How We Crowdfund and Invest in US Farmland

David Chan

United States
Real Estate
Long-Term Investor

Who are you and what’s your story?

My name is David Chan, I am the Chief Operating Officer and a member of the founding team at Farm Together.

In regards to how I became interested in farmland and agriculture, I would say that is centralized around the fact that I grew up in an area where I got to experience every kind of weather there is, from hurricanes to tornadoes, and it just became a lifelong interest and passion.

I studied meteorology in college at Cornell. And there, my focus changed a bit more to climate change and learning about climate research and how we can both mitigate and adapt to our changing climate. I started to look at different industries and how they could be a part of the solution towards our mitigation and adaptation strategies; I found agriculture to be uniquely positioned.

Because there is a circular relationship with farmland in particular, where the suitability of regrow and wear will change as the climate changes, but also the way we use the land, the farmland management practices that we employ, can either positively impact the environment by sequestering carbon and nutrients in topsoil, or could negatively impact the climate. And so, I thought farmland and agriculture is uniquely positioned in the 21st century to hopefully be a meaningful part of the solution and how we combat climate change.

I was very much impact-focused—how can I as an individual leave a meaningful footprint towards advancing the causes that I believe in?

And for me, the pivot towards becoming an investor, I originally was planning to pursue a Ph.D., and continued advanced research around climate science, then I realized that in my view, I think we know what we need to know, and I think there are few more powerful forces out there than the force of capital. 

Capital can truly change lives and by being in the seat of an investor, and supporting sustainable farmland management practices, and by making that a key component of how we invest, we have ample room to have quite an impact. Much more so than I could see in other areas and that is ultimately what drove me towards investments.

One part of the problem is bringing in more capital into this space and bringing in more professionalized management practices and more sustainable farming management practices.

From a more fiduciary perspective is the promise of this asset class and the competitiveness of the returns that we see, and why we believe it is suitable for so many different investors, and not just institutions, like pensions and endowments, who have historically been the main players and the main investors in the space. From that vantage point, I also think it is a very interesting problem to solve and we are excited about serving the retail investor community and giving them access to this asset class.

At Farm Together we are now in our fourth year, we were founded in late 2017. We are a mix of folks who come from the investment world and also the tech world.

On the investment side, our CEO and founder Artem Milinchuk was previously at Ontario Teachers’ Pension Plan. That is where he first learned about farmland as an asset class and started allocating to farmland from an institutional investor’s perspective. He later worked at Sprott, a large private investment company, and also was the CFO of full harvest technologies, a food waste, and a B2B company. Myself, I come from an investment background as well. I was previously at Prudential, doing farmland investments on the west coast in the United States. I also worked in agribusiness private equity for an asset manager out of New York called Ameri Capital. And I also was at a data company called Grow Intelligence. Our director of investments Josiah Terrell-Perica, also from Prudential. He spent just over five years managing their West Coast asset and has underwritten north of a billion in farmland deals and deployed over a quarter of a billion into US farmland.

I would say Artem, just like myself and the Investment Committee, we bring that seasoned investment process into our sourcing and underwriting and ultimately our selection process for what deals we move forward on. The rest of our investment team also comes from similar backgrounds to round out that skill set.

On the tech side, we have software engineers, product managers, and individuals working on automation to essentially help us accelerate how quickly we can source and underwrite properties and allow us to increase the pool of properties that we can evaluate and ultimately increase the probability of finding what we consider to be top decile properties to make available. And those individuals tend to have more experience from large technology companies and tend to have hard skills in coding and software engineering. It is a little bit of a different background, but it very much complements the investment team, as it helps us accelerate our work and become more efficient and ultimately bring even better properties to our clients. 

What do you invest in?

Farmland investing, which is broadly speaking, a form of real asset investing, which would include farmland, timberland, commercial real estate, residential, real estate, and some others.

FarmTogether’s Yuba Almond Orchard in full bloom.

Generally speaking, the way returns are produced is two-fold. There’s an income return, and that is typically produced either through rental income, for example, if you are leasing the property to a tenant, or by operating income, for example, if you are directly operating the property. In that case, you would have more exposure to performance, which in our field would be commodity prices and yields. And then you also have an appreciation of the underlying value of the asset itself, the physical asset. Upon sale, our investors would then realize any appreciation on that underlying asset that was building throughout the years of their investment. Very similar to commercial real estate, where you have your rental or income return and your appreciation return.

There are lots of different ways to structure farmland deals. From lower risk, lower yield to higher risk, higher yield. At the lowest end of that spectrum would be pure cash leases, where all of the income is for rent. And those would typically also be in commodities that we call Row Crops, these are basically annual commodities that are planted once a year like corn, soy, wheat.

They tend to be a lower risk because, if for whatever reason you have an outlier year, you have another opportunity to reset the following year by replanting. Also, because it is pure cash leases, you really have very little performance risk, if any at all. Your main risk is counterparty risk since you are just collecting rent in that case.

