- July 24, 2020
- Posted by: august19
- Category: Podcast
When we think of investing, we immediately think of housing properties, businesses, and the likes. But as with the great thing about being in this space, the sky is the limit when it comes to finding what to invest in. One of those is farmland, and in this episode, Chris Seveney interviews David Chan from FarmTogether to share with us this interesting investment concept that rarely gets talked about. He discusses why farmland is arguably the best asset class for capital preservation, how the investment process goes, and what implications it has on the farmland industry. What is more, David takes us into a case study that shows us what it is like investing in Oregon and what risks could potentially show up. If you are looking for ways to diversify your portfolio, follow this conversation to learn about this interesting investment strategy that you could potentially add to your toolbox.
Listen to the podcast here:
Why Farmland Is The Best Asset Class For Capital Preservation With David Chan
I brought on a special guest. I brought on David Chan from FarmTogether. One reason I wanted to bring David on is because as note investors, nobody’s ever heard of what we do. It’s an interesting investment strategy. I want to have him on to share the strategy with others because we all look to diversify our portfolio. It’s important for people to diversify their portfolio. David’s got an interesting investment concept that we have. David has been with FarmTogether for a few years. He’s worked in a lot of private equity side, AMERRA Capital, Prudential Agriculture. He also got his MBA from Harvard. David, how are you?
I’m doing good. How are you?
You went to Harvard and now you’re in the New York area. Why don’t you start by telling us a little bit about FarmTogether?
At FarmTogether, our mission is to increase access and to direct investments into US farmland. We think farmland is arguably the best asset class for capital preservation. In the past, it’s been difficult if you’re an individual investor to gain access and add farmland to your portfolio if you don’t have several million to allocate towards space. It’s hard to find farms that are operating and profitable under that in size. Most folks don’t know how to farm. There’s also a skill gap and a geographic constraint too because if you’re in the Delmarva or if you’re in New York or Boston, most of the farms in the US are not near you or at least none of the big ones. We are leveraging crowdfunding, which is a form of being able to syndicate a deal to many different equity investors and reduce the minimum investment size. We’re leveraging that to open up this asset class to a much broader cadre of investors.
I’m curious because a lot of people who are reading, we invest in land that has property on it. With farmland granted you’ve got agriculture on the land, but it’s also like a production business. How does farmland investing work? How does it tie together with the people who are doing the farming? Are you investing in the land or is it the farming component too?
I should say that I have not been at FarmTogether for a few years because FarmTogether is only a couple of years old. It is a production business. If you are familiar with real estate and I imagine many audiences are, real estate delivers a dual return stream. Part of it is going to be income-based. The other part is going to be appreciation. Farmland works the exact same way. The income stream can either be through the form of rental income or lease income where you own the property, but you lease it out to a tenant. The tenant is going to do all the farming. The tenant has full exposure to the performance of the property.
If yields are high and prices are high, the tenant is happy. If yields are low and prices are low, the tenant is not happy. Your upside and downside are capped. You’re collecting that rental income. The other form of an income stream could be through operating income. Rather than renting out the land, you could pay an operator to do the farming for you and have the exposure of both yield and price. If yields are high and prices are high, then you’re the happy one and vice-versa. It’s a bit riskier, but we do see higher returns, higher yield to compensate for that risk in what we call Direct Operating Models.
Finally, there’s an appreciation component and this is one of the strongest attributes of farmland. If you think about where all of these goods go, especially if we’re thinking to grow crops like corn and soy, these products go both into feed and food. They’re used in growing beef cattle and chicken and pork. They are used as food themselves for food-grade commodities. They’re used as ingredients. They go into the production of many consumer-packaged goods. Your backpack is probably made out of a portion of corn. The pen you’re writing with probably has some corn in it. It’s astounding how many commodities and products, goods like corn and soy go into.
Because of that, it attracts inflation remarkably well. We could also talk about diversification. I believe the correlation between farmland and inflation is about 0.7% or 0.8% and basically one would be perfect. It tracks closely to inflation and because of that, your appreciation is a known factor. If you underwrite conservatively, you should be able to hit that number. We love the asset class for that reason and then for diversification. It is an asset class that follows its own direction and doesn’t take cues from the broader macro.
