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Farmland LP Summary
Farmland LP is the largest organic farmland fund manager in the United States. However, they focus specifically on converting conventional commercial farmland into sustainable farmland growing organic produce. This conversion typically takes around 3 years.
Farmland, as an investment, typically outperforms the stock market due to its consistent demand and low correlation to the stock market. However, throughout history, participating or investing in farmland generally meant the purchase of a farm directly yourself. Farmland LP is striving to change that.
Farmland LP not only offers investors a way to participate in the appreciation of farmland, but also looks to add value to farmland by increasing efficiencies and profitability.
Currently, the fund is for accredited investors and requires a large minimum investment of $50,000. It also requires a holding period of 1-7 years.
- Access to Asset Class that Traditionally Outperforms S&P 500
- Adds Value to Farmland via Organic Conversion
- Long Track Record of Returns Since its Launch in 2009
- Open to Accredited Investors Only
- High Minimum Investment of $50,000
- No Secondary Market Meaning Investors Can't Sell their Positions Early
Supply and demand is a fundamental concept for all investors. When there are more people demanding something than there is supply, prices increase.
One modern-day case of this opportunity can be found in organic produce. Currently, organic produce makes up less than 1% of all farmland use.
At the same time, over 4% of food consumption is organic.
In essence, there is a significant demand for organic foods but the supply is limited. This is one of the reasons why organic foods tend to cost more than their non-organic counterparts.
But how can investors capitalize on this imbalance?
There are a number of opportunities available, however, we believe one of the most promising is to convert non-organic farmland to organic. Through doing this, investors can capitalize on the advantages of owning farmland as well as the trend towards organic.
Farmland LP is the largest organic farmland fund manager in the United States. This investment is for accredited individuals focused more on growth via appreciation versus cashflow.
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Farmland LP Review: Summary
- Farmland LP is a farmland fund specializing in organic farm conversions while focusing on sustainability
- By buying non-organic farmland and converting it to organic use, they are able to increase land value
- This process, however, often takes years which makes cash flow less of a priority
- Increased efficiency allows Farmland LP to be as much as 4x as profitable per acre of farmland
- Farmland LP investors have access to investments in two proprietary funds with a third coming in the near future
- Only accredited investors can invest with Farmland LP
- Currently, only the Vital Farmland REIT is taking on new investors
- The Vital Farmland REIT requires a minimum investment of $50,000
- The fees on Farmland LP investments vary, but typically include a management fee and an incentive fee
- Since its inception, Farmland LP has consistently outperformed expectations for the fund
- Farmland LP is an investment for those focused more on growth via farm repositioning and subsequent asset appreciation
- Investors with less to invest or those focused on immediate cashflow may find AcreTrader or FarmTogether more suitable for them
What Is Farmland LP?
Farmland LP is an investment fund specializing in converting conventional commercial farmland into sustainable farmland growing organic produce. The fund was founded in 2009 and has grown to over $175 million in assets.
Through converting farmland to organic, the fund is able to improve land value immediately. Additionally, through their use of technology and proprietary processes, they're able to improve the efficiency of the land.
For most farmers, converting to organic is a massive undertaking. The 3 year-long process is enough to discourage many smaller farmers from even considering making the change.
Through their economies of scale and past experience, Farmland LP is able to do these conversions much more easily. The fund capitalizes on the gap between supply and demand in the market for organic foods.
In order to make a profit, the focus is on identifying land with significant potential for growth in California, Oregon, and Washington. These states fall in the management team's area of expertise and tend to have superior soil and water quality.
Once the land is purchased, Farmland LP immediately begins to pursue more sustainable practices that ensure the longevity of the land. This includes shifting from single-crop farming to a more diverse farming operation.
By rotating between specialty crops and livestock and avoiding chemicals, Farmland LP keeps the soil quality high, further improving land value.
However, since this conversion process often takes many years, immediate cashflow from the land is not the focus. Instead, the idea is to improve the value and then recognize the bulk of the return from asset appreciation or selling the converted farm.
