Farmland can be a compelling asset class for investors, as a hedge against inflation and a profitable source of income. But what about orchard farming and other, more specialized agricultural operations?
This week we speak with Josh Guggenheim, the Director of Acquisition at Gold Leaf Farming, a company focused on sustainable farm sourcing and expansion efforts in California and Arizona.
Click the play button above to listen to our conversation with Josh.
- Orchard farming and how it intersects with Opportunity Zones.
- Overview of farmland as an asset class and why farmland can be a hedge against inflation.
- How sustainable agriculture can produce environmental and social benefits.
- Current trends over the last decade in farmland and what’s to come in the near future.
- Understanding how farmland investing stacks up to other investments and equities.
- Market trends and investor perception specific to opportunity zones in 2022 and beyond.
Featured On This Episode
Industry Spotlight: Gold Leaf Farming
Gold Leaf Farming is a hybrid farming company and investment firm. They own and operate almond, pistachio, and date farms in California and Arizona, with farms located from just north of Sacramento down to Bard, California.
Learn more about Gold Leaf Farming
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.
Jimmy: Welcome to The Opportunity Zones Podcast. I’m your host, Jimmy Atkinson. And joining me today on the show is Josh Guggenheim, director of acquisitions for Gold Leaf Farming, an owner and operator of tree orchards in California and Arizona. They are headquartered in San Francisco and that is where Josh joins me from today. Josh, thanks for coming on. And welcome to the podcast.
Josh: Yeah, no problem. Thanks for having me today.
Jimmy: Excellent. Good to talk with you, Josh. And looking forward to diving in here. We’re gonna be talking about orchard farming and how it intersects with Opportunity Zones in a moment. But first, let’s zoom out and get the big picture on Gold Leaf Farming. So, Gold Leaf Farming currently owns roughly 10,000 acres of orchards where you are farming almonds, pistachios, and dates. Josh, give us a high-level overview of the Gold Leaf Farming operations if you could.
Josh: Yeah, no, that’s exactly right. So, we are really a mix of an investment firm and a farming operating company. So, on the investment side, we identify opportunities for investments within tree orchards and specialty AG. So, we have some almonds, dates, some wine grapes, some pistachios. Once we identify an asset that we like, we raise capital from high net worth individuals and small family offices and capitalize kind of each deal in its own SPV. And then once we close it, we run the deal with our in-house management team. So, we’re doing everything from kind of deal identification, capital raised, and also the hard part, which is the farming operating all in-house. We have about 22 going to 23 properties under management all within the West in California and Arizona. And for us, kind of a typical deal looks like, you know, a $10 million equity raise, maybe it’s $15 million assets in total, made up by a pool of high net worth and family offices. I’d say probably two-thirds of our deals are deals where we’re buying existing orchards for cashflow, and one-third of our deals are developments. A lot of those developments happen to be within Opportunity Zones, and I guess that’s what we’ll be talking about today.
Jimmy: Yeah, absolutely. And we will specifically turn our attention to the OZ fund that you have open, GLF23, toward the end of the show, but wanted to get a little bit more high-level zoomed-out overview of farmland as an asset class. Give us the macroview, Josh, and why do you see farmland overall as an inflation hedge?
Josh: Yeah, sure. So, you know, there’s a lot of ways to look at farmland. One view is looking at permanent crops versus row crops. Here at Gold Leaf, we’re only doing permanent crops, so, nut, wheat, barley, etc. We’re doing more tree-based crops which can only grow in certain areas and require certain water, certain climates, certain soil. We at Gold Leaf don’t wanna be in the crops that can just grow anywhere. We’d like to be in an area that’s pretty supply constrained. However, for both areas, both permanent and row crops, there’s one kind of attractive macro-trend going on, and that is that there’s just not any more farmland in the world. If you look at arable farmland per capita, it’s gone down by about 50% In the past few decades. And essentially, as you know, farmland is becoming… Some farmland is going away due to urbanization and other trends. You’ve got a hungrier and hungrier planet with more and more people and people, particularly in the emerging markets, eating more and more food. So, you’ve got the growing demand in a constrained supply, and that’s the background for farmland investing and maybe a reason why a lot of people are dialing in today.