One of the things too is there is a positive social impact with this. That’s one of the things with my show. A lot of people try and do some social responsibility. It’s important in nowadays society and this seems like it fits right down there. You’re saving farmland from development, having it done overseas that’s being made here with the COVID crisis going on in this country. You’re going to see more of a push towards more production here in the United States. That was one of my questions that we can talk about later. I think a lot of people can see inflation is going to be coming in the future. I have no investment or anything in this. I’m thinking in my head, “He’s talking about inflation is good and what’s going on in the world.” This is something people should probably start thinking about.Farmland is arguably the best asset class for capital preservation. Click To Tweet
We think that this is an asset class that has an outsized potential tech to drive impact. It’s something that we care deeply about it and we are intertwining in every part of our investment process from our sourcing and our underwriting to our management. Impact and sustainability are broad terms, but we like to use the UN’s sustainable development goals as our North Star. If you are thinking about impact, it should be back to one of those goals in some way, shape or form. Thinking through ESG and the social economic and environmental benefits that could be created through sustainable farmland investments, you see 8 of the 17 UN sustainable development goals are covered here.
It’s ranging from zero hunger, good health and wellbeing to other categories like responsible consumption and production, sustainable cities and communities, and also considering life on land and decent work and economic growth. If you think about farmland as an industry from the labor that’s involved in the actual fields, all the way up to the quality assurance, that’s required for a good that ultimately enters our bodies. It’s tremendous what the talent pool is responsible for and also the value that they bring to the broader society. With responsibility could come consequences.
With poor incentives in place, without thinking through and having proper stewardship, and sustainability framework, this could be an asset class that could erode the environment. It could do more harm than good. We’ve certainly seen that in some parts of not only the US but the world. The FarmTogether has no tolerance for that. We adhere to a strict sustainability standard. We’re in the process of formally subscribing to a standard that will be audited by a third-party because we think third-party assurance is important. Reporting, setting metrics, and accounting is also equally important. We’re excited to be rolling that out and are looking forward to doing this quarter.
It’s in order now, you had the slide with some returns and then it briefly talked about I think it had 10.5% unlevered returns on there. If you’d have a disclaimer, do you want to mention that?
I always scroll past that too fast. I think our attorneys would yell at me, but yes this is a disclaimer.
People read it. We’re not going to read it to you, but it’s confidential privilege information. We’re not giving investment advice, all the typical hoopla. You’re not suing any of us. Don’t think about it. We’re not telling you anything, we’re talking about farming and FarmTogether.
Over a 45-year period, it’s been steady, high yielding especially on a risk-adjusted basis asset class, 10.5% annual average return for that period. Mind you that there were several global events through those 45 years that were significant. We had the hyperinflation of the 1980s. We had a Russian freedom program in agriculture in the 1980s. We have the dot-com bubble burst, the great financial crisis. We’re not slicing and dicing to find the best of years here. This is a broad spectrum.
If you invest in tech stocks as an example, you could have 40% one year, negative 10% the next, and 2% to negative 6% and 30%. It’s a roller coaster ride. Those ups and downs where I’m curious. Is this more like mutual fund-ish which is more consistent basis or over that 45 years? Taking out the impacts from world turmoil from that perspective or is it weather-based?
There’s a number of different factors whether in one given region. It’s local but weather can certainly play a role, like an idiosyncratic event like a flood or a drought concern affected a given property. As a whole, if we look at US farmland as an aggregate, we find it to be stable. The second bucket here captures what you’re talking about which is the volatility of the returns. How much does it swing? What’s a roller coaster ride like for us to get those 10.5% annual average returns? The volatility of the index over that same period of the asset class has been 6.4%. If you want to think about what the 6.4% mean, we look at the S&P 500. Those numbers are flipped over that same period the S&P 500 delivered about a 7.5% average annual return with a volatility of closer to 13%. It’s hard to communicate, but we always think about for every basis point that you’re getting in return or yield, how much volatility, how much risk are you taking on to get that? Not to get too academic, but for any fans of the Sharpe ratio, look at the Sharpe ratio in farmland.
I was going to say the volatility is the standard DV either single or double. A high majority, high percentage is going to be between 4.1% and 16.9% from the 10.5%, 6.4%. That’s interesting that you talk about on here is how it’s uncorrelated with other assets, which means it’s not tied to other assets. Meaning if the stock market takes off, this doesn’t care. If the housing market crashes, this doesn’t care. A correlation of zero means it’s similar to if it snows in Massachusetts and you’re in Florida, it doesn’t matter to you. That’s kind of what those numbers mean.
