When combined with the opportunity zone incentive, farmland can be a compelling asset class for investors. Farmland offers unique features compared to traditional real estate and often outperforms other investments during recessionary times. But what makes agriculture a low-risk, high-return asset and how can investors capitalize on these opportunities?

Paul Pittman is the Chairman and CEO of Farmland Partners Incorporated, and John Heneghan is the founder and manager of the Promised Land Opportunity Zone Fund. 

Click the play button above to listen to our conversation with Paul and John.

Episode Highlights

• Current trends over the last decade in farmland and what’s to come in the near future.
• How farmland offers a range of investment options that fulfill numerous portfolio objectives.
• Understanding farmland and its income characteristics and expenditures.
• Why farmland is a rare investment that combines increased demand with shrinking supply.
• How farmland investments provide a hedge against inflation and a potential benefit from inflation.
• Understanding how farmland investing stacks up to other investments and equities.
• Financing farmland in opportunity zones and sustainability of development efforts.

Featured On This Episode

• Paul Pittman on LinkedIn
• John Heneghan on LinkedIn
• Green Street Advisors Reference Guide on Farmland

Industry Spotlight: Promised Land Opportunity Zone Fund

Promised Land owns approximately 3,800 acres in Illinois, South Carolina, North Carolina, and Mississippi. Promised Land was founded and is controlled by Servant Financial, a Chicago-based investment management firm.

Farmland Partners, an NYSE-listed REIT, serves as property manager of the fund. Farmland Partners owns approximately 166,000 acres in 16 states from California to Florida. The company harvests 26 different types of crops and has more than 100 tenants on its farms.

Learn More About Promised Land Opportunity Zone Fund

• Promised Land Opportunity Zone Fund
• Servant Financial
• Farmland Partners, Inc. on LinkedIn and Facebook
• Email Farmland Partners — [email protected]

About The Opportunity Zones Podcast

Hosted by OpportunityDb.com founder Jimmy Atkinson, The Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.

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Show Transcript

Jimmy: Welcome to another exciting episode of The Opportunity Zones Podcast, the weekly show where we interview opportunity zones professionals and experts from fund managers to tax advisers, from real estate developers to venture capitalists. If it impacts opportunity zones or the opportunity funds industry, we cover it here on The Opportunity Zones Podcast.

I’m your host, Jimmy Atkinson. Farmland is one of the most successful industries in the United States. Over the long term, farmland actually has better historic returns than the S&P 500. It’s a great hedge against inflation, and it has beaten the majority of other real estate asset classes over the long term. Finally, when coupled with the opportunity zone incentive, farmland really can be a very compelling asset class for investors. Joining me today to discuss this and more are Paul Pittman, chairman and CEO of Farmland Partners Incorporated, ticker symbol FPI on the New York Stock Exchange, and John Heneghan, founder and manager of the Promised Land Opportunity Zone Fund. Gentlemen, thanks for joining me today, and welcome to the podcast.

Paul: Thank you.

John: Great to be here, Jimmy.

Jimmy: Great to have both of you with me. So Paul, let me turn to you first. Can you characterize, first of all, the overall farmland market? And also, can you characterize the opportunity that is in front of investors with respect to farmland as a real estate asset class?

Paul: Yes, the farmland real estate asset class in the United States is approximately a $2.5 trillion asset class. It’s shocking that it’s that large. And in most cases, there’s very little opportunity to invest in that asset class by the average investor. What our company has done is we are listed on the stock exchange and give an individual investor as well as institutions an opportunity to invest in farmland directly by just buying common stock that holds those assets. What we are doing teamed up with the Opportunity Zone Fund is adding the wrinkle of creating an opportunity zone fund so investors can get the benefits of that opportunity zone legislation. The asset class, in our view, should be invested in in a broad and diverse way, and thus we own a portfolio that is quite diverse in 17 states with about 26 different crop types. And the total portfolio of FPI, either owned or managed, is in the neighborhood of 175,000 acres.

Jimmy: And what’s the overall value of those 175,000 acres?

Paul: Oh, the overall value would be in the neighborhood of $1.3 to $1.4 billion of farmland.

Jimmy: Yes, quite a large portfolio you have there. I want to bring in John now because he recently partnered with your company, Paul, to form the Promised Land Opportunity Zone Fund. So John, can you describe for us how the farmland business intersects with the opportunity zone tax incentive?

John: Sure, Jimmy. So just as background, I spent 13 years overseeing private equity and hedge funds for equity group investments, Samuel Zell’s Family Office, and came across three characteristics of a solid investing by value, find great partners like we have in Farmland Partners, and the ability to scale with a billion-plus under management, we can certainly scale Promised Land Opportunity Zone Funds with Paul and his team.

