Ep 191 – How to Successfully Invest in Agriculture in the United States | with Chris Rawley
When people think of investing in land, the United States isn’t at the top of most people’s mind. You think of places like Belize or Panama or anywhere other than the US, but there are still opportunities available for success in the space here.
Adam Schroeder and Zach Lemaster talk with Chris Rawley, founder and CEO of Harvest Returns, about how he’s been successful investing in land in the US, and how investors can follow his blueprint to get solid returns on their own.
Learn more about Harvest Returns by CLICKING HERE
Transcription:
Adam
Hey, Rent to Retires, it’s Adam Schroeder here with another episode. Joined as usual by the CEO and founder of Rent To Retirement, Zach Lemaster. We are joined today by Chris Rawley. He is the founder and CEO of the company, Harvest Returns. And we’re gonna be diving into something that, as far as I can recall, we have never touched on, and that is, uh, investing in agriculture. So, Chris, thanks for joining us.
Chris
Really happy to be here. Thanks for having me.
Adam
Absolutely. So run us through a little bit of your background of how you got into real estate in general, but then also kind of how you caught the, uh, the bug of not owning properties, but owning land with things growing on it.
Chris
Yeah. Um, it’s kind of a long, windy story, but I’ll, I’ll, I’ll keep it brief. Um, I was in a, a naval officer, uh, served time out in a destroyer and then worked in the Pentagon and then got out and did some stuff in the reserves for a long, long period of time. But, uh, my first job out of the Navy was with Jones Ling Lasal. I was, uh, now it’s j l l, people are familiar with that. Worked as a property manager, decided I was tired of making other people money working in real estate. So went out there and found a single family home. Uh, got into it. It was down in, uh, college Station, Texas, which is where I went to school, so I was pretty familiar with the, the market down there. Um, it’s a great market, by the way. Had had students in there, eventually moved outta the student housing side, which is, which is always fun.
Chris
And then, uh, decided to get into duplexes, same market, but, uh, got into duplexes and eventually I decided I wanted to be a developer. So went out and bought some land, um, plotted it all up, didn’t know what I was doing, was able to get out of that before I lost any money, and actually made just a little bit of money. But I, I really started looking at the land side of things. And in my navy travels, you know, I went to a lot of places where people are, you know, they don’t have supermarkets and restaurants, and I’ll have like, you know, 24 7 access to food like we do, and they have to grow their own food or, or buy it from, uh, you know, the local market. So it really made me think about agriculture and food. And back in 2015, as I was looking to sort of diversify my real estate portfolio into, into some kind of farming, you know, at that point I learned it was hard to do, uh, without either knowing somebody that, that was in farming or being a farmer background yourself, um, or having a lot of capital to get into a piece of land that was made sense from a scaling perspective to make money.
Chris
It’s, it’s not necessarily like single family where you can kind of get into real estate really small and then sort of grow yourself. You, you’ve gotta, you gotta start with some sort of scale and know how, so I didn’t have that. So I kind of skipped a bunch of steps and decided to just start a platform for people to invest in farms. Um, and taught, taught myself that way. And, uh, back in 2016, we did that. We started up company harvest returns. Since then, we’ve raised, um, over $31 million for I think something like 50 different farms and ranches and agriculture businesses. And essentially what we are is we, we have a, a flow of offerings that come in flow of deals. We do the due diligence and we allow people to invest in these farms and ranches at a small, you know, easy to access amount anywhere from 5,000 to say $25,000 is sort of our minimum investment size. And, uh, we’ve done, you know, brought a lot of momentum, started, helped a lot of farmers either start their farm or expand their farm. And it’s, it’s pretty, been pretty rewarding.
Adam
You mentioned the people, you know, y’all do the due diligence, you know, it’s fairly simple to do due diligence on, you know, single family rentals. Um, but as you got into this, how, how does one go about actually doing due diligence on, you know, farmland or, you know, if you’re growing trees and all of that? ’cause it’s, it seems a lot more complicated. Running comp seems miserable or impossible. I mean, how do you do that?
Chris
Yeah, you know, you’re, you’re right on the single family. As long as you kind of follow the parameters and understand, you know, you’re, you’re making positive cash flow. You, you can, you can do okay. And, and single family and other types of real estate. So you, you kind of seen one house, you’ve seen ’em all, right? Whether it’s, you know, you’re doing fix and flips or, you know, whatever. With, with farms, it’s like you’ve seen one farm, you’ve seen one farm. So it is, uh, a little bit tougher on the diligence side. On the land side, there are definitely comparables and there’s more and more platforms that enable you to kind of get an apples to apples view of just the land piece. But the farming piece itself, um, we’ve developed some expertise in, in a few different, what we call verticals, you know, segments of agriculture.
