There are more than 80,000 farms and ranches in California, which despite the glitzy reputation as the movie capital of the world, is the nation’s leader in producing citrus, grapes, vegetables and nuts, and has a generally moderate, Mediterranean climate which is exceptionally good for food production.
But, perhaps due to the attractions of the coastal glitz and bright lights of the big cities across the country, the state’s farm owners are getting older and their heirs are often uninterested in continuing the family farming business. The average age of a California farm-owner in 2017 was 59, and tracking higher, reported the USDA Census of Agriculture. Many who own farms we are targeting for acquisition are well into their 70’s and are keen to retire.
Obviously, a lot of California farmland will be coming to market in the coming seasons and years, and much will be “legacy land” in older, less profitable crops, or on farms and ranches managed for comfort and not to optimize profit.
This land will largely be sold on a “per acre” basis, that is, based on “comps” or in comparison to recent sales of similar farmland. The actual productivity or profitability of the individual farm in question is not considered by lenders, often due to banking regulations. Farms, oddly enough, are treated by regulated lenders (that is, the banks) like single-family detached houses: When you buy a house, the per-square-footage and neighborhood dictate loan sizes, and that is determined by comps.
For shrewd investors, the standard bank-lending practice is opening up opportunities. First, here at Bravante, we are carefully select farmlands that are more profitable, or situated such that boosting profitability is clearly possible through redevelopment i.e. by planting higher profit crops. The basics of good farmland rarely change, and include good soil, abundant water and access to infrastructure and market.
But should we exit farm-holdings in the future, we will be positioned to seek out the greater number of institutional buyers playing the market, who are willing to pay for agriculture assets on an income basis, like other operating businesses. Such institutional buyers will get as much bank financing as possible, and then top-up bids with equity or second (non-bank) mortgages.
Even if we do not sell and instead hold our farms for the income streams they provide, we anticipate being able to refinance them based on the new, far higher valuations. This will mean investors will get some or all of their capital back, while leaving them in the deals, earning income despite now having no money in the deal.
In short, over time we will be able to reduce investor risk to zero while still providing continuing income streams from crop sales.
