds, of owners who frequently assign historical, cultural, and sentimental, as well as economic value to the property. So while heir property can be quite valuable, because it is co-owned by numerous people, all of whom have a legal right to and interest in the land, it is often very difficult for any single owner to fairly extract economic value from the land without forcing sale of the entire property.
The following two suggestions can help family owners with limited resources unlock the value of their land. The first uses public policy to create an environment in which families can safely take action to manage their land with a significantly decreased risk of a forced sale. Such sales, which often return substantially less than market rate, are usually initiated by a co-owner who needs cash and/or is uninterested in participating in the management of the property. The second is a practical suggestion proposing a strategic financing tool that could be used to provide the capital infusion necessary to productively manage the family’s land.
Public Policy that Reduces Risk
The Uniform Partition of Heirs Property Act “helps preserve family wealth passed to the next generation in the form of real property” by providing a variety of “simple, due process protections.” Some of these include requiring notice to all other owners about any request to sell the land, providing heirs who want to keep their land the first option to buy out heirs who want to sell the land, requiring an appraisal so the fair market value of the land is known and can be obtained in the event of a sale, and requiring the use of a real estate agent or similar professional to market the property for sale.
This balanced legislation is now law in Alabama, Georgia, Montana, Nevada, and most recently Arkansas, which passed the legislation in February. The bill has been introduced and is currently being considered in several other states. This legislation is critical because without it, many families will not attempt to reach out to relatives and negotiate land management plans because they are nervous that a relative might request sale, providing a small amount of quick cash but stripping the family of its wealth. Without proper land management, families cannot realize the full value and benefit of their property.
Building Capital for Land Management: A Proposal
The Heir Property Act removes certain key barriers to initiating productive management of land, but many low wealth families do not have the capital or legal savvy to set up a family land trust, determine the best way to manage their land, hire a property manager, or take other steps needed to execute a land management plan. In such cases, a strategic injection of capital provided in the context of other supports can help a family with low resources unlock the value of their moderately liquid asset creating savings and income and building their wealth.
The Land Management Loan would provide that capital. Much like some energy efficiency loans, it would work by leveraging future cash flows to access the capital needed in the present. Here’s how it would work:
Step 1: Families would work with advocates like the Arkansas Land and Community Development Corporation and others to understand their goals for their land and, importantly, what options work best in the area. In some areas, timber production is the most viable option; in others the focus should be on row crops; still others may focus on housing development.
Step 2: In addition to supporting the family in developing a land management plan, advocates would develop relationships with appropriate property managers and financial institutions.
Steps 3-6: The financial institution would provide a loan to the family which would be used to stabilize the legal status of the land, hire the property manager, and execute the land management plan.
Step 7: The property manager would use land profits (from the timber sale, rent payments, etc.) to payback the bank and provide a return to the family.
Because the advocate provides new business to both the property manager and the financial institution, the advocate would charge each a finder’s fee. This model is outlined in the figure below:
Some financial institutions may want to participate because of the potential for Community Reinvestment Act credit. Property managers may be interested because of the opportunity to work with families who are committed to making their land productive. Use of a property manager is critical for many families because it means relatives have the option of not living on the land to manage it themselves. Regardless of where family members choose to live, the community benefits from increased taxes and economic activity resulting from productively managed property.
Given that heir property is such an unstable form of ownership, a number of legislative, administrative, financial, counseling, and other remedies will be required to turn it into an asset that promotes family economic mobility for all heirs. A forward-thinking ancestor made the first critical step by purchasing the land for the family. The Heir Property Act and the proposed Land Management Loan are two more steps in the right direction toward securing that investment for the family’s future.
Karama Neal, PhD, created Heirs of Arkansas, a grassroots organization founded in 2013 that successfully promoted passage of the Uniform Partition of Heirs Property Act in Arkansas in 2015. She serves as Chief Operating Officer of Southern Bancorp Community Partners, a Community Development Financial Institution based in Little Rock.