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Investing In Farmland With Elise Alexander – Real Estate Women

 

One of the leading asset classes available to investors today is investing in farmland. This is because farmland offers a diversified investment opportunity with attractive long-term returns. Today, Elise Alexander, the Vice President and General Counsel for AcreTrader Inc., joins Moneeka Sawyer to give us a closer look at farmland investing and how it differs from traditional real estate investing. She also talks about its benefits and the several ways you can earn from it. If you’re thinking about diversifying your investments and making passive income, tune in!

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Investing In Farmland With Elise Alexander – Real Estate Women

Real Estate Investing For Women

I am so excited to welcome to our show, Elise Alexander. This is what Elise says about herself, “I am the VP and General Counsel for AcreTrader Inc, which is an Arkansas-based platform that enables fractionalized ownership of farmland and allows investors to earn passive income starting online in just minutes. Our mission is to empower our customers to buy and sell land smarter with advanced technology, data and expertise. I grew up on a farm and ranch in Crawford County, Arkansas. In addition to my role at AcreTrader since 2003, I have served as President of a large family office, managing several companies and providing legal counsel to portfolio companies as well.” Elise, welcome to the show.

Thanks for having me on. I’m excited to talk to you.

I’ve been looking forward to this show because we’ve never had anybody come on and talk about farmland. What an interesting topic. Thank you for coming on. Could you give us your high-level story? How did you get into this kind of investing?

I grew up on a farm and ranch so I had exposure to farmland. Fast forward a few years, my brother who’s a money manager at a large banking firm, wanted to invest some family money in some land. I thought, “I don’t think this is a good idea. We won’t be able to get our money back.” It turns out he was right and I was wrong. We’ve invested in farmland independently of the AcreTrader job over the years and done pretty well at it.

I was at least familiar with the asset class when I met Carter Malloy, our CEO and Garrott McClintock, our COO. It is unique and has different aspects. We’re going into why it’s different than traditional real estate investing and a good alternative in a way to diversify your portfolio. We aren’t investment advisors so we can’t give investment advice but we can talk to you about farmland and tell you how to invest in different ways through AcreTrader. I’m excited about the asset class.

Talk to me a little bit about how you got involved with AcreTrader specifically.

It was through a mutual friend who approached my brother in his job and said, “These guys are a startup. They’re looking for equity to start the company and grow.” Through that conversation, we found out they were looking for legal counsel. I had gotten a little bit less busy managing the family side of things and was looking for my next opportunity. My first thought was, “This seems simple. Why has nobody thought of this?”

My second thought while looking at the quality of their slide deck was, “They already have a lawyer involved. They probably don’t need me.” That led to a phone call and another in-person meeting in late February of 2019. We hadn’t even yet launched our first farm. I fell in love with the concept. I liked Carter and Garrott. There were maybe 3 or 4 other people on the team at that point. I was like, “I these guys. I feel at home with them. Let’s go.” It’s been like this ever since.

Talk to me a little bit about how farmland as an asset class is different from other asset classes and other ways to invest in real estate.

It’s different than just investments in stocks or bonds. For example, it’s not correlated to the stock market. If you have a fluctuation in the stock market, it generally doesn’t affect the value of the farmland, which is nice. There’s also a relative lack of price volatility in the price of land. There have been some downturns in the US in the past several years in the values of farmland but much less so than other asset classes. There’s a real long-term appreciation of the value of farmland.

NCREIF is an organization that tracks a lot of land statistics. Their main statistic is that the average annual return for farmland is about 11% to 12% over the last several years. If you look at the USDA Statistics who published the cumulative annual growth rate of farmland in the past several years has been about 5.9%. You can earn money with farmland in a couple of ways. One is you get annual distributions from the rent on the farm and then also that long-term appreciation that we talked about.

Another benefit to farmland versus other real estate assets is it has a pretty stable tenant base. You have a lower default rate. If these farmers don’t own the land and they’re a tenant on your land, they want to be there. They’re spending time, energy and money. They’re putting fertilizer in the soil that is good for more than one year. They’re real salt of the earth people. Certainly, farms fail but it happens in industry and business anyway but the default rate is lower. The farmer has a bad year. He or she is not necessarily going to move off and say, “Sorry, I’m not paying my rent.” They pay rent, not monthly but in advance of their growing season. That helps as well.

One of the things I loved about AcreTrader in the business model but also farmland is there’s a real social good that I haven’t been able to benefit from in any other business or job I’ve had. We’re preserving the assets. Farmland disappears at the rate of 2.9 acres per minute in the US. We lose it to development. We’re also ultimately helping feed people, not just in the United States but also in the world. That feels good to me as opposed to pushing some paper around the desk.

