Land Investment Companies – What are they?
We recently had a tract of farmland in my county that was sold to a land investment company. The selling price was over $12,000 per acre–outbidding any local farmer. I took a step back and while I have heard of these types of companies, this is the first time they made their presence in my county. So what and who are land ownership companies?
There are approximately 911 million acres in the U.S. 61% are owned by farmers and ranchers. Of the remaining 39%, 10% is owned by corporations, trusts, and other owners. While currently a small percentage now, that number has been growing as farmland becomes an attractive investment.
Land Investment Companies recognize that farmland is truly an investment. They bring together investors and people interested in selling or leasing farmland. Landowners, working with an investment company, can delegate land management or sell their land outright to these companies.
Who Uses Land Investment Companies and How do they work?
Both landowners and investors use land investment companies. Farmland is a high-value asset where land sales have reached $10,000 – $25,000 per acre in the Midwest. Investors can purchase shares, thus allowing them to own land acres and receive a yearly return on those purchased acres.
Currently, there is a 475-acre farm in south-central Minnesota available for investment purchase. A minimum investment of $20,800 touts a 7.9% annual return. The rent for this piece of property is about $375.00 per acre paid before planting, minimizing risk for the investor. There is also a bonus rent scenario where rent payments could be increased based on yields. For comparison sakes, average land rent locally is about $225-$250 per acre.
What are some of the selling points of investing in land in a company such as Acre Trader?
- Flex lease allows for additional yield upside given above-average crop yields and/or commodity prices.
- 5-10 year target hold period given stable cash flows and potential for long-term appreciation.
- Invest in a hard asset with little or no correlation to other major asset classes.
So as you can see, investing in land is a lucrative and potentially attractive investment. Rental agreements offered are cash rent, sharecrop, and flex rent. Returns for the investor are a result of farm rent and land appreciation.
One important caveat — Not just anyone can invest through these land investment companies. Most of the companies are only open to accredited investors (i.e., those with a high net worth of more than $1 million excluding the equity in their primary residence or a high income of $200,000 in each of the last two years, or $300,000 if married).
Who Benefits from Land Investment Companies?
I believe investors will benefit from these companies. One investment company requires a sizable minimum investment of about $20,000, but the return is much better than many traditional investment avenues currently. When the money market is paying less than 1%, investing in land with a return of 10% is very attractive. Land doesn’t depreciate, which is another reason it’s a good investment. Typically, land investment owners will keep ownership for about 5-10 years.
Farmers can also benefit from land investment companies. Let’s say the farmer wants to expand their farming operation by buying a neighboring tract of land. By selling a farm they currently own to a land investment company, they can use the monies from the sale to purchase a new tract of land. They can rent back the land they sold to the investment company.
What are the Ramifications of Land Investment Companies?
Land Investment Companies have the potential to change the landscape of farmland ownership. The land is no longer owned by a farmer, but rather a company. Who can pay the high rent ($375/acre as mentioned above compared to $225-$250 average) to these investment companies? Also, will the land be “mined” of fertilizer value because of possible low margins? How much fertility will be put back into the land each year? As farmers, we are true stewards of the land, and it’s important that we leave the land in better shape. But with small margins, is that possible?
Who will be farming the land? Are they local farmers? Are they invested in the local communities? Are they mega farmers possibly from states away?
And the big question:
What About Younger and New Farmers?
I do believe if land investment companies grow by their continued land purchases and the level of rents charged, it will detract and make it nearly impossible for new and younger farmers to farm. Renting farmland that is owned by a land investment company at $375-$400 per acre is high and more than likely out of reach for new and young farmers.
Is There a Place for Land Investment Companies?
I do believe there is. But my hope is that it is not the new “normal” of land ownership. Local farmers play an important role in our ag and rural communities. It is our responsibility to boost our local economy, be good stewards of the land, and see out the next generation of farmers and farm families. At the end of the day, the farmers behind the land are just as important as the land itself.