Chris
Uh, and I can go into those, but it’s, the first thing we’re looking at is, is numbers. Do the numbers make sense? We’re looking at the, the team that the involved, that the farmer brings us. Does, do they one, you know, know how to grow whatever they’re supposed to be growing? Um, and two, do they have business savvy? So you see a lot of farmers are really good at farming, but they’re sucky at, at business. And you see some business guys that think they wanna be a farmers, and it turns out they don’t like to get their hands dirty. So to find that perfect, you know, combination of, of team is really important to us. Once it kind of makes it through that initial screening, we dig into the proformas, we look at the numbers, look at the cashflow projections, and then we decide, um, what is the deal gonna look like?
Chris
Is it sometimes they come to us and they have very strong parameters of what they want. You know, they want equity or they want debt. So we’ve done equity, we’ve done debt, um, or we’ll give up a farmer a loan or a rancher, a loan, and then basically we syndicate that loan and, and then we, you know, pay the cash flow from that loan and the principal, or we’ve done equity where we’re actually own a farm or own a piece of the farming operation. We might take cash flows from it, and then eventually it’s either gonna get sold or refinanced and we’re taken out our equity from that perspective.
Zach
Chris, I wanna back up a little bit and, um, understand like just what, like what are the key differences and why, why invest in agriculture in, in general and in land? I mean, I think that when we, when we look at, uh, I mean, you’re really investing in a business, right? And, and all things considered this is looking at like income. I mean, same thing when you evaluate a residential house, like you look at it as a business, but it’s, yeah, it’s, it’s much easier metrics to, to look at on the surface. Um, and we know that land is always a good thing to, to buy. Um, and, you know, there’s not being any more land made out there. So <laugh> yeah. Um, land is, is good to, to own mm-hmm. <affirmative>. Um, but sometimes the problem with land is that it doesn’t, you know, it doesn’t produce income.
Zach
And so I know when people are like syndicating and raising capital for the multifamily investments, like the play or the, the goal is to take an underperforming asset mm-hmm. <affirmative>, and then increase the performance of it, and then exit it at some point. And so people are obtaining a return on, on their investment, like as that property is being, um, you know, the, the improvements are being, the rents are being raised and the income is being, and then they’re, they get like an i r R at the end when they mm-hmm. <affirmative> exit the property. But is that the same thing you’re doing? Are you improving the business and coming in a, like, as a consultant or talk to me more about like what you’re doing with the properties that you’re either lending to getting an equity piece in Yeah. You raising money for.
Chris
So yeah, in some cases, very similar to, you know, investing in, in a real estate deal, you know, people are always looking for what they’re saying, the highest and best use of land. And farming’s no different. So, you know, you have an empty field, what crop is being planted, and instead of having tenants paying rent like you do in a, you know, single multi-family home, your, your tenants are your crops, right? And you’re growing your crops and you’re selling your crops. And, and there’s a lot of variables there. As you said, you know, what is the, what’s the market price of the crops? So you’re dealing with, you know, just like rents, they go up and they go down, primarily up. But, you know, it’s all depending on what’s the neighborhood, what are the comps. Same thing with crops. It’s, you know, what are those crops going for?
Chris
So let’s just say you’re growing berries, strawberries, blueberries, whatever. Um, you know, what’s the current market price? That can be very seasonally because the availability of these crops is done seasonally. And, you know, they may be flown up from Mexico or brought up from Mexico and or grown in California, whatever, depending on the season. And as far as the, the value add, in some cases we’re, we’re loaning to an existing operation that wants to expand, so they wanna buy some more land, or they wanna buy some more cows that grow their revenues. Uh, there’s a lot of economies of scale to be had in farming. So the bigger you are, especially if you’re, you know, kind of a smaller, newer farmer, you’re competing against these giant industrial types of farms. So the more more land you have, the more capital you have, the better you can compete.
Chris
Um, and, and we’re, we’re in several little niches. So one of those niches is, is grass fed livestock or regenerative livestock. So, um, it’s a higher premium. You go into a grocery store, and if you look at like grass fed, grass finished livestock at like a whole foods more expensive or beef, you’re gonna, you’re gonna pay higher dollar. And that means the rancher’s gonna get a higher dollar. There’s a lot of intricacies. There’s also, there’s a sustainability factor. Um, we’ve done some controlled environment agriculture, which is indoor agriculture, so like hydroponics. So if you’ve ever been, um, you know, you may have heard like of urban farms, um, I’m sure there’s some in Austin, I know there’s some in Denver, we’ve got some in Dallas. We funded one in Dallas, we funded one in Alabama, we funded one in, uh, Omaha. People are growing food closer to where it’s produced. Most of the lettuce leafy greens we eat in the United States are growing in a single county in California and shipped all over the country. Monterey, California, Salinas Valley, California. And it’s shipped all over the country. So why not grow those indoors where it makes more sense? So indoors, so,
Zach
But, but still are you, are you, so is a play here is like, you’re, you’re not taking an underperforming farm and making it a better performing farm and then selling it off, right? You are basically lending capital, you’re raising capital. You, you lend it to the farms to expand to possibly,
Chris
Yeah. Or develop even development. So if you think of like, you know, a greenfield development, somebody’s got a piece of land, or in the case of these urban farms, they, they take an office, an old warehouse building, and they turn it to an urban farm. So you’re repurposing the, the building for something different. Well, let’s
Zach
Go back to my initial question then on, um, and, and just get a less away from like the Okay. The syndication aspect and, and stuff you’re actually working on to focus on. Just like why, why agricultural in general, you know, like what are some differences, um, in investing in agricultural, from a financing, from a tax perspective, why would someone consider if they’re gonna go out and not lend money to someone, they’re just gonna interested in buying their own, you know, and getting into that asset class. Like what are some key differences that they need to be aware of, and why would they do that over residential?