Jimmy: Yeah. Give us a case for why farmland is an inflation hedge now.
Josh: You know, there’s a few reasons. I mean, number one, obviously, it’s a real asset. That’s just supply constraints. So, you know, prices of that real asset will go up during inflation. Other reason is that the cash flows generated by the property are tied to food prices. And if food prices are going up during the time of inflation, the cash flow generated by the property is also going up and tracking that. And now as a result you have a cash flow generated by the property tracks with inflation. So, historically, if you look back at some different periods, there’s been…farmland has actually been positively correlated to inflation. I think I saw a stat saying that it was something like farmland is about twice as correlated to inflation compared to gold, whereas other asset classes might be negatively correlated. And the real reason there is, like I said, you know, there’s a tie to food and commodities-driven type of angle.
Jimmy: And what are some other trends that you’re seeing in farmland? Is it becoming more institutionalized? And what are some impacts that that’s having on the asset class?
Josh: That’s an interesting question. So, one of the cool opportunities here at Gold Leaf is that we see trends that have happened in other commercial real estates, you know, say, 20, 30 years ago being pretty similar to trends that we see today in farmland and, in particular, farmland has something like $2 trillion of farmland in North America and only maybe $50 billion of institutional capital. So, it’s under penetrated by institutional capital. It’s very mom and pop-owned. And that’s probably similar to if you think about commercial real estate in the ’50, ’60, ’70s versus today, you saw a huge institutionalization of that asset class. I think we saw something saying that REIT…market values of REITs, even since 1990s, are up something like 150 times just because that asset class and commercial real estate is institutionalized. We see that in farmland, right, where today it’s a lot of mom and pop farmers, a lot of them are selling. The average farmer in the U.S. is like 65 years old. So, a lot of selling due to generational reasons. On the other hand, you’ve got a lot of institutions who are interested in inflation hedge and interested in cash flow and something uncorrelated. So, at Gold Leaf, we’re trying to kind of solve that problem where we’re buying from these family farmers, put together an asset pool, and then, hopefully, 10, 20, 30 years down the road, the asset class will institutionalize and we’ll be able to exit.
Jimmy: Which is a very important part of being able to take advantage of the Opportunity Zone tax benefits is being able to exit after holding for at least 10 years. Can you tell us a little bit more about how you see Opportunity Zones being a good fit for a certain farmland product?
Josh: Sure. So, there’s a few reasons. And we’ve done… I guess we’re raising right now our sales Opportunity Zone Fund of the GLF23, which we can talk about later. But farmland… Not all farmland is a fit for Opportunity Zones. So, there, obviously, has to be some sort of, like, development or substantial improvement angle. With what we’re doing, it’s actually a good fit because we can buy essentially bare land or land with old trees and develop or redevelop it into a new orchard. So, our game plan here is generally 10-year holds. We buy land, we substantially improve it by putting in irrigation systems, filtration systems, trees, etc. And then the orchard matures over the next four to five years. We start generating cash flow from the orchard, we take cash dividends, and then after the 10-year hold period, we sell a mature cash flowing orchard. And that’s basically the story.
It’s a pretty easy game plan. But the nice part… I guess there’s a few interesting things with OZs and AG. Number one is that in California, a lot of the Central Valley, which is the productive region, permanent crops, a lot of the Central Valley is within an Opportunity Zone. So, we’re pretty excited about that because you can buy excellent quality soils, excellent climate, and good water rights within an Opportunity Zone and you’re not really sacrificing the asset quality for Opportunity Zone tax treatment. You know, a lot of our investors say, if the deal makes sense outside of the Opportunity Zone, then it’s a good deal. Don’t do an Opportunity Zone deal just because of the tax. But if you can find a deal that works without tax treatment but has tax treatment, then it’s a really good OZ deal.
