Where The Similarities Between Agricultural and Commercial Real Estate Begin—And Where They End

Accredited investors who have dipped their toes into real estate investing can speak to its virtues: consistent passive income and healthy capital appreciation. But commercial real estate—which accounts for most of the available real estate investment funds—also carries risk. Shifting demographics in the area the property is located, changes in public policy, changing demand within a given rental market, and the state of the economy at large can all impact the returns of commercial real estate.

Of course, every alternative investment asset investment carries its own risk and reward profile, which is why Artem Milinchuk, CEO of the fintech startup FarmTogether, saw a unique and largely untapped investment opportunity in U.S. farmland.

“What is beautiful about farmland is that the underlying characteristics don’t really change. It doesn’t move with the stock market, and it can stay productive forever in a sense,” said Millinchuk during a recent interview about the startup.

Milinchuk explains that, while farmland carries many of the same virtues of other alternative asset investments, it also has its own special characteristics that investors should know before diving in.

Of Farmers And Coffee Shops

Structurally, investments in farmland and those in commercial real estate are fairly similar. Purchasers own a percentage of the property and are entailed to those proportional profits. Milinchuk likened farmland leases to those of retail businesses.

“If you want to start a coffee shop, you don’t go buy the building. It’s the same with farming,” said Milinchuk. “When you lease you have way more flexibility, you’re not locked into a particular parcel of land and you can lease different land in different years and plant different crops there. Additionally, operators can get a high return on capital if they invest into their operations versus into owning the land, same as in real estate.”

From the perspective of an alternative asset investment, Milinchuk draws several parallels between commercial real and farmland investment funds. Both serve as an inflation hedge and both have a fairly stable quarterly rate of return, averaging about 3% for CRE and roughly 2% for farmland according to NCREIF’s property returns index and farmland index.

And, like commercial real estate, farmland property is also appraised and purchased in light of each property’s intended use. Milinchuk explained this in terms of parcel size and the types of crops that can be grown competitively.

“For something like almonds, it will be maybe 40, 50, 100 acres, as it is with most high-value tree nuts. For corn, it will start from maybe a few hundred acres. I would say from a dollar perspective, which might be an easier way to look at it, it’s starting from the $1.5 to $2 million all the way up to $15 and $20 million. That’s our sweet spot where it’s still good quality land, but you’re not facing competing from the big institutional players that buy parcels that above the $25 million and $50 million,” said Milinchuk.

Appreciating Farmland

Of course, the qualities considered valuable for farmland differ from those for an office building or apartment complex. Property improvements and location play a part in both, but the factors influencing those elements can differ drastically.

“We look at land that we think has the potential for price appreciation,” said Milinchuk. “Take the deal we did with an almond property in the Central Valley. We buy trees that are still young and as they grow they appreciate in value. The other part is just choosing the right regions, the right markets where we think land will grow in value. For example, the more northern latitudes, as the planet warms up, they will have more value.”

What’s more, while the value inherent to commercial real estate is largely dependent on the amenities of the buildings that occupy it. Farmland has the benefit of improved agricultural technology, which drives up yield, and thus the value of the land, over the long-term.

In addition to the kind of property improvements that boost the value of the land, Milinchuk points to the historical improvements in farming techniques that have gradually improved crop yields as another source of capital appreciation that is unique to farming.

“We’ve seen a relentless growth in yield productivity that since 1947 has been 3%-3.2% per year. So every time something new comes up like creative evolution or herbicide, pesticides, ag-tech, all of that increases the yield and that yield eventually flows to the price of the land,” said Milinchuk.

Finally, although any real estate investment can be considered an inflation hedge, farmland’s role in producing necessary food items means that farmland is able to retain its value against rising prices elsewhere in the economic chain.

Milinchuk said that “Because farmland grows food and food products—corn and soybeans go into thousands of products—land actually has been shown to move in lockstep with inflation as well. So when you have inflation you can count on land being a real asset and growing with inflation.”

These factors all influence the research and due diligence that go into the farmland funds FarmTogether offers accredited investors. The deals, which have a time horizon of between five to seven years, take these elements into consideration in realizing both the passive income from leasing the property to experienced farmers as well as the equity appreciation once the land is ready to be sold.

FarmTogether is a content partner of Benzinga