Farmland LP Investment Strategy
All potential investments undergo a strict due diligence process before being added to the funds on the platform.
Specifically, Farmland LP screens for locations meeting the following criteria:
- Water – Strong access and legal rights to high-quality water sources.
- Climate – Ranked based on scenario analysis through 2050 and 2100.
- Valuations – Based on production capacity and ability to improve the land.
- Economies of Scale – Consolidation of land across farms.
Once a location is identified, the following factors are used to determine suitable pieces of farmland.
- Soil – High-quality soils with the potential to improve future crops.
- Revenue – Significant upside potential by converting to organic operations.
- Value Enhancement – Ability to convert to permanent crops and cheap access to water sources.
- Infrastructure – Opportunity to upgrade existing infrastructure for immediate value-add.
- Tenants – Desirable tenant base of local farmers and operators.
Clearly, the strategy revolves around the premise of increasing land value by making immediate improvements. These improvements not only increase the value of the land, but also the profit potential in the short term.
Farmland LP Sustainability
The improvements that Farmland LP is making to the land also serve to reduce the carbon emissions of farming operations and release fewer toxins into the earth. For socially conscious investors, this investing strategy is a win-win!
Another core philosophy of Farmland LP's investing style is introducing crop diversity. Many commercial farms will plant the same crops year after year, leading to a significant decrease in soil quality.
By rotating crops and livestock, they can ensure that soil quality remains high for decades to come.
This also allows Farmland LP farms to be more responsive to changing market conditions. Because they are not locked into a single crop, they can quickly pivot into more profitable crops.
Sustainability is at the core of all business endeavors for Farmland LP.
Back in February 2021, they earned the highest sustainability award by HIP Investor Inc, a leading ESG and sustainability-ratings firm.
The 82.0 rating (of a possible 100) places Farmland LP as #1 in HIP Investor’s worldwide corporate universe of 10,000 corporations, as well as at the top of the agricultural real estate investment trust (REIT) category, the closest comparable peer group.
Farmland LP Technology
Through its use of modernized technology, Farmland LP is able to further increase its efficiency and returns for investors.
Aerial Imagery – Through the use of drones, Farmland LP is able to easily monitor their land and make decisions quickly. This increases the overall efficiency of operations and yearly yields. The resolution is fine enough to see individual leaves on plants.
State-Of-The-Art Farming Equipment – Farmers are able to tend to more fields in less time with the newest tech. This allows the funds to scale much faster.
Best-In-Class Varietal Selection – Modern crop varieties produce better quality foods and are easier to harvest. By staying on the cutting edge, efficiency is maximized.
Automated Harvesting – The ability to harvest with fewer humans keeps Farmland LP as profitable as possible. All the while, they are able to provide 3x the jobs of other farms.
How Does Farmland LP Work?
Investors in Farmland LP have two options for their investment. They can choose to either invest in a limited partnership or a proprietary REIT.
The fund started off only offering the limited partnership, hence the LP in the name. However, a few years in, the management team decided to create a REIT to facilitate more investment opportunities. Both of these are private, non-traded investments.
Limited partnerships and REITs are treated differently in a number of ways including tax consequences, legal structure, and regulation.
REITs pay out dividends to investors the same way a stock would, however, the tax treatment is a bit different. The majority of REIT dividends are typically treated as ordinary income. But any dividends that are a result of the REIT selling property held for over a year will be treated as long-term capital gains.
Limited partnerships pay out distributions to shareholders. These always receive ordinary income treatment and end up taxed at the investor's marginal rate.
One big benefit of investing in a limited partnership is the ability to receive pass-through losses. In the early stages of many investments, there will be a loss period where more money is going into the property than is coming out of it. If this is the case, investors will get to deduct these losses on their tax returns.
Limited partnerships are structured as a pass-through entity, whereas, REITs are corporations. The main impact that this has on investors has to do with liquidity.
It's typically much more difficult to sell out of a limited partnership than it is to sell out of a REIT. This is because the market for limited partnership shares is smaller.