To tell you the truth, a few of our deals we’ve done have been in an Opportunity Zone, but have structured it in an Opportunity Zone. So, the water and the climate and the yield potential and the Opportunity Zone is kind of an added benefit. So, that’s kind of the high-level here with just agriculture and not sacrificing asset quality to be in an Opportunity Zone. The second thing is that it’s not really a competitive marketplace in an Opportunity Zone. Like I know, for example, some of the East Bay in the Bay Area is within an Opportunity Zone. And developers are pricing in that Opportunity Zone as we speak. Being an Opportunity Zone, having land in the Opportunity Zone you can command a premium for price in some sorts of real estate. That’s not the case at all in farmland. People we’re competing against, they’re not looking for Opportunity Zone tax treatment necessarily. They don’t have the capital gains to take advantage of it. So, as a result, with farmland, you can basically buy Opportunity Zone land and not have to pay a premium for it, which is kind of interesting to see.
Jimmy: That’s a good summary there, Josh. And I’ve noticed most of your or a lot of your farmland deals are located in that Central Valley in California where the farmland there is…the soil there is very fertile. It’s one of the nation’s, if not one of the world’s most productive regions for agriculture. The water is a little bit of a challenge sometimes there. Can you talk a little bit about that and the importance of getting water rights?
Josh: Good questions. Water is probably our largest diligence item when we’re looking at a farm. Water… There’s a few components of water, right, when we’re looking at a farm. There’s groundwater, so that’s well pumping. And then there’s surface water, so, that’s water distributed throughout California and irrigation canals, essentially. So, we’re generally looking at a property at both of those angles. In California, you will obviously hear about, you know, the drought in some parts of the state that affects both the groundwater and surface water. And then you’ve also got some groundwater regulation that passed in 2014, which basically limited the amount of water that farmers could pump or gives the state the ability to monitor the amount of groundwater that farmers can pump. That regulation is a game-changer in California because in the past certain areas in the state could pump as much groundwater as they wanted and it would be enough for the orchard. Going forward, that will be limited. So, how we see the state is that currently there’s something like 1.4 million or 1.5 million acres of almonds. That number will probably end up being about flat going forward because areas without good water quality won’t be able to grow acreage. Water is like a very constraining factor in regards to the supply.
So, if you look at past almond acreage in California, it’s grown probably 6% to 8% per year. All of a sudden with these new water regulations and water scarcity, that will stop. So, how we view it is if we can buy assets with good quality water, senior water rights, good groundwater pumping rights, we’re buying into a market that has a lot of demand, but can’t necessarily grow because of this water supply issue. So, investing in Ag can actually be one of the best ways to monetize investment in water. And we actually see a lot of water players in the space because we’re basically buying in an inefficient market that’s gonna be increasingly supply-constrained. So, we view water as a risk and definitely something that we have to diligence. But if we do it right, our water rights that we own with our properties should appreciate and the commodities that we produce should be increasingly valuable.
Jimmy: Yeah. If you do that right, it makes the deal much more valuable. Let’s turn our attention to your fund that you currently have open now. You’ve done a few Opportunity Zone deals in the past. You have one fund that’s currently open as of when we’re talking mid-February 2022. Gold Leaf Farming 23 or GLF23, pistachio farm located in Fresno County, I understand. Tell us a little bit more about that, Josh.