Chris
Sure. So, you know, the first thing is what we, we kind of call the, the drivers in the, the industry. You named one of ’em, they’re not making any more land. So land is becoming scarcer, arable, agricultural land suitable for growing things is becoming scarcer as, you know, cities grow, they develop over fields. We’ve all seen that. Uh, anybody that’s, that’s been around a while, especially live in a rapid growing city, that this, they sprawl outwards and they go over fields that were formally used for agriculture. Um, the second piece is just demographics, population of the ki of the world. Right now we’re about 8 billion. We’re projected to be about 10 billion by 2050 continues to grow. There’s more mouth to feed, less land to do it. Farmers need to become more efficient, environmentally sustainable, sustainable and how they’re producing food. So that’s kind of our investing thesis is that we’re looking for farmers that are, you know, doing growing food in different, more efficient ways.
Chris
Um, as far as things like taxes, um, you know, there are tax benefits, uh, as everybody probably knows, there’s a lot of subsidies that go in the US to farmers. Some farmers get paid not to grow on their land. It’s very interesting. That’s, you know, that’s definitely a, a core part of some, um, farming, like row crop farmers, soy, wheat, you know, there’s, there’s a lot of insurance. Um, you know, crops can be insured, so it’s just like a, like a building or a house. Uh, you’ve got some risk management involved in there. And then there are some tax favorability. The, you know, there’s depreciation depending on what, what you’re doing to, obviously you don’t depreciate land, but you can depreciate things like trees. If you’re growing trees, you can depreciate, um, infrastructure on a farm. So there’s those sorts, same sorts of tax benefits you might get in owning real estate. And, and there’s also, you know, some credits and sustainability and carbon credits and things like that that some of our farmers, I
Zach
Mean, can we, can we be really, um, specific on some of those? I mean, let’s, let’s, like, let’s talk about it a how, someone I really, what I want to get out of this, I think is applying how, um, our audience can, let’s say they, they’re interested in owning, you know, yeah. Some, some farmland or something like, yeah. How can they apply that? How can the average investor go out and, and find land or livestock? Mm-hmm. <affirmative>, I come from a, a farming and ranching background in my family. Um, yeah, I’m, I’m from Wyoming. They’re, they’re all farmers and ranchers, uh, except for my parents who are electricians, but their grandparents, their brothers and sisters are. Yeah, we were out branding cows not too long ago, uh, at my uncle’s ranch. But like, you know, I, and I still haven’t gotten into the details specifically with them, but they were all, I, I know that in my discussions, like with my uncle, he always talks about the a hundred percent depreciable assets of livestock and like, just go and buy some livestock and then put it on my land, you know, and, and like the tax benefits.
Zach
But let’s talk about how we could, the average person can like, start investing in, in land without like lending money. You know what I mean? Like, what are, can we, what are some <crosstalk>?
Chris
Yeah, I mean, it, it, it’s, that’s hard because I, I, I guarantee if you talk to your family, most of them, that land has probably been in their family for more than one generation. Um, that’s a very common situation in farming. Most of the farmers, most of the farmland is owned by absentee farmer landlords. I mean, more and more of it’s kind of being bought up by corporations and investment banks and, and syndications like ours. But most of it’s still owned by, you know, the grandfather who used to be a farmer, and now he’s not. And maybe there’s a grandchild involved in farming, or maybe it skipped a generation or whatever. So for an individual investor, it’s, it’s i’ll, I will freely admit it’s very, um, tough. And that’s what we discovered, and that’s why we built our platform. But there are ways, if you just want exposure to the, a asset class at a really low, um, you know, entry point, there’s farmland, REITs, farmland funds, publicly traded.
Chris
You can go out there and buy, you know, 50 shares of, of this or that. Um, the, those have done pretty well lately. Uh, there are some, you know, caveats because they’re publicly traded, they, they tend to go with the stock market. If you want to buy a piece of land farmland, you identify it, and you, you can certainly do that. Find a farmland broker, go out and find a piece. And then if you don’t have the farming experience, you can hire somebody to either run their cattle on it, you know, they’ll pay you rent, or you can have a farmer pay you rent for owning that land. That’s definitely, you lease
Zach
It out. Right? So that’s, that’s an example.