Jimmy: And so tell us a little bit more about the partnership. I’m curious to hear how it came together and what the overall investment strategy of your qualified opportunity fund is.

John: I spent a couple years looking at all kinds of opportunity zones in multifamily, in urban settings, industrial, and retail, and never found the right project or partners. Post-COVID took a deeper dive into farmland because it’s essential. People gotta eat. I looked at the OZ rules as they relate to farmland and discovered that it was very favorable and possible to efficiently scale the OZ wrapper within farmland. So my background is not in farmland, so we reached out to Paul Pittman and formed a joint venture.

Paul: If I can add just a little bit to that, I think one of the more powerful things about farmland in the context of the opportunity zone is that it is an asset class that is very, very low risk. Many people think of farming as risky, and farming is. But farmland ownership, which is really a different business than the actual farming, is a very low-risk business. And so when you can do that in the context of the opportunity zone, the great thing there is that you don’t have a principal loss or a likelihood of a negative return scenario because the asset class is fundamentally about food demand, and food demand is very stable and almost always growing.

Jimmy: So go deeper on that. What are some of the trends that have unfolded within this industry over the last several decades, or maybe even longer than that? And where do you see those trends heading in the future?

Paul: A couple of really, really powerful trends that drive almost everything about the ownership of farmland. So the first trend is that population growth leads to increased food demand. That’s, frankly, self-evident, I won’t spend any more time on it. But even more important than population growth is increases in GDP per capita. So anytime that someone moves from just sort of a sustenance level of wealth, meaning truly poor, into what we would view here in the United States is still frankly pretty poor, by the standards of China or some places is pushing you into the middle class, your consumption of fruits, vegetables, and proteins skyrockets. When you’re very poor, you eat basic calories in the form of rice, wheat, or corn, depending on where in the world you are. But the minute you have a little bit of money, you eat a much more complex, interesting, and frankly, healthier diet. That materially increases food demand and demand for farmland way beyond just the population growth.

The third factor is that good farmland is scarce and always getting a little more scarce every year. The scarcity is driven by gradual urban development on ever-increasing parts of the world. And on top of that, you have decreasing water availability, and much of the farmland in the world is irrigated. And as we have less and less water available for agriculture, you take farmland out of production. So that’s the big backdrop.

Now turning to the industry, specifically, the industry is characterized by massive productivity increases through time. And those productivity increases come in two different ways. One is the yield per acre for whatever crop: corn, soybeans, wheat, rice, almonds, you name it. We gradually have technological improvements that raise that yield per acre through time. And a lot of people say things to me like, “Well, the corn price hasn’t changed in 100 years in real terms.” That’s not actually even true, but it’s close to true. But what has happened is the total bushels of corn you would grow on a given acre has more than doubled in that 100 years, and so the revenue per acre of these properties just keeps growing.

The second element of productivity is just how much food can be grown by a single human being. And we have seen here in the United States incredible increases in the productivity of individual farmers and the amount of land that they can effectively farm. And this is just like the semiconductor industry or anything else. As you get basic productivity increases and efficiency of the operations, you can create significant wealth creation for investors. Those are the big industry drivers, you know, that productivity gains comes from everything, from better equipment, to better technology, to better environmental stewardship of the land, to better chemistry and/or fertilizer use. So this productivity story just keeps getting better for the asset class.

Jimmy: Yeah, Paul, that’s fascinating. I want to see if maybe we can spend another minute or two focusing on some other macroeconomic drivers of the industry. I mentioned in my intro that as an asset class, it’s a great hedge against inflation. Could you expound on that a little bit? How is this asset class inflation-resistant or a good hedge against inflation? And maybe also how is it recession-resistant, or is it recession-resistant? Maybe talk about those two different dynamics there.

Paul: So let me start with the recession one and then I’ll go to the inflation one. But the recession one is the easier question, so I’ll start with it. When you think about what underlies the investment thesis here, and as I said a few minutes ago, it’s food demand. When your wealth goes down, the last thing you will cut out of your family needs for a given month or a week is food. You may change how often you eat out. You may change whether you’re eating chicken or filet mignon, but you are still eating roughly the same number of calories. In fact, there’s a lot of science that says you eat more if you’re depressed and poor and sad. So the recession-proofness of the asset class is well understood. And the best and safest place to be in the asset class is not the actual production, but the land ownership. And that’s really because it’s the key element of food production, and you’ll be pretty safe, about as safe as you can be in any investment if you’re at that level.