We have that break out going to go a little bit further down here, but this is the correlations. This is I think one of the most interesting perspectives of the asset class. Looking at how it’s related to other asset classes, it’s negatively correlated with US stocks. The S&P 500 is our benchmark here for stocks. Negatively correlated with the US Bloomberg Barclays bond aggregate. Almost a zero correlation with gold and only a moderate relationship with real estate. This is in our view one of the best diversifiers for a portfolio because you have negative correlation across the two most major asset classes for what you would consider to be a competitor. Most folks think of gold as a competitor because it is an excellent inflation hedge. You have the little correlation there and then real estate, which is in the same asset allocation bucket, even for real estate, there’s only a moderate relationship. We think it’s astonishing how uncorrelated of an asset class farmland is.
Why don’t we roll a little bit more into defining what it is a little bit more of farmland? Not many people know about this. I’m curious, what’s been the push for this? What’s next? Where do you think this is going? The same thing with notes before I got into it, I never heard of investing in farmland. It seems like this is probably something new and coming up. It seems like it’s also been around for a while. I’m curious from that perspective, the size of the market and some other things along those lines.
That’s what I find to do the most surprising aspect of the asset class that will speak with investors farmland. They’ll say, “I need to get used to it. This is all new. This seems like an esoteric asset class.” I think to myself, people are investing in Bitcoin and cryptocurrencies, all these new instruments that we don’t understand or at least at the time didn’t understand. Farmland, which arguably I would say is the oldest industry, the oldest asset class known to man because we have to have it here to get here. It surprises people. It does have a new flavor because I think it’s been inaccessible in the past.
The asset class has been around for millennia. What we’re seeing now in the US is interesting. The average age of the US farmer is now approaching 60. Many are considering estate planning, retirement, thinking about what is next for them and what is next for their farms, and come tell them what that is. The fact that many in the next generation are not necessarily sold on continuing to be operators. I would love for a sociologist in a PhD program to do this as their thesis one day. I don’t know why farmers always have three kids, but we see it over and over again that there were always three kids. Two live 300 or 1,000 miles away from the farm and have nothing to do with the industry, never farm, and they’re ready to liquidate.
The one sibling is emotionally tied to the farm. Maybe as a farmer themselves, they want to hold that property forever. It creates problems especially for families thinking about estate planning. How do you resolve this? We see a huge opportunity there for us to be a solution as a flexible capital provider. With the way that we’re structured and how we syndicate deals, we can structure a deal where we’re syndicating two-thirds of the equity of the property out on our platform to equity investors looking to add farmland to their portfolios. Leaving one-third of the ownership with the one child who wants to continue either owning or maybe even operating with the farm. That’s a structure that hasn’t existed before. The advent of crowdfunding, which is exciting. All that’s happening on the supply side. According to the USDA, upwards of 70% to 75% of all US farmland is going to trade hands in the next two decades. We’re talking over 500 million acres. It’s tectonic.
When I think of farmland, I do think of the majority of it is owned by families. You’re probably going to start seeing institutional and private equity and other investors jump in. I’m curious how big overall is this market? You mentioned like 500 million acres. I know the mortgage market I play in is 30 trillion, 25 trillion, 30 trillion. The reality of it is it’s much smaller based on the true marketing plan. Overall, I’m curious how big this asset class is.
In the US, farmland is about a $2.8 trillion market, and of that only max $50 billion is under institutional ownership and management. It’s a drop in the bucket. The global farmland is nearly a $9 trillion market. We see the same thing. Institutional ownership and management are a fraction simply because it’s been held and managed in families for so long. We see this as a tremendous opportunity because if in the next many years we don’t have the infrastructure for not only institutional investors, but also retail investors to come in and be able to invest in this asset class and enjoy ownership and enjoy all the benefits that this brings to a portfolio. Your mind doesn’t have to wander far to think about what the implications could be for US farmland as an industry. How many acres would we lose to redevelopment? I think between 2000 and 2015 or 2010, somewhere within that timeframe, we’ve lost twice the size of the state of Massachusetts in US farmland.