Chris
Yeah. You lease it out to farmers. Most most farmers, like I said, are, you know, most farmland is owned by absentee owners and, and, you know, farmed by somebody else or somebody else runs the cattle. Can we, can
Zach
We talk about that a little bit? Yeah. ’cause um, so I, I was an Air Force captain for, for seven years, and I was stationed in North Dakota. I started to do, um, I, I did a lot of wholesaling and flipping in that area, and just because of the kind of rural aspect of it, um, we wholesaled farms and sometimes we, we acquired, um, actually some farms that we ended up leasing out. But it was very interesting to me, like actually that’s really accessible of, um, and we never held one for very long. Yeah. We always turn it over to other aggregators or, or mm-hmm. <affirmative> farmers taking on, um, more land and, and looking for projects. But, um, it was interesting that like, you can pick up a farm. Like it doesn’t have to be this large huge like operation. Like you can pick up a crop, right? Or a, you know, an acre, five acre, 10 acre farm, whatever, uhhuh, um, where there’s just small crops. But, um, and then lease it out, someone will just lease it out. So in that area, you, you own land, it’s producing income. What are, what are the tax benefits and the business structure look like? Just on like owning a, a farm? Um, you can we talk about that just real basically?
Chris
Yeah. I mean, if you’re, if you’re definitely, like, like you were, if you’re in a rural area and there’s a lot of farms around you, and you kind of know the market and have contacts, I think that’s a great thing. You know, most of our investors are urban, suburban. They don’t live places where they farm, but tax benefits, you know, very low tax rates. Um, most places have some sort of agriculture exemption, most districts. So, um, what does that
Zach
Look like? What does the agriculture exemption look like? Can we, it’s
Adam
Insane.
Zach
Yeah. I mean, you have drivers
Chris
To share. I, I don’t know specific, I mean, it’s, it’s, I
Adam
Can tell you Yeah, go ahead. My, my in-laws own over 200 acres in, uh, like kind of southeast Texas. They pay under $3,000 a year in property taxes because of ag exemption, which
Chris
Is, so you could have, you know, a million plus people prop piece, million dollar plus piece of property and pay hundreds of dollars worth those taxes, where if that was a single home or multifamily, you’d be paying seven 8% here in Texas. Um, so yeah, it’s, that’s very favorable. Uh, you mentioned depreciation. That’s very similar to the real estate side. If you’ve got something, you know, a depreciable asset on your land, you just, you can’t do much with the land itself. There’s things called conservation easements. So somebody might have, you know, let’s say a hundred acres, but 10 of the acres are not farmable, and you can put it in a conservation easement and take, um, pretty significant tax, tax benefits from doing that. Um, you know, what, what,
Zach
What is that conservation easement and, and can you clarify the tax benefits a little bit more? Yeah,
Chris
It’s, it’s a, you know, we don’t work with these, but there’s a lot of people that do there. You know, it’s like a land trust, and you’re basically telling the government that you’re never gonna develop this piece of land. You’re gonna keep it like a wetland or something just for wildlife, um, adjacent to your agriculture. And I, it’s almost like a hundred percent write off. I can’t, don’t quote me on that, but it’s, it’s a pretty significant type of, um, tax benefits. It’s cultural, like what you might get in oil and gas drilling where <crosstalk> can, you still,
Zach
Can you still farm it on it?
Chris
No, you can’t, you can’t farm that piece of land, but it can be adjacent. It can be, it’s usually gonna be like hilly or wet, too wet to farm anyway. Can you
Zach
Lease it out for hunting? Do you know, uh, can you have income on it?
Chris
Do that for hunting, and that’s another source of revenue. A lot of farmers do, you know, if you have timber or farmland, you know, in the off season, in the winter when you’re not growing anything, you rent, you know, do leases to hunters, you, you get a, another source of revenue. Uh, you know, I’ve hunted on land before where there’s cows running around. You gotta make sure you don’t shoot the cows. So it’s, uh, that’s pretty common here in Texas. Yeah, that’s
Zach
A, that’s a fat look in deer, right? Yeah.
Adam
Why did you pick the us? I mean, there’s a lot of, you know, I’ve seen a lot of farm farmland and agriculture mm-hmm. And, you know, lumber investing outside of the US that, you know, seems a bit cheaper, um, yeah. Than it would be in the us. Um, why did y’all, and it seems like you could buy it individually, so why did y’all pick the us?
Chris
Um, mostly for simpl simplification sake. You know, when you start to go overseas, you’ve got a lot of crazy tax things, cross border taxes, you’ve got some currency risk. Um, you know, there’s countries where you don’t like Panama, where you, you greatly mitigate a lot of that stuff. And, you know, land ownership is so different. We knew we were gonna, our, our business model is based on doing a lot of deals and keeping them in the US keeps things fairly simple. That said, we’ve done a few foreign deals. We’ve actually done deals as far as Ghana, west Africa. Um, a couple of those deals didn’t go well. One of ’em is going very well where they’re growing bananas right now. So, um, we are familiar with some foreign jurisdictions, but they’re, they’re harder to underwrite. They’re harder to visit, they’re harder to know what’s really going on. Whereas I can drive, you know, two hours and visit one of my farms here in Texas and, you know, lay my eyes on it and see what’s really going on.