I know a lot of farmers. One of the biggest criticisms we get about our business model is, “You’re just buying farmland and driving up the price.” The asset class is huge but there are a lot of ways that we help young farmers as they’re growing their business. They can’t afford to buy land. We buy it for them and then lease it to them. Our investors partner in a way with that farmer to help him or her grow their operation. There are a lot of different ways I could describe that but that’s the general benefits that I see in distinction from traditional real estate.

Do your homework, do your due diligence, and don’t just rely on something somebody told you.

I’d like to hear a little bit more of those details. First of all, you are renting to small farmers. Why don’t you tell me a little bit more about that? Who is it that you’re renting to? Go into a little bit more of those benefits.

Some of our tenants are large corporate-type farmers. For example, we have a couple of tenants who are repeats in different areas and some have organic farm operations. To be certified organic land has to undergo this long process. You can only use certain types of products on the land to enhance it. There’s a lot more that goes into that if an organic farmer is going to ask you for a longer-term lease. Some of those are larger operations. Some of the tenants we have are young farmers who are starting.

They may have only a limited amount of capital. They need that to buy farm equipment, the fertilizer, the seeds and things like that to go into the farm. They don’t have enough credit maybe to get leveraged to buy the farm. They’ll bring us a good farm. We’ll do our process to review it, give them an option to purchase it at the end and lease it to them. That’s one way in which we help large farmers.

The farming generation in the US is growing older. Sometimes people pass away and maybe their children don’t want to farm. Maybe they have 3 kids, 2 want to farm and the 1 just wants the money. It’s a good way we could buy that farm. Our investors could buy that farm from those descendants of a long-time farmer. The 1 who doesn’t want to farm goes away and the other 2 may want to lease it back from us and continue farming that same ground that their family has owned.

There are a lot of ways that we help farmers if we refer them to resources that they may not know they have access to. It’s not just us trying to buy land and benefit from it. We view it as a partnership with farmers and try to help them. We have tools that we provide to them and data that we try to make available to them and resources. How do you find a good CPA that knows how to account for farming and things like that? It makes us feel good. They’re great people. We get to meet new people every day. That’s fun too.

Farmland is disappearing at this huge rate. How does that affect your business? What do you guys do?

It affects our business in a couple of ways. I wouldn’t say that we would never convert farmland to commercial development. For example, we buy farms in Illinois and Chicago continues to spread out. There are commercial developments near where we are. There are wind farms on some of our farms that our investors own. Generally speaking, buying that farmland and continuing to engage in the farming business through our tenants preserves the farmland for being commercially developed for that period.

Sometimes it can make buying farmland more challenging. If a commercial or a development company is interested in the same piece of land, we want to put it on the platform and allow investors to invest. That can drive the price up. We try to make sure that we are purchasing farmland at a price that provides for appreciation over time and the investors can benefit. Other things that affect farming and farmland are commodity prices and what’s the going rate for rent in that area. There are a lot of factors that go into deciding whether a farm might be a good investment.

Overall, the fact that a lot of farmland is going away to development doesn’t hurt our business model but our population and the need to feed people is going up. Some farmland is used not for growing crops but for grazing livestock which also goes toward feeding people. At this point, we haven’t had any farms on the AcreTrader platform that is used for livestock and grazing. We are hoping to expand our offerings to include things solar and timber. There are a lot of different ways to make money through farmland that isn’t always growing soybeans, corn or apples.

What I’ve heard about farmland is that the small farmers getting shut out and the big farmers are all coming in and buying a ball of land or doing all the production. It sounds to me like your love is with the smaller farmer. Am I understanding that correctly?

We love all farmers. Ultimately, we’re going to lease a farm to the person or group that has a proven performance history. What does their yield data look like? Are they financially sound? Are they known in the community to be good people and people that we would enjoy working with for a long period? More of our tenants are smaller farmers.

The bigger corporate farmers do a great job at farming sustainably and having a lot of good practices in place. Those larger farmers have more ready access to capital. If they need a line of credit for their operations or to buy more farmland, it’s easier for them to do so. Some of the smaller farmers have less access to capital. Statistically, it means a lot of smaller farmers are tenants. If there was, we don’t prefer one over the other when leasing.

When you’ve got a lease, how long does the lease usually last? How long do you write the lease for? When do you normally sell? What’s the longevity of those contracts? Part of why I’m asking that question is that as an investor, we’re getting whatever it is every single year. Do we ever get to take advantage of the equity growth in that? What does that look like?