As far as inflation goes, if you tracked over the long term, you would find something in the neighborhood of long-term returns to the asset class, as far as appreciation goes separate from the rent you would receive from leasing properties, is going to be around 150 basis points higher than inflation. There’s some research that suggests it’s way higher than that. But the farmland is essentially…in my view, it’s gold with a coupon if you will. And if you think about it that way, you know, gold’s a wonderful hedge against inflation. Farmland, in my view, is even better, because you’ve got the current yield aspect to it while you’re holding it as a hedge against inflation. You know, during the inflationary era of the late 1970s and early 1980s, farmland had some of its best annual appreciation rates it has ever had. So there’s quite a bit of historical proof that it’s a wonderful hedge against inflation.

John: And I think we’re seeing the death of the inflation is a transitory narrative.

Jimmy: Absolutely. Yeah, we sure are, and it looks like it may be around to stay for quite some time. So it’s an important insight you have there, Paul, about how farmland can be a real lifesaver for investors who are looking for that type of hedge against inflation. I think that that’s great. Hey, John, I want to turn back to you to get a little bit more insight on your qualified opportunity fund. Could you tell us what exactly does the QOF hold? And are you looking to raise additional capital and acquire more assets?

John: Yes, the opportunity set is very large. So we’ve raised $40 million to date. We’ve deployed $50 million including leverage in 10 farms in 4 states, 8000 acres. Our target capital raise over the duration of the OZ benefit period is something like $250 million in equity, which we’ll get leveraged at 45%.

Jimmy: And then what types of projects are you looking to add to the portfolio potentially?

John: Today, the 10 farms are all row crop. We spent some time with Farmland Partners looking at permanent crops, which is trees with either fruits and nuts. There are higher gross yields for those as well as appreciation potential, but higher risks if the end-market consumer appetite for that particular fruit or nut decreases. So we’re looking to expand from a solid base of durable cash flow row crop and complement that with higher returning more development risk intensive. The asset class, as Paul has described earlier, is low-risk when we look at the types of improvements that we’re doing, and we’ve got an efficient formula to meet the improvement criteria established by the IRS. We’re looking at projects that enhance the productivity of the dirt. The projects are in months versus years for a multifamily building, and the lease-up risk is not present. You have a farmer tenant, you tell him, “I’d like to add drainage tile to your back 40 so it doesn’t flood every other year,” he’s gonna pay you for that capital expenditure.

Jimmy: I wonder if you can go into a little bit more detail. Thanks for that, by the way. But I’m just curious, for a listener out there who may have some farmland holdings and is looking to get involved and potentially help you build out your pipeline, what exactly are you targeting in terms of your deals? The size of the deal, maybe the acreage. You went into some detail about the types of crops that you’re looking to diversify against. Row crops, typically, are your current holdings, and you’d like to get some more permanent crops. So understood there. But what else can you tell us in terms of how you’d like to build out this pipeline going forward?

Paul: I can pick up?

John: Yeah, go ahead.

Paul: Go ahead, John.

John: Oh, you want me to go?

Paul: I was going to say we’ll focus on high-quality farmland and the Corn Belt in the Southeast and the Delta, and most of the permanent crops would be in California.

John: I can give a little more kind of granularity or specificity on that. So first, the opportunity zone vehicle will be looking for properties that are in the opportunity zone. Farmland Partners itself will buy farms anywhere in the United States. If somebody has farmland and they’re looking to liquidate it, we’re happy for them to reach out to us, whether it’s in an opportunity zone or not. As a property manager and advisor to the Opportunity Zone Fund, we suggest the building of a diversified portfolio. That’s what we’ve done with our portfolio at FPI. The row crop side of the portfolio is, in my view, lower risk. The specialty crop side of the portfolio is higher risk. The reason I say that is as simple as your specialty crops portfolio is, in round numbers, 60% or 70% raw land, and 30% or 40% the trees growing on that raw land. Those trees are depreciable, just like a house. They have a defined life, they have repair requirements, so on and so forth. So there’s just a variety of things that make the specialty crops side of the equation riskier, albeit as John suggested, slightly higher return, particularly in the current yield part of the return.

So when you build out a portfolio like the opportunity zone, we encourage them to start with row crop and then move into specialty crop as they got scale. Because you got to do that first deal or that first five deals, and our view was do those early transactions in the lower risk portion of the asset class and then move into the slightly higher risk, higher return portion of the asset class. As far as what we’re looking for going forward, really, any additional assets anywhere in the country would be on our radar, and then it’s the individual due diligence of those individual farms, whether it makes sense or not.