Zach
What are some of the risks, uh, investing in agriculture? I mean, let’s, I wanna talk about that as well as the financing of like, someone, like how does debt work? Mm-hmm. <affirmative> on, on land, I mean, but what is, um, like, what are some of the risks? Obviously if you’re in crops like that could be, you know, extremely economically driven, like on a global scale. Yeah. Mm-hmm. <affirmative>, uh, you have seasonality as you mentioned, and, and weather. Um, yeah. You, you have, I mean, there’s just a lot of variability. So what are the risks and how does, how does one mitigate that? Yeah,
Chris
I mean, you, you nailed the first one. It’s, it’s kind of those environmental aspects of, you know, weather too much rain. So for several years, California got too little rain, and then the spring it got too much rain, and they were both pretty damaging too. Its crops out there. Um, same thing with cattle farmers. You don’t have enough rain, you can’t grow grass, you can’t, you can’t feed your cattle or you have to pay extra to bring in, you know, supplemental feeds to feed your cattle, which raises the prices, which is one of the reasons we’re seeing really high beef prices right now, um, among others. But, uh, so there’s that weather risk. There’s d disease risk. You know, there used to be a really strong citrus industry in Florida. A lot of that has been, um, destroyed over the past decade or so from this disease called citrus rust.
Chris
Um, so disease is one, um, market risk as far as, you know, the commodities are up, but then they can go down. So if you’re dealing, if you’re investing in a piece in a farm that might have a commodity based product, that’s, uh, there’s some risks there where, you know, you might be growing a lot, but you can’t sell it for what the input costs worth. It’s just like being negative cash flow on a upside down on a, uh, a property. Um, and then, you know, but there’s ways to mitigate those risks. So one of it is just good management practices, having an experienced farmer that knows what they’re doing actually on the land. And then, um, there’s crop insurance and things like that. And there’s what we tend to be in spaces where they’re more nichey, so you’re not exposed to a lot of commodity risk. So we don’t, for instance, do like soybean, corn farms. There’s other places you can invest in those, just because for a lot of reasons, one, there’s, there’s plenty of places for those folks to get financing. But also, um, the, it’s, it’s riskier from a cashflow perspective, but there’s also a big backstop U S D A guarantees these loans and things like that. So, you know, happy to talk about the financial structures as well.
Adam
Yeah. So whenever, let’s talk about that a little bit. So, you know, I’ve got, you know, let’s just say I’ve got a hundred thousand dollars. I wanna, you know, loan it out to somebody. Um, I find a farmer looking into it. What are, what’s a realistic terms that you can, um, that you would give somebody like that?
Chris
Yeah, so, you know, it’s, it’s, think about like a real estate purchase. You have a capital stack. So whether it’s a single family home or a big commercial office building or anything in between, you might have some equity, you know, down payment. You might have some debt. You might, if you get really complicated, you might have like bridge loans and mezzanine debt and things like that. But you’ve got, um, you know, first of all, we’re gonna look at the project. What are the capital sources? Sometimes a farmer will come to us and they’ve got a piece of land they’re sitting on. It’s really valuable. But they don’t have any cattle, they don’t have any fencing, they don’t have any pens. All the things you need to do to raise, raise livestock. So we will provide them a loan to help them acquire the cattle, help them acquire the fencing.
Chris
And you know, right now, just from a pure debts perspective, we’re seeing, you know, 12 to 17%, uh, returns to our investors. Uh, that’s, that’s kind of our, our most recent track record. I think the past three years was like 12% on, on the debt side. Uh, if you’re investing and then somebody else is bringing like maybe a loan, like maybe they’re going to their farm credit union to get a loan to buy a piece of land, and we’re investing in the company equity. Say, take that a hundred thousand dollars as part of a bigger, you know, multimillion dollar farm acquisition or farm improvement, um, you might see higher returns. It just depends. Uh, you might see above 20% i r r if, uh, internal rate of return, you know, if all the pieces are in place and, and, uh, things put together correctly. Chris,
Zach
Um, when you, when you’re structuring, ’cause basically it sounds like your, uh, lending capital, your, your platform is lend capital to farmers that you wanna, you know, create this new business opportunity, expand what, what have you. Um, and, and they’re, you know, coming to you for financing. Um, are you securitizing this against the land? Because some of this is for like future potential revenue mm-hmm. <affirmative>, right? Um, there’s not, yeah, we
Chris
Need that. So, so we’ll, you know, we’re always gonna look for what the collateral is. Just like anybody, anybody lending money, you know, what, how, how secure is my money. So we will secure it against land, like the example I provided where maybe they got a nice piece of land, but they don’t have anything else. We’ll secure the cattle. We’ve got a pretty good system now where we can, you know, look at their cattle inventories using software. So we’re, we’re confident that they’ve got enough cattle to, um, you know, we’re, we’ve never had to do it, knock on wood, we, we’ve never had to repossess cattle, but if we had to, we could. And then just auction that off, we, we wouldn’t wanna run that place. Um, or we could sell the land. You know, it’s like any kind of workout where if, if you had to a loan default, you’re gonna look for some sort of recourse to be able to get the investor’s principle back.