Most of the holding periods on farms re-estimate between 5 and 7 years. If you purchase shares in an entity that owns farmland through the AcreTrader platform, most of those hold periods, we think 5 to 7 years is about the sweet spot. We have the ability to sell the farm sooner. Investors earn an appreciation in this passive income model in two ways. They’re getting a part of the cash that’s generated by renting the farm from the farmer. At the end of the life of the farm, when we decide, “The markets are good,” we have an offer on a farm.

 

However that comes about, we pay the closing costs and the commission for the sale. Everything that’s left comes back out to the investors in that LLC or LLP that owns the farm pro-rata based on how many shares or membership interests they have in that farm. Investors get annual income and then get to share in the long-term appreciation. AcreTrader doesn’t take a carried interest. We do charge farm management fees annually. We have an affiliate that’s a real estate brokerage that gets a commission. Otherwise, we try to leave the bulk of the appreciation available to investors.

What is a minimum investment into any of these properties? Does it differ?

It varies by type of farm. The other type of farms besides row crop farms are soybeans and corn. Those are 5 to 7-year whole period. A permanent crop farm would be an orchard where they grow nuts, almonds, pistachios or apples. Those types of farms have a longer whole period. The reason for that is if it’s a new planting, it takes a while for the trees to grow enough.

It takes time to begin producing the fruit and then to reach full maturity where the farm is the most profitable and therefore, a better candidate for a sale or a liquidation. Those periods are more than 10 to 15 years on hold. AcreTrader is new. We’ve sold one farm so far. We have some others that we’re looking for or receiving offers on at the moment. We consider seeing if it’s economically viable and it’s a good outcome for our investors when we look at, “Is it time?”

You do a management fee annually. What does that look like?

That is 0.75% of the fair market value of the farm. The fair market value of the farm can go up over time so that the dollar amount of that fee could go up. Investors don’t receive state invoices or anything like that once we’ve collected the rent and the AcreTrader management fee. We have an affiliate that’s called AcreTrader Management, LLC. That’s the entity that does the farm management. Out of those fees, we may also contract with a local third-party farm manager.

That’s no additional expense to investors but that’s somebody who is a professional farm manager. They have boots on the ground. They’re there looking at the farm, talking to the farmer and making sure they’re being sustainable using good farming practices. Those fees are covered by the AcreTrader, the management fee. We get the other things we do for that fee, paying the property taxes if there are improvements to be made on the farm like the irrigation equipment breaks or we need better drainage on the farm.

We would supervise those and work with the farmer to make sure that his or her farming was not interrupted. We pay the property tax on the farm and get general liability insurance on the farm. It’s truly passive to investors. After they’ve made that initial investment, they get to sit back and receive their cash distributions across the platform back into their wallet. We do the tax and accounting reporting annually as well.

First of all, if we’re going to do passive investing, we have to pay a management fee. That’s par for the course. Your management fee is low. It’s not even 1%. You do an awful lot for a low percentage. That’s amazing to me. In residential, we might pay management fees of 8% to 12% to 15% of rents. It’s a little bit different. You’re doing it on value. In residential, we do it on rents but it seems to cover quite a lot. I love that.

We want people to love the asset class too. We’ll still make money. We’re thinking long-term, big picture. We don’t want to benefit ourselves upfront at the expense of the investors. That’s not a good way to build a relationship. We want them to trust us and behave with integrity. That’s what being in business for a long time is about.

With regards to payments out annually, in syndication, we have a term that’s day one payouts. How soon after the investor invests do they start getting payments out?

Usually, if we purchase a farm in the first six months of the year, the first payouts would come in December of that year. What can happen in farmland after June 1st-ish is farmers have started planting and preparing the ground. After that, if I bought a farm in August, I likely wouldn’t receive rent on that farm until the following year. Some leases are split between payments between March and November. That coincides with starting the process of planting and once they’ve harvested.

To answer the last question you asked which was lease term, it varies by farm and land. Sometimes the leases with the farmers are a year. Sometimes with the organic farmers might be 3 to 5 years. Sometimes they have rent escalation. Some of our leases are cash where they pay us a set rate. Some are cash with some flex lease component, which means they pay a base amount of rent. Depending on if the farm performs and the yields are higher than certain levels, the investors may also get a piece of the crop rent or the crop production and the sale of that.

To circle back to the question you asked about rent on day one, in some cases with the more permanent crops too, the disclosures on the site will tell you, “You can expect to restart receiving payments,” and then the timeframe. On permanent crops, if it’s a greenfield operation where it’s bare land, we had to go through and somebody’s got to plant trees and install irrigation, it could be three or more years before you start receiving cash distributions. As an investor, you’d want to know that upfront.