It’s interesting too because I’ve had some properties in the mortgage notes up in the Wisconsin area. What they’ve been saying, what’s been going on up there is, these families and houses have been completely not taken care of and stuff like that. What they’ve done in the past many years is they subdivided the property to have the farm as one and the house on the other. The house is literally this little parcel compared to this massive farm. They would separate them and then they were pulling the mortgages out on the house. If something happened to the house, it’s like that’s the house and then the farm would be in an LLC or some other entity that they couldn’t touch.
They’ve had some challenges with some farming in the last few years in those areas and that hurts the market up in there. It’s interesting because that’s the experience I have with farming last talking with an investor about the markets up in that area for real estate. He said it was hurting a little bit because of what was happening with the farms and how they were subdividing it and stuff like that. For example, I’ll go down to Florida and I’ll go to Epcot Center. They talk a lot about farming and stuff and new technologies. There’s probably new technology that can probably, without using chemicals, to enhance either production or harvesting and things along those lines. Possibly bring some costs down to also maximize profits. Is that true too?
Certainly. As a tech-enabled investment manager, we see that as a tremendous opportunity not only on the application side but also on the varietals. Permanent plantings are a section of farmland that relies on a biological asset that’s going to provide cashflow for several years. This will be a tree like an almond tree, a hazelnut tree or a vine, wine grapes, table grapes. When you think about those assets, every time you replant, you’re planting a new varietal. If you are being a diligent operator and manager and staying up to date with the latest research, the new varietals are incredible.The way we farm influences the environment. Click To Tweet
We’re doing a hazelnut orchard that we’re selling to our platform in Oregon. It’s going to be replanted with a varietal called the Polyvarietal. It was released out at Oregon State University a couple of years ago. This varietal is essentially pest resilient, light resilient. It requires almost no inputs and simply by using the latest and greatest in genetics and plantings of these biological assets, you can help improve the soil profile because now, you’re dealing with a hardier tree that doesn’t need nearly as many inputs as some of the older varietals would.
My mother-in-law gardens all around the house. She takes the seeds, drop it in, throw some water, this and that. I never realized how much chemistry between chemical balance, pH and everything, and soils. It’s an art form, which is interesting. I think this is where some of these farmers who they’ve relied on the last families hundreds of years on their green thumbs and being able to do it. Also, having some assistance from the tech side can probably also even further enhance and grow this business. You mentioned this Oregon thing. If people want to invest in Oregon or something else, I’d like to run through that. Let’s go through this case study because I’m interested to hear how this works and how it worked out.
This is Jupiter Farm. Jupiter Farm is a dual commodity orchard. We have both walnuts and almonds planted. It’s based on the east side of Tulare County, which is on the southern edge of California Central Valley where most of our tree nuts in the US are planted and harvested. This orchard was interesting because from the investor standpoint, a good portion of it was turnkey. There are 54 acres of mature walnuts. They’re planted to this variety that’s called the Chandler variety, which is excellent. It’s the walnuts that you’ll find in the grocery store, the walnuts that most people like to consume. Going back to new varietals, the Independence almonds are the latest varietal in almond production.
These were planted in 2019. These almond trees are babies. For the first three years, even four years, an almond that was planted won’t produce any commercially-viable yield. This was such an interesting property because we can offer investors a cash yield from the existing mature walnut trees while giving them the upside of a development. Those 16 acres of almonds are developing over the horizon. We have an estimated payout diagram if you were to have invested $100,000 in Jupiter Farm. You see these first few years are about more or less let’s say $4,000. By the ending years, we’re closer to $10,0000 and then even above $10,000 and by the last year $11,000. It’s not because the prices of the walnuts are projected to be doubling in that timeframe. It’s because the Independence almonds are now mature and are a critical component of the cash on cash yield. It was a nice way of offering both cash yield while giving our investors also that upside of development.
I look at this and it reminds me of a lot of investors investing in an apartment complex that is 60% occupied. It may need some rehab and new leasing. In this instance, it’s like you got some revenue stream. You’re enhancing the property to get a better revenue stream. You’re getting cashflow during that time and then you turn around and you’re going to flip it and then cash out. That’s probably if you bifurcated the IRR. That’s where you get most of the returns, which is typical in this instance. What are the cap rates? How do you determine what the pay and what it would sell for? It looks like this one was a $2.4 million investment? How’d you come up with that number?