Now, as we go up the yield and risk spectrum, we move towards what we call permanent commodities or permanent plantings. And those are crops that have a long-lived asset, like an almond tree, or a citrus tree or wine, grape vineyards. With those assets, you are depending on those same assets to produce a cash flow over a period of 10 to 30 plus years in some cases, and so an outlier event such as a lightning bolt, setting fire to and destroying five perfectly mature almond trees would cause significant damage to your investment as you would have to replant new trees wait for them to mature. Unfortunately, we cannot speed time. So, you have to wait, five to six years for the biological process of the tree actually becoming mature and producing those commercial yields again.

One of the things that we love about farmland is the flexibility and the spectrum of yield that we can work with to allow us to bring a diverse group of products and diverse group of offerings to our clients. Not every deal is going to be suitable or a great fit for every single client. And we think it is important to bring some deals that are lower risk, and that are pure cash rents on row crops. And those deals that offer net cash yields of anywhere from 2.5% to 3% and net IRR as of 7-8% over an eight-year duration typically. So, that would be at the lower end of the yield and risk spectrum. We also do high-yield deals.

We recently closed some to get an offering called our Galaxy Organic Apple Orchard, which is a conversion property, where we are converting conventional apple farmland to certified organic apple farmland and changing out an old variety of apples Red Delicious to a brand-new variety, Cosmic Crisp.

The structure of that deal is one where it is direct operating and there is also the conversion from conventional to organic. And so that is a much higher yielding deal the net IRR  for that deal is north of 15% and the net cash yield is approaching 20%. Obviously, there is more risk involved since there is the risk of the conversion process to organic and also price volatility of Cosmic Crisp apples and yield variants as well.

We do everything in between those two examples and we think it is important because different investors have different goals, different priorities. Some folks really prioritize income and want to see early income. Other investors want to benefit from the depreciable value that can be captured in a development property. They are not as income-focused and would rather have a higher total return. We cater to both types of investors.

Walk us through your process of identifying and executing on investment opportunities?

Our sourcing and underwriting process is at the heart of our value proposition to our clients. We view sourcing as essentially building as robust of a funnel as possible, we want to evaluate as many properties and as many potential opportunities as possible and have a very broad, top-of-the-funnel. Through a variety of criteria, we whittle that down to fewer and fewer candidates for underwriting and ultimately properties that we’ll actually move forward on with an offer and hopefully secure for investment.

At the top of the funnel, we are looking at publicly available properties that are listed, off-market properties that have been brought to us through various partners of ours in the industry. We also have a “Sell Your Farmland” page on our website and sometimes landowners will bring properties to us. Some of the early criteria that we screened for and this is going to sound probably similar to real estate, but we look for criteria that are extremely difficult, if not impossible to change. Location is obviously going to be very important. In many of our deals, we are partnering with operators, who are skilled operators and have very strong track records in farming the commodities that are specific to their regions.

Operators will generally serve a certain geographic footprint, and they will not really go outside that radius. You need to be close to an operating partner, if you were to hope to have them hired as your operating partner, or if you were going to look to lease to them. One way we filter that group is by thinking, where our preferred operating partners are located, and whether or not the property would fall into their areas of service.

We also look at water security and water risk. We will evaluate the riparian rights, this is important in California because of a new regulation, which is called SIGMA, or the Sustainable Groundwater Management Act. We will evaluate both the groundwater rights and surface water rights, we prefer properties that have both and those are called those dual sources. And we often make a big cut there for water security. We will look at the grading of the property which is essentially the sloping. Is it conducive for the latest technology in farm technology? Is it conducive to either large tract machinery or high-density plantings? And if the grading is too big of an obstacle, we may pass on the property for that reason. We look at soil health, we will look at climate risk, for that we look at an ensemble of over 40 climate models and consider the projected changes in temperature and precipitation for an area over a given property and whether we believe that is either a benefit or a hindrance to our perceived value of that property when considering it for acquisition.

Those are just a number of the criteria that we review, and once we pass properties through those various filters, we quickly end up with a handful left to further evaluate. When we are down to those final candidates, that’s where we’ll start to do deeper due diligence. Including property visits, and ultimately, full underwriting before placing an offer and hopefully securing the property for investment.

In 2020, we did just over a dozen crowdfunded deals in the year, so roughly a cadence of one per month. Our goal for 2021 is to increase that number to something in the ballpark of 18 to maybe 24 offerings. We continue to see this tremendous opportunity in the US farmland and while we have been exploring other markets as well, at this very moment, we still continue to only focus on US farmland. These investments are typically held anywhere from 8-12 years. And distributions, depending on the deal can begin the earliest a month after you invest. Sometimes with development properties, distributions may not occur until year 3 or 4, when there is a commercial yield being produced on the property. And then at the end of the investment period, when the property is sold, you would receive the net proceeds from the sale.

In the US, we serve the accredited investor community. And for international investors, we do not have that specific requirement. Our minimum capital for our crowdfunded deals is $15,000, which is still a meaningful amount of capital, but quite low compared to the capital that would be required if you wanted to outright purchase a single property on your own.