REITs have a number of regulations that limited partnerships do not. This makes them much more standardized investments than limited partnerships.
REITs can either be public or private. Public REITs can trade on a major exchange and must meet a certain set of criteria to maintain their status.
The REIT offered by Farmland LP is a private REIT which allows for more flexibility in the way investors are paid. However, this does inhibit some of the liquidity benefits REITs can typically offer.
With a publicly traded REIT, you can buy and sell shares on major exchanges like the NYSE. This gives them high liquidity. No such marketplace exists for private REITs. You should be prepared to commit for the full duration of the investment.
Limited partnerships face significantly less regulation and can be structured in more creative ways. As a result, limited partnerships typically have higher minimum investment requirements and require investors to be accredited.
Farmland LP REIT vs. Farmland LP
Currently, the Farmland LP REIT is accepting investors, while the limited partnership was fully funded with $80 million.
The REIT is very close to the target fund size of $150 million and the minimum investment starts at $50,000. This is significantly more than the typical REIT minimum but is still cheaper than buying farmland directly and managing it yourself.
The REIT is closing on October 29th 2021.
A 7-year time horizon is set for the REIT and includes two optional 2-year extensions. As a private REIT, there is no secondary market so investors should be prepared to hold their investment for at least 7 years.
On this particular project, it is projected that from converting from conventional to organic farming, Farmland LP will raise the profit per-acre by over 10x.
The target IRR for investors in the REIT is 11.1% which is in line with typical farmland returns. However, it's entirely possible that the fund outperforms.
The limited partnership has a target IRR of 9.6%, but has been delivering an IRR greater than 13% since inception. This suggests that their estimates may be slightly conservative.
Farmland LP Fees
There is no standard fee schedule for Farmland LP investments.
The Farmland LP REIT is currently the only open investment and has both a management fee and an incentive fee.
1. Management Fee
The management fee on the Farmland LP REIT is 1.75% per year. This is on par for many other private farmland investments. The fee covers the costs of ongoing maintenance of the farm and also contributes to converting to sustainable practices.
2. Incentive Fee
An incentive fee kicks in once investors receive a certain level of returns. At that point, Farmland LP will begin taking a share of the returns themselves.
For the Farmland LP REIT, the incentive fee is 20% of returns once investors have received 6%.
So if the investment generated 26% in returns, Farmland LP would receive 4% (20% of 20) and investors would receive 22% excluding the management fee.
Farmland LP Pros
- Ability to capitalize on consistent high returns offered by farmland as an asset class
- Take advantage of the supply and demand shortage for organic foods
- Track record of outperforming expectations
- Contribute to sustainable farming practices that reduce carbon emissions
- Investment strategy that makes immediate improvements to the land and increases land value
- Significant positive impact on the climate through avoiding chemicals and reducing carbon emissions
Farmland LP Cons
- No standardized fee schedule
- High investment minimum
- Only open to accredited investors
- Lack of liquidity in private investments
Farmland LP Review: Final Thoughts
If you are someone looking to make a positive impact on the planet through your investing, Farmland LP presents an effective way to do so while following a time-tested investing strategy.
Of the $2.6 trillion dollars of farmland in the US, less than 1% is organic. With the rising demand for organic foods, there is a big need for more organic farmland. By converting conventional farms to organic, investors can see an immediate increase in the value and profitability of their land.
However, this does not come without some drawbacks. In order to get started, you'll need to be accredited and have $50,000 or more to invest. This is a big barrier for many newer investors. Additionally, the 7 year minimum holding period means that you'll need to be invested for the long-term.
But overall, we think that Farmland LP has carved out a niche with a lot of potential. There is a large group of investors interested in socially conscious investing and this opportunity is perfect for them. This is made clear in the fact that the fund has already raised over $175 million and continues to grow every year.
The bottom line is that farmland is an asset class that has consistently outperformed the stock market and most other major asset classes. Whether Farmland LP aligns with your investment strategy, we think that diversifying investments into farmland is something to consider for many investors!