Josh: Exactly. So, it’s a pistachio development. We will basically be buying 600 acres of land on that land currently. Some of it’s older almonds that need to be torn out and some of it is open land. And we will essentially be developing all of it to pistachios. The model here is in this particular region in California, pistachios are trading three to five times higher than almonds. So, by redeveloping the open land and old almonds into pistachios, there’s some substantial appreciation potential. We’ll be developing for something like, let’s say, $25 grand per acre as a cost basis. And pistachios trade for 40 to 60 per acre. So, there’s a nice margin of safety built into our development there. The general plan here is close sometime in the spring, start redeveloping immediately, pistachio trees take a few years to ramp up. It’s basically maybe four to five years for the first crop and then cash flow. So, the first four years there won’t be any cash flow. the trees will be maturing. After that we’ll start paying the dividend probably in year 5 or 6, and then we aim to exit in year 10. So, the returns here are if you can use Opportunity Zone benefits and defer capital gains, etc., it’s about a 20% IRR over 10 years, a little bit better than a 3X MLIC. And then if you can’t use any Opportunity Zone benefits and you’re just investing into your cash, it’s about a 13% net IRR deal.
Jimmy: Which is still pretty good, but, of course, it’s better if you do have some capital gains you can roll into it and take advantage of all the tax benefits that the OZ program offers. And so what’s the total project cost and how much equity are you raising and what is the minimum investment?
Josh: So, this feels about $7 million that we’re raising. We’ve got about half-committed right now and they’re looking to raise a bit more. We genuinely do a 50k minimum check with our investors. There’s generally two cohorts, I would say. There’s a lot of 50k guys. And then we also have a few larger $1 million or $2 million slug guys. And generally, it’s the breakdown here. So, this one… We’ve got another deal that we’re actually working on right now which is a bit north not far from Modesto. That’s actually the OZ development that might be in kind of Q3 of this summer. But yeah, generally our deal’s pretty similar to the GLF23 deals where it’s $5 million to $15 million of equity. Let’s a minimum raise and we’re generally targeting, without tax benefits, kind of low teens and with tax benefits, you know, high teens or 20s.
Jimmy: What’s your roadmap going forward for the next several years, Josh? How many more OZ funds do you anticipate that Gold Leaf Farming might roll out over the course of the next several years until the program sunsets at the end of 2026?
Josh: Probably we’ve been doing, since we started, maybe three to four a year. That’s what we’re trying to do. And it really depends on the underwriting. And if we can keep sourcing quality deals, I think where we play in the market here is that there’s a lot of small properties for sale that sell, you know, let’s just say, subscale that are 100 acres or something or 50 acres that are pretty high priced because there’s a large smaller buyer pool. Think of doctors and lawyers, etc. And then there’s some properties that are 50 to 100 million properties. Those are great, you know, fits for pensions who can bid up for them, not a lot of buyers there. We like to play kind of in the sweet in the middle spot. We try to be bigger than what the small families can buy, and maybe a little bit smaller than what pensions wanna buy. So, long story short, we’ll probably keep doing these 4 to 5 deals, say, 500 acres each, and build up a portfolio that way. And hopefully, we can buy them at a good price because there’s not a lot of competition that we’ve got. And if we want to bring the assets together and exit to a larger pension later, that’s obviously an opportunity too.
Jimmy: That sounds fantastic. I wish you nothing but the best of luck. Josh, if our listeners are interested in learning more about you and the Gold Leaf Farming platform, where can they go to learn more?
Josh: Thanks for asking that. So, the best would be to go online at goldleaf.ag. That is our website and you can find information there, or email me just directly at [email protected] is another good way to do it. I also think we’ve got a listing on our latest fund on your website, Jimmy, if they wanna check that out as well.
Jimmy: Very good. We’ll be sure to link to all of those in the show notes for today’s episode. And as always, for listeners out there, you can find those show notes on the Opportunity Zones Database website at opportunitydb.com/podcast. And you’ll find links to all the resources that Josh and I discussed on today’s show. I’ll make sure that we link to goldleaf.ag. We’ll link to the listing on the Opportunity DB website and we’ll also throw Josh’s email address up there as well. Josh, thanks for offering all of your insights today for my listeners and me about farming and the Opportunity Zones. Thanks for joining us. Appreciate it.
Josh: Awesome. No. Thanks for having me on, and looking forward to working with you guys.