The benefit for our clients is it makes it possible to diversify and create a basket or a portfolio of several different farmland properties across different geographies and different commodities and different yields and risk profiles. Our sort of ideal client is one that appreciates alternative assets and appreciates an uncorrelated asset class.

We have enrolled 100% of our acres in a sustainability standard called Leading Harvest, where our properties are subject to a third-party audit to ensure compliance with the state and the sustainability standards that Leading Harvest has set.

We underwrite for climate, we underwrite for water risk and we believe that you have to treat a role as a manager in this field as one where you are managing an asset that is intertwined with the environment, the community, and local labor in such an intricate way compared to many other asset classes.

What books, platforms or resources have you found useful?

I would say one of my favorite books is a book by Mark R Terceck, who used to be the CEO of the Nature Conservancy, here in the United States, called Nature’s Fortune, and it is basically reimagining how we think about the environment and how nature can be a quantifiable asset class.

And coming at this from the vantage point of as a farmland investor, our assets are outside, our assets are intertwined with the environment in a myriad of ways. If there is a once-in-a-century storm, if there’s a wildfire, if there’s a flood, those are all risks for our assets. It’s something that we need to think about very deeply and that book for me as a farmland investor, I found very impactful.

Beyond that, one of the books I always come back to, and it is one of the earliest books I read, is a Random Walk Down Wall Street by Burton Malkiel.

I think it is important to understand some of the statistical relationships of the stock market with just randomness. And I think that gives more appreciation and more credence to alternative investments. 2020, in particular, at least from what we hear from clients, has really challenged their perception of the broader stock market serving as a barometer of economic health or certainty.

Taking a step back from this assumption that the stock market is perfectly efficient and a perfect barometer, and understanding that there is some randomness involved and there are stochastic variables that really can only be understood in the math is important. That was the first book for me, that really helped me understand public equities and how the stock market is constructed., And that has led me to a much deeper appreciation for alternatives.

What advice would you give to someone who’s just starting?

For someone who is just starting out, I would read as much as possible, listen to podcasts and just consume as much information as you can, and also learn about different asset classes. When I first started investing and granted I was in university, so maybe it was also a function of being younger, but I really thought that public equities and fixed income were the only two asset classes out there. I didn’t really know that there were so many other worlds beyond just those two. I eventually learned about private equity, venture capital, real assets, real estate, farmland, timberland, and all of these different alternative asset classes. And not just alternatives, but even within fixed income, you have high yield, bonds, etc. And then you have so many emerging markets, you have so many different niches and aspects of these various asset classes.

So if you ever plan to be a single security investor, understand how many asset classes are out there and how returns are created.

I think just getting that sort of big-picture view is really important.

Once you have an appreciation for the universe of options, then start to craft a thesis that reflects your view of the world and your view of which industries are poised for success and which industries may be challenged. 

What investment opportunities are you excited about at the moment?

I am very biased towards investments that have an aspect of impact and are not only investing for a financial return but are also investing for some form of a measurable social or environmental return as well.

I think the headline of this year will be impact investing and sustainability and I think it is finally starting to be in the bullseye for larger institutions who control the majority of capital.

The CEO of BlackRock, Larry Fink, just released his annual report and the core message of his annual report for 2021 was one of getting to net-zero. And in every single one of his past quarterly updates, if you did a word mapping, I think sustainability would have been the number one most cited word in those updates. So when you have a leader like Larry Fink, and an organization like BlackRock taking sustainability seriously, I think the broader industry is going to hop on board as well.

It has been a long time coming for someone whose route into investing has been one of impact. And with a shift in leadership views towards the need for sustainable investments and with a shift in the political environment, at least here in the United States, to one that has more favorable views towards this type of investment, I really think we are poised to see a complete transformation of the way managers’ report, with not just financial metrics, but sustainability metrics as well.

The food and water space are areas that I am most excited about. And at Farm Together, I get excited about every single day we have. I do not know if I can say that, but I am very excited about one that’s coming up as we are launching our first pistachio offering.

Oddly enough I tolerate almonds, but I am not the biggest fan of almonds. I like them more as a sort of an input like, I love Almond milk and, but I do not snack on raw almonds the way many people do. But I could eat more pistachios than probably 95% of people, so I’m excited about the pistachio orchard.

Where can readers go to learn more about you?

Our website has so much information about farmland investing. We have a learning center that has white papers, blog articles, and thought leadership on how we view investing in farmland today. There are so many good resources there for someone who is just starting to explore the space. If you register for an account, which is free to do on our website, you can view our past offerings and listen to some of our webinars where we talk about specific deals. Those are also great resources to discover how we think about underwriting and how we think about different deals. Also at the end of each of those webinars, we take questions. And if anyone would like to reach out to me directly my email is just [email protected]

Thanks to
David Chan

 for doing this interview.

If you have any questions or comments, leave a reply below.

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