John: Yeah, Jimmy, just to give you a sense of the scale, there’s massive scale in farmland. We mentioned earlier that we have a pipeline that we need to vet of $500 million in row crop and permanent crop. And Paul and his team of five regional managers will lead up that effort in sourcing farmland in OZs that they think is high-quality, has good water rights, and satisfies the diversification criteria.

Jimmy: Gotcha, that’s helpful. Thank you. So you stated earlier that…just to kind of characterize the size of the agriculture market earlier, we discussed how it’s approximately $2.5 trillion worth of agriculture real estate in the United States. And before we got on the air here, we were discussing amongst ourselves that we kind of estimate maybe roughly $300 billion worth of opportunity zone farmland in the United States, so a very large addressable market there, obviously, I wanted to talk now with you about, on the investor side, on the capital raising side, if there’s an investor out there who has capital gains who’s interested in your product offering here, what is the minimum investment? And what sort of returns are you projecting?

John: The minimum investment’s $100,000. In return profile, were basically the historical returns of the asset class. So with leverage, high single-digit expected returns. Inflation, as Paul mentioned, drives the returns higher than that.

Jimmy: And what are you thinking in terms of exit strategy? Beyond the 10-year holding period, how do you return capital and ultimately appreciation or profits to the investors?

John: Yeah, after we satisfy the 10-year hold, as high-quality farm is very, very liquid, and we’ll seek, sort of, the highest bid on those farms that we’ve improved.

Jimmy: And, John, you touched upon earlier that you’re looking for deals where you can meet that substantial improvement requirement that’s required by the IRS on all opportunity zone property. What exactly are you doing to meet the substantial improvement? Can you walk me through an example of one of your farmland holdings, and how you were able to achieve substantial improvement?

John: Yeah, the substantial improvement applies to any structure on the land. So improvements on a typical farm will be grain bins or irrigation equipment or, as we discussed earlier, trees, permanent crops. With respect to farmland that has no improvements, the IRS was a little opaque. And we’ve spent significant time with tax advisors and legal advisors to develop some IP, and the threshold for land is not the substantial improvement, it’s significantly lower.

Jimmy: Gotcha, that makes sense. So I think we were drawing a comparison to multifamily earlier where multifamily substantial improvement can take quite a bit of time and a lot of capital expense improving an existing building or maybe adding on to an existing building. I think that’s why, typically, with the multifamily asset class, at least within opportunity zones, you more often see ground-up development than substantial improvement for multifamily. But with farmland, it sounds like it’s much more doable. There’s usually not a whole lot of permanent property on the farmland that needs to be substantially improved or built onto. And it’s interesting that permanent crops count toward the substantial improvement provision. I was unaware of that. That’s really interesting.

John: Yeah, so maybe an example, the centerpiece of our 10 farms is a farm in North Carolina. And what we’re going to do there is land leveling and clearing the drainage ditches and canals, so that the excess water is moved off the farm. And then we’re building grain bins to satisfy the production capacity of the farm. It’s a 4000-acre farm.

Jimmy: And that type of capital expense is not too burdensome. And like you said, it takes months instead of years. Am I right about that?

John: We’ll have to do the drainage and land leveling off-season, and that may take a couple of years just to get across the full acreage.

Jimmy: Okay.

John: But the grain bins, we can do that in a few months.

Jimmy: Okay, that makes sense. Okay, well I want to thank both of you, Paul and John, for joining me on the podcast today. Thanks for all the insights you provided on farmland, and specifically opportunity zone investing in farmland. But before we go, where can our listeners go to learn more about Farmland Partners and the Promised Land Opportunity Zone Fund?

John: Folks can reach me at [email protected]. And the website for Promised Land is promisedland.fund.

Paul: Right, and if you want to reach Farmland Partners, again, our ticker symbol on the New York Stock Exchange is FPI. You can reach me at [email protected]. We have a website as well, of course, at also farmlandpartners.com. On that website, for those of you who want to learn more about the asset class, there is a link on that website to a primer about farmland that was authored by Green Street Advisors, a well-known industry advisory firm for real estate, particularly REITs. So feel free to download that report if you’d like to learn a lot about the history of the asset class and the long-term return profile. Thank you very much, Jimmy, for your time today.

Jimmy: Yeah, fantastic. Thank you both for joining me. And before we go, for our listeners out there, of course, I will have show notes, as I always do, on The Opportunity Zones Database website. You can find those show notes at opportunitydb.com/podcast. And there you’ll find links to all of the resources that Paul, John, and I discussed on today’s show. I’ll be sure to link to farmlandpartners.com and the primer that Paul was just discussing on farmlandpartners.com. And I’ll also link to promisedland.fund. Gentlemen, thanks again for joining me today. I appreciate it.

John: Thank you, Jimmy.

Paul: Thank you.