We think of it as almost if you looked at real estate. You might think of $1 per square foot or something along those lines. We think in $1 per acre. I think when we look at this property, what we’re essentially implying here is that over the horizon we’ll be able to capture about 65% on a nominal basis appreciation. I believe we’ve acquired the property for $25,000 per acre, $24,000 or something to that effect. I believe we’re underwriting an exit of probably in the high $30,000s, which is market for a turnkey property like this. If we were thinking of what the least potential would be and what cap rates would look like. A property like this, you could probably be thinking of a cap rate around the 5%, 6% ballpark.
I know you get excited talking about this, I am interested in learning more too. What was the factor that was like, “This is a property to buy?” Was there something that jumped out at you on this property? Was it maybe a distressed seller? It looks like it had 54 acres already, somebody was doing something. I see ahead of the riparian rights, which is probably a grand slam in this business especially walnuts and almonds need a lot of water. That’s probably a key factor. Why would you tell somebody to invest in this deal?
All of our underwritings begin with the things that you can’t change. You can’t change Mother Earth. We look at the soils and we look at the water. This property has class 1 and class 2 soils, which are excellent, and also had abundant water rights with riparian rights to the Tule River. We back-tested what the property’s water allocations looked like in the past and usage. The property has a surplus of water and could easily and has sold back to the district in previous years when it has not needed all its full water allocation. We screen many properties out because unfortunately the soils have been degraded or the water is lackluster and unfit for investment. This property had AA-plus water and soil. In farmland, if we’re sticking with the analogy of a real estate, that’s like being on a corner block of a beautiful neighborhood. You can’t attribute enough value to it.
One question getting back to the risk component. If it’s a bad year, I know you have your debt obligations, but are there operating expenses and stuff? COVID shut down a farm, for example, you have your operating, your debt expenses. Depending on how you structure these deals, is it the operating costs that can add to some of that risk or is it basically you lease out the land? Did you lease this one out?
We’re directly operating this. We consider all of that when we take on debt. That’s partially why we at FarmTogether don’t look at high LTVs for these deals. This deal was a 39% LTV. I can’t think of a deal where we’ve been over 50%. We try to keep that reasonable and we also will build what we would call a reserve capital account, which is extra cash in case there is a global pandemic that could influence the market in a negative way. We’re confident on this property and all properties that we underwrite and our ability to serve us the data. I think that largely influences why the LTVs that we use are fairly conservative.
You mentioned this is done by crowdfunding. Is there a crowdfunding platform that you use? It looks like it was a $2 million investment and 40% was financed. About $1.5 million is probably what you raised on this deal. What’s the minimum investment? How much do people typically invest? Do you use one of these platforms? I know one in my area is called Fundrise or something like that. How does that process work?
We have our native platform. All the deals are syndicated on FarmTogether.com. Our minimum investment tends to be $15,000 per deal. That number fluctuates a little bit, but between $10,000 and $20,000. It’s never been more than $20,000. I think we are always trying to keep these as accessible investments because our goal is to make this asset class more accessible. Average investments vary by the deal. One way that they’ve leveraged their platform and the fact that we have a new deal at a regular cadence at least once a month is they’ll decide, “I want to invest 20% of my portfolio into farmland or 10% of my portfolio department. That gives me X dollars, $200,000.” Now, I have the opportunity because each deal can be crowdfunded. I can do a $25,000 investment in this California citrus deal and a $50,000 investment in this Oregon. Another $25,000 investment in this Illinois root crop deal. You can build yourself a nicely diversified portfolio, diversified geographically across states, diversified from a commodity standpoint over the course of a couple of months and deploy rather quickly. We see plenty of fines taking advantage of that.
Your projection for a quotation in five years from now, how much are you looking to get out the door and get invested in this fiscal year and over the next five years?
I don’t know if I could put a number on it. We all believe together at FarmTogether that farmland as an asset class is going back to that. The data $50 billion under management of a $2.7 trillion, $2.8 trillion asset class. There are many opportunities. I certainly believe our hope would be to be managing a meaningful amount of capital over the next five years. Several hundreds or maybe even upwards of over a billion of retail investor capital. We do think that there’s one great property available and becoming available especially over the next twenty years. We know how many are going to trade hands now. We also think that the asset class has proven to be one and arguably, in our opinion, a prime one for capital preservation.