Zach
And are you in first position for that or you’re they’re not taking out debt? We,
Chris
We’ve done first and
Zach
You guys.
Chris
Yeah, we’ve done first and second.
Adam
Okay. So if I’m looking to get it into this, what is the first step that somebody would have to take to start investing in agriculture? Is it just finding, go on some website and find farmers looking for financing, or what’s the first thing you have to do?
Chris
Yeah, I mean, that’s our model. We’ve got the cash flow or, or we’ve got the deal flow, or farmers know that we provide capital, they come to us and then, you know, if people wanna invest, they can come to our platform. That’s all pretty soup to nuts. Pretty automated process. But if you want to, you know, there’s other ways if you want to go out, I’d find a farm, a, a land broker, you know, try to do it as close to where you are as possible, just so you can get out there and look at the land. There’s advisors, depending on how big you, you know, how much you’re investing, you can, you can go out there and get the comps. You can hire a farm management company to manage it for you. Just like you might hire a property management company. You can, um, you know, hire soil analysis and do all those sorts of things in the due diligence process. Or you can come to harvest returns. And we’ve kind of, we’ve kind of taken care of all that.
Zach
I was looking at, uh, a land deal, it was one or two years ago, um, where we, we were looking at, um, it wasn’t farming, but maybe putting on some where there was gonna be future potential income from, um, you know, like a, a small campsite type of thing. Um mm-hmm. <affirmative>, it didn’t, it didn’t end up working out just based on, there’s a lot more cleanup, uh, on and money involved in the development of it than we anticipated. But one thing that was interesting to me is like, um, and I’ve also looked at some, some farm stuff in the past, but like financing, like if there’s not current income on it mm-hmm. <affirmative>, like I couldn’t find anyone to finance it. Um, like basically there, especially on the land that was just, uh, would needed to be developed, there’s just like no loan options for me, at least out out here that I was able to find.
Zach
Um, so it was challenging. It’s like I needed private money. I needed mm-hmm. <affirmative>, I needed cash, um, to do it. And then I was trying to really wrap my head around the, the tax side of things was like, well, how can I structure this to meet the most tax efficient structure? Mm-hmm. <affirmative>, and as you mentioned, land is not depreciable. Um, you know, so that was a big challenge and that’s something to know. But all the improvements are all the equipment, you know, um, the improvements on the land, all the equipment to run, like a lot of that stuff is pretty much a hundred percent appreciable, um, in a lot of cases. Um, and so in livestock you could put on it. So, I mean, what are, I guess the question to you though, uh, just for my own knowledge, what, what are some, just if you could outline just bullet point tax benefits of, of own and operating like a farm or, you know, a ranch or having land in general, like what are all the tax
Chris
<crosstalk>? Yeah, I mean, start with low start with low property taxes from those agriculture exemptions. Um, depreciation, if you do have improvements on it, include, which includes things like trees and livestock, depending on what you’re growing. Timberland, if you’re, if you’re growing that, um, various tax credits, very specific and, and they’re hard to, ’cause they’re, they vary from state and, and municipality, just like any other tax credits. But, you know, we’ve, we’ve had seen farms and opportunity zones, so some of your listeners may have heard those where, you know, you’re, you’re in fact, we’ve actually invested in one of our urban farms is an opportunity zone with
Zach
Opportunity zones. You do have to like, to take those tax benefits, you do have to like, improve it. Correct. Like 50% Right. Or something like that. Yeah. So you have to dramatically improve the land. Yeah.
Chris
So in the case of the deal we did, it was basically kind of a, you know, rundown neighborhood. ’cause that’s basically what opportunity zones are supposed to be an old shell building and now it’s a vertical farm. Um, so they improved it and there’s a restaurant and it’s, it’s doing really well. Um, so that’s yeah. Opportunity zone and, you know, farm to
Zach
Table, right? Is that <laugh>? Yeah.
Chris
Capital games. Yeah, exactly. Um, you know, where it, it literally is like, there’s a restaurant upstairs and in the basement is the, is the vertical farm. So they, like, you can go down there and like look in the window while you’re drinking your cocktail and then go upstairs and have a salad that was grown downstairs. So it’s, you know, and I think they even have like a little elevator to get the stuff up. Hmm. So it’s, it’s definitely, you know, as locally grown as you can get. But, uh, you know, other tax benefits. Um, you know, I would say like anything else, although real estate’s got super tax benefits and that’s one of our, you know, people are incentivized to invest in it. Don’t invest in a deal just because of the tax benefits, invest in the deal ’cause it’s a good deal. Right. But there are, you know, our culture’s got its fair share of, of tax benefits.