The time you spend becoming more educated pays dividends. Just keep learning, reading, and keep asking questions.

Do you start accruing your interest from day one? When do you start accruing the benefit?

We don’t accrue interest. For example, on a farm, if for whatever reason a farmer did default and didn’t pay rent, you wouldn’t get distributions that year. There’s no accrual for that. One of the good things about AcreTrader is we vet the tenant base in the area. We know if something did happen. If a farmer for whatever reason had to default on the lease, we know there would be other tenants there available. Depending on the time of year that happened, we could get another farmer in who would start planting and there could be some distributions that year. There’s no accrual and catch-up from an accounting sense.

I visited your site. When you talk that it will make on average 12% a year, you’re including that there are years that you may not pay anything. Is that true? Give me a little bit more of a breakdown on that.

Our model doesn’t provide for a default. We don’t include the fact that any certain year you might not get written but it’s very conservative. We base that estimated yield or annual IRR based on the same base rent at the beginning of the lease. We don’t factor in any escalation and rental value in there because it’s hard to predict upfront. We would rather people have realistic expectations and then surprise them if we do well. Appreciation and rental rates would serve to probably offset any year in which you didn’t get rent but there could be a year that you did not receive a cash distribution into your wallet.

A couple of things that we want to talk about in EXTRA is Elise is from AcreTrader. I’m going to let you know exactly how to get in touch with her. There are many different ways to buy farmland. We’re going to be talking about that in EXTRA. I’ll probably ask Elise a few more questions as they come up for me. I’ve never had a conversation about this asset class, which is fascinating but I also don’t know what to ask. I’m sure that conversation will be juicy. We will do that in EXTRA.

Before we move into our three rapid-fire questions, I want to let how to find out more about AcreTrader. Go to BlissfulInvestor.com/Farmland. That will go to their homepage at AcreTrader. There are resources to learn more. You go to the Resources tab. There are opportunities. If they’ve got any investments that they’re taking investments on, that will be listed in investments. You can get on their newsletter so that you can find out more information. There are a lot of resources on that webpage. Did you want to add anything else regarding the webpage, Elise?

I’m sure your readers are familiar with accredited investors’ status. At this point, our offerings are only open to accredited investors. We hope to broaden that at some point in the future but at this point, it’s only accredited.

What is the minimum investment you can get?

The lowest are usually somewhere between $8,000 and $10,000. Depending on the farm and the price per acre, that could be more than one share. Each offer will tell you what the minimum investment is required and what number of shares that gets you. Sometimes we have sponsored offerings that somebody else finds and sources the deal. They bring it to us and pay us a fee to use our platform. In some of those, the minimum could be $25,000 or $35,000. The highest we’ve ever had is maybe $50,000. We figured out that was too high. If you watch our site, there’s something for everybody in a range.

Go to the site and find out more at BlissfulInvestor.com/Farmland. You can get all sorts of interesting information about AcreTrader and farmland. Thank you so much, Elise. That was amazing. Are you ready for our three rapid-fire questions?

I’ll do my best.

Elise, tell us a tip on getting started investing in real estate.

The main thing is to do your homework and diligence. Don’t rely on something somebody told you. Don’t be afraid to ask questions of anybody you can find.

What would you say is one strategy for being successful in real estate investing?

 

It’s continuing to learn about that asset class that you’re interested in. You can make a more informed decision if you understand the nuances of how the market works with respect to that asset class. It pays dividends, the time you spend becoming more educated. Keep learning, reading and asking questions.

What would you say is one daily practice that you use that contributes to your success?

It’s being mindful and intentional about taking the time. We all in the workforce are busy. Take that time, allocate it and be true to it to do the learning. That sounds like a broken record but it does matter.

It’s been so fun to chat about this on this portion of the show. Thank you so much.

Thank you for having me. I enjoyed it. I could talk about farmland all day.

Ladies who are subscribed to EXTRA, we are going to be talking more about farmland and specifically different ways to invest in farmland, not just AcreTrader so you’ve got some different resources. If you are not subscribed but would like to, go to RealEstateInvestingForWomenEXTRA.com. You’ll get this episode and many others. The first seven days are free so you can check it out.

For those of you that are leaving us, thank you so much for joining us. This was an interesting conversation. I hope you enjoyed it as much as I did. I look forward to seeing you next time. Until then. Remember, goals without action are just dreams. Get out there, take action and create the life your heart deeply desires. I’ll see you soon.

 

Important Links

• AcreTrader Inc
• Resources
• RealEstateInvestingForWomenEXTRA.com

 

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