Particularly in what we believe is going to be a chronic low yield environment and notwithstanding the fact that we’ve had this incredible idiosyncratic event that is COVID. Where rates are now, where rates may go, the potential for stagflation, the potential for hyperinflation, there are many different macro drivers out there that could influence the portfolio that we think having a tried and true asset class. It may not get you a 30% IRR, but it’s difficult to lose a principal in an asset class like this. That’s why we champion it and hope to make it as accessible as possible.
I look at it from a perspective of you acquiring this property, the land is going to have value unless there’s probably something catastrophic that happens to the soil. From that perspective, it’s like anything you may have a bad year. In the long-term, I’m guessing your typical hold time is probably 7 to 10 years.
Another thing on that point that we find exciting, I think alternatives have been historically a difficult asset class for some folks to enter because of the whole period. Not everyone has the luxury of being able to lock up capital for ten years. One thing that we’re excited about while we certainly underscore that farmland is we’ll treat you best if you hold it for the full horizon as you start to get to enjoy that increased cash on cash yield and all the appreciation. If for whatever reason you do need liquidity during the investment during the lockup period, we are actively going to facilitate a secondaries market, which we’re excited to be opening this fall.
The way that our secondaries market will work is one year after each deal closes, we’ll open up the secondaries market and anyone who has invested in that deal who may be interested in liquidating their position can post that on our secondaries market. On the flip side, if you’re a Byron, you loved hearing about Jupiter and you wish you were in the Jupiter deal. You can go into the Jupiter secondaries market and see if there potentially is any interest that’s available to purchase. That’s one way we’re trying to also help democratize the asset class and make it a little bit less intimidating for folks who may not be ready to fully commit to a ten-year horizon should something occur during those ten years where they need liquidity.
It’s funny if people that know me well, they know sometimes the wheels start spinning in my head. The first thing that pops in my mind is I’ve got two kids and I’ve started creating self-directed IRAs for them, Roth IRAs. They’re fifteen and going to be nine. Ten years to them is like, “Who cares for them?” If my daughter all of a sudden had in two years from now $20,000 in an IRA, that’s a Roth IRA, she’ll be seventeen. You put that in there. She’s not even going to remember that’s in there. All of a sudden, she’s 27 years old. She’s got something that has been invested in this for some time.
That’s non-correlated with everything else going on in the world and something that is added benefit from the social standpoint. That’s where my head spin is thinking, “Self-directed IRA people who are young.” What I see a lot of times too is I had a call with somebody and they were like, “How long are your funds?” I said, “Usually they’re only 2 to 3 years.” “Why are they short?” I said, “Because most people invest in notes want that money faster. Apartment deals, you’re 5, 7, 10 years.” This type of deal, it’s 5,7, 10 years because if you did it for years, you’re probably not going to have great returns.We don’t need more strip malls in the US. We need more sustainable farms. Click To Tweet
It takes time for it to build and people need to understand that. You want to diversify on. I’m going to be 45. For ten years, I’m not going to be living on an island yet with all my millions. It’s something that diversifies and continues to grow. I should get some of this stuff for my kids because it isn’t correlated to anything from these things. Why don’t you tell us where people can find more information about you, some of these investment options? Do people have to be accredited investors or can anyone invest in these types of things?
All of our crowdfunded deals have been structured and under this exemption that’s called a 506(c), which means that if you’re a US person, you would need to be an accredited investor. We are actively looking at alternatives for that. Would recommend if you’re interested in farmland and busting, even for the nonaccredited investor. Visit our site, join our newsletter. We will be the first to let you know as soon as we have a product that’s open for nonaccredited investors. Our website is hopefully a one-stop-shop or learning more about the space. We have a white paper there. We also have a thematic paper on farmland performance during recessionary periods, which could be interesting for folks to see how it performed during the ‘80s, during the dot-com bubble, and during the great financial crisis. If you have any questions, our email is Info@FarmTogether.com. I’m happy to learn more about your interest and answer any questions.