Adam
So what do you do in terms of management? I mean, if you’re, if you’ve gone out, you’ve found the farmer, you know, they just need money for one or two things, you give ’em the loan. Are you actively involved in it? ’cause I imagine the farmer would want you as far away as possible. ’cause Yeah, they, you don’t know anything about it. And
Zach
How do you know that farmer’s gonna perform? Right? I mean that’s a lot of trust on, on their end, right? It,
Chris
It is. We’re, we’re fairly passive. I mean, we try to do all of our work up front and the due diligence, and then our investors actually help us with the due diligence. ’cause they get in front, farmer gets in front of them and, and, and they ask really tough questions and, um, you know, kind of tear the deal apart before they decide to invest in it. So that’s, um, you know, that’s important. But for the most part, we’re passive. Now that said, we, we will engage our network to help our, you know, previous farm investments, you know, and at some point we’re putting together this fund and we’ll have a more active management role. ’cause we’ve kind of got the, we feel like we’ve got the track record to do that now. But for the most part, our, our investments are passive and our investors are, are passive investors. They wanna go out and visit the farm. They’re, they’re welcome to do that. But, uh, beyond that, it’s a pretty passive situation.
Zach
I guess. Chris, just the last question, talking about your specific, uh, for people that are interested in potentially investing with, with, with Harvest, um, you know, what, what does a fee structure look like for, for the manager on, on your end, and then mm-hmm. Like, it’s still not clear to me on the timeline of, of this, because I don’t know, like, are, are these, because are, if these loans are term loans, is it a 10 year term and then the investor gets paid back? Or what does that typical structure look like?
Chris
Sure. So, so on the duration of our deals on, on the debt side, it’s one to three years. We’ve exited a bunch of one year loans and, you know, on, on our way in some three years as well. And, and in between on the equity side, it’s more like, you know, buying a multifamily, fix it up and, and sell it. So it might be three to five years to kind of stabilize the cash flows, that sort of thing. Um, you know, and there’s different ways you achieve and exit. It’s through a cash out refinance, just like you might in a property, um, sale of the sale of the asset to another higher level sort of investor. Um, or, you know, in, in some cases we’ve done some agriculture technology, kind of more startupy types of companies where we’re expecting a, a bigger sort of exit.
Chris
Um, as far as the process, uh, and our fees, uh, we take fees up front from the raise. So let’s say a farmer wants a million dollars, we’re gonna raise 6% or so on top of that, you know, our fees structure’s fairly complicated, but that’s coming outta the raise. So it is, it’s tagging the I r R, it’s coming against the I R R, the expected return for those investors. We don’t take asset management fees, but we do take a carried interest. So if the farmer, which is generally 20%, so, and this is on the equity side, um, if a farm does really well, they sell it, our investors get their money, then we take our money and we’ll take 20% of those profits, um, on top of our fees. And then on the debt side, we’ll usually, besides the fees up front, like kind of a origination type of fee, we’ll take a spread. So if it’s a 15% loan, we’ll take a couple of, couple of percent and then the investors will get the rest.
Adam
So are there any areas of the United States that when you looked at it and saw that there were opportunities kinda stuck out in your mind as well? I never would’ve guessed that, um, you know, this area would be good for this investment.
Chris
Yeah, I mean, Zach mentioned Wyoming. We haven’t done Wyoming. We’ve looked some deals there, but up into Great Plains, man, we’ve, we’ve done really well. We’ve got, um, Montana, Idaho, uh, a lot of our cattle producers are up there. We’ve looked at some other deals related cattle processing up there. Um, I will tell you, there are some states that we don’t like, we’ve done deals in some of these states, but we don’t like, just because the regulations are crazy. It’s the same as real estate where I couldn’t,
Zach
I couldn’t imagine which states those are, Chris.
Chris
Yeah, I’m sure you can. But it’s, it’s states, you know, states that have super high taxes and super, super burdensome regulations. And unfortunately one of ’em is a really ag state. You know, California, we, we like it from an ag perspective. We hate it from a regulatory perspective.
Adam
What is, is there an eviction process or something that if they default or how do you find somebody to
Zach
Do you foreclose? Yeah. What is that, I guess? Yeah. Yeah.
Chris
I mean, we haven’t, we haven’t had to do that. But the plan is, yeah, we will foreclose if there’s land, we’re gonna take the land and we’re gonna, you know, liquidate as quickly as possible and get our investors whole. If there’s, you know, assets on like cattle, we’ll send ’em to auction and we’ll sell
Zach
’em. I’m guessing that one to three year loan, like if you’re talking, if you’re lending debt, it sounds like, well, a one to three year loan would probably be along the lines of like expansion startup mm-hmm. <affirmative>, you know, um, where they’re able to, you know, get other financing to buy you out. I mean, that wouldn’t be truly, like, you’re not truly a bridge or mezzanine financing in that scenario, but it’s, it’s short-term debt, right. For them to Yeah.