The 506(c), you have to be accredited. There are other options out there which I’ve done 506(c). I’ve also done a 506(b), which is something you can’t advertise, but you can discuss it with people who have preexisting relationships with. If you start reaching out to FarmTogether and I’m not giving financial advice or telling them what to do, and you start inquiring about different things if an opportunity ever does come by. You can possibly have that existing relationship because you’re not or eventually you may grow to that as well but does kick my daughter’s Roth IRA out of that situation, unfortunately. Any last second things that you thought we should have covered that we didn’t cover in regards to anything or anything else that you’d like to comment on?
One thing I think that your audiences would also find interesting is something we find interesting and we’re working on getting more of these types of deals on the platform. There’s a whole new area of farming known as Regenerative Farming. It can take many forms, but ultimately you’re utilizing a set of land management principles where you can drive carbon sequestration through this type of farming. To the point where you can generate carbon credits from the actual farming. We are super excited about this. My background and how I fell into ag is my undergrad degree was in Meteorology and Climate. I’m a complete weather nerd.
When I was thinking about careers, I thought to myself, “What industry is going to be impacted by climate change? What industry could be part of the solution for climate change?” It’s this interesting and unique circular relationship where the way we farm influences the environment, but also could be in a negative way, but it could also be in a positive way if we farm through using regenerative practices to sequester carbon from the atmosphere into the soil. We are working on underwriting a couple of regenerative deals. We hope to be able to offer our investors on the platform some regenerative opportunities over the next couple of quarters.
The due diligence process and we talked about the Jupiter one being extra water but I’m guessing too there’s probably a process. You’ve still got to review the title. You’ve got to make sure it’s probably zoned for what you want to do. What are some of the other things that are like, “I would’ve never thought that?” As part of due diligence or what is that process? How long does it take also to close the deal once you start getting it under LOI, Letter Of Intent, or something to closing? Is it typical 2, 3 months? Does it drag on for a period of time because of the amount of due diligence you need to do?
Our process is probably identical or similar to what you see in real estate. We’ll issue an LOI. I will come to terms and then enter into PSA where we will agree to our escrow period. Our escrow period is as short as 45 days on the quick side to as long as 90 days in the long run. During that period, we’re going to be doing a variety of different diligence tests and analysis. Our diligence checklist is sometimes growing over time. It’s 112 items now. This spans from an Ulta entitled survey phase one environmental, reviewing riparian rights, testing water quality, soil quality, doing a soil mapping, checking, packing of seeds for past years of yields to make sure that it’s been as productive as we’ve been led to believe it has.
We look at drainage and tillage. This is more of my science are coming up, but we look at a climate. There’s a website called Cal-Adapt specific for California, but you can look at how temperature changes and precept change. This is a 40-model ensemble that the international panel on climate change uses. We’ll look at, what is the climate impact like for the property? There’s an appraisal done. That’s standard in every deal. In many ways, it probably parallels real estate, but what some probably deeper areas in chemistry because we do have to test soil and water and some of those elements. We believe that climate is an important piece of the equation here. That’s more on our site, but we do look at climate in each deal as well.
If you’re going to go buy like a multifamily deal, you hire an engineer, you hire entities to look at the HVAC or electrical. You have a forensic analysis of the building. You’re basically doing that on the soil and on your asset. You’re checking out the asset. What if a developer comes to you and says, “I want to buy this land to develop it and build a mall or housing or something on the property?” Has that ever come up? Is it your corporate creed that it’s like, “This is farmland and we’re keeping it as farmland?”
We’re not interested in that. It’s in our operating agreements, we will sell to farm managers. We are in this business because we want to retain US agriculture as a strong industry. I don’t think we need more strip malls in the US. I think we need more sustainable farms. We have no interest in that.
Have you ever considered putting any type of sustainable energy, whether it be solar wind on properties as well?
Yes. We love that idea and have been exploring it lately. When we do properties that are good candidates for either a turbine or solar panels, we would like to add those and include them in the CapEx development budget. We have not yet. That’s something that we look forward to doing on future properties.
Thank you, Chris. It was a lot of fun being here and I hope you have an awesome 45th birthday.
Thank you. This will be on our Facebook page. It’s a pleasure having you. I enjoy talking about other investment strategies with people because it gets my brain spinning. I love notes, but I love investing in real estate in general. Thank you for coming on and please check out FarmTogether.com.
Thanks. Take care.
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