Chris
Yeah, that’s exactly better debt
Zach
Qualify for better debt, or
Chris
Yeah, in some cases they qualify for better debt. And other cases we have had, we just had a sponsor that we had done a note with him. He is a cattle guy. He paid us out and we did a bigger note with him. Um, you know, he showed that he could get it. He had the cash flow to pay us off. And so he went out, you know, we said, Hey, what’s the, what’s the biggest amount of money you can raise? Um, or which is based on, you know, how big his land is and how many cattle he can, you know, you can’t stick unlimited numbers of cattle on a piece of land. So in this case, we helped him expand his herd. We had another, um, group where they owned the land, but they needed to put pivot irrigation. So you’ve seen out that these big, you know, half mile long pivot things that, that do big circles, and they irrigate the land.
Chris
So this farmer was able to take his unsuitable land for grazing and irrigate it. And so now it’s more suitable for grazing, which will enable him to grow his herd naturally and get higher, you know, and then get us out. So unfortunately right now, we’re still in a rising rate environment. I mean, that’s been, that’s been good, but at some point we’ll be, we’ll be able to, in a declining rate environment, maybe the next two years, who knows? Um, and then they’ll be able to refinance that at lower rates. But right now we’re kind of, we’re seeing situations where, you know, if it’s a new loan, it’s one thing. If it’s, if it’s trying to refinance, that’s very hard for us to do because we’re not gonna be able to compete with a rate they got three years ago, just like in a, in a single family home or whatever. Yeah.
Zach
Just, just in summary here, before we go, like we talked about the farming side. Let’s talk about the ranching side with, with livestock. What I mean for someone, let’s say that’s like just looking for tax benefits and they’re thinking about buying cattle and then leasing land or giving it to someone to raise the cattle for them. I mean, which is potentially viable option. Yeah. Um, like what, what, how does that, how are you underwriting cattle? What does that structure look like, um, from a business perspective and what are the tax benefits of cattle ownership and, and raising
Chris
<crosstalk>? Yeah, I mean, so there’s the model you kind of described there. There are some small ranchers out there that will do what’s called an absentee ownership program. You don’t see that as much lately, but there are some where, like you said, you give ’em money, they go out and buy some cattle, they raise the cattle, they feed the cattle, they sell the cattle. You don’t, you don’t have to touch the cattle, you don’t have to, you name your cows or anything like that. You just let them do it all. That’s,
Adam
You’re not going out and branding them, Zach.
Chris
Yeah. And, and you know, the tax benefits of that are, you know, it depends on what the farmer’s got, what the rancher’s got going on. But there might be, uh, you know, there, there could be depreciation, there could be. It’s just, it’s really hard to say, you know, I wouldn’t say there’s direct tax advantages to doing that. It’s just you’re benefiting. Um, some of these, you know, some of these ranchers have pretty high margins, like 20, 30% depending on what, where they are in the cow’s lifespan and who they’re selling to and how big they are. The bigger they are, the better prices they can command by the big meat packers. So one of the things we, we worked with a, a company that aggregated a lot of different, smaller ranchers, guaranteed the pricing and then sold it up to the big meat packers. And, you know, you’ve heard of some of these guys like J B s and Cargill and things like that. Um, we tend to, we like to work with smaller ranchers who are trying to get bigger.
Adam
Do you have a kind of minimum size that you require of the, the ranchers or farmers? Bef
Chris
<crosstalk>, yeah. The smallest loan we’re gonna do is about $200,000.
Adam
Oh, I meant, I meant land size wise.
Chris
Oh yeah. It, it depends, you know, it depends on what they’re doing. There’s a lot of, a lot of ranchers these days, the ones we like to work where they’re doing these very intensive grazing techniques where they pretty small paddocks and they graze, um, you know, a lot of cattle on ’em more than you would normally. And then you move the cattle on, you let that ground rest and then you move ’em on again. You let that ground rest. Um, and it’s really good for, it’s really good for the soil and seems to be okay for the cows. But you’re basically mimicking like kind of a bison sort of grazing or,
Adam
Yeah. All right. Well, fantastic. Well Chris, thank you so much for joining us today. Really appreciate it. The website is harvest returns.com. That’s harvest returns.com. Chris, is there anything we haven’t asked you that you feel is important for our audience to know since this is our first agriculture interview, I’m sure we missed something you think is important. Yeah,
Chris
I mean, there’s a lot of real estate investors out there. It’s great. I love real estate. Um, I’d ask him to kind of consider agriculture, but educate yourself, you know, if there’s a lot of resources out there, start site. We’ve got podcasts and blogs and things like that. We want to help people understand before they invest in this asset class that might be new. It’s just like anything, you guys are out here to educate. That’s great. Um, so people get smart before you start putting your money to work.
Adam
Fantastic. Well, again, the website is harvest returns.com. If you’re interested in the single family, uh, space as well, you can head on over to rent to retirement.com to see what inventory we have there. And if you wanna see Zach’s report on the top 20 markets to invest in in 2023, just send an email to [email protected]. That’s [email protected]. Really appreciate the time you spent educating yourself today, and we’ll talk to you on the next episode.
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