DEAL TIME! Antelope Almond Orchard
Listen To or Watch the Deal Pitch Here
Deal name: Antelope Almond Orchard
Target IRR: 10.0%
Target net tax adjusted IRR: 12.8%
Target net avg. cash yield: 8.6%
Target hold period: 10 years
Adam Gower: Hey! Welcome to a sneak preview of the Gower Crowd podcast, Series IV. The Real Estate Crowdfunding Show - Deal Time, where you're going to hear real estate professionals pitching their deals. I am your host, Adam Gower. And, this new series actually was inspired by the incredible attention my weekly newsletter has been getting. The newsletter exclusively covers news and updates from the world of real estate crowdfunding in a super, easy-to-follow list format. There's no fluff, just industry updates. So, if you're not already subscribed to the newsletter, just go to GowerCrowd.com and subscribe there. It's totally free. And of course, you can unsubscribe at any time. Now, not only do you get the weekly updates on everything happening across the real estate crowdfunding industry, but now, you'll also be getting access to actual live deals in this new Podcast series, plus, there is going to be a bunch of amazing industry information that we are putting together now. It is totally proprietary. It's going to blow your socks off. So, subscribe to the newsletter at GowerCrowd.com and be among the first to hear all about it. Also, of course, if you want to pitch your deal on the show, just go to the Podcast page at GowerCrowd.com and follow what I hope are the very obvious, bright, shiny links to submitting your deal. All there at GowerCrowd.com. Now, the new series has not officially launched yet. So, today's show is a special teaser and without endorsing the deal or providing any kind of financial or investing advice of any type of course, it is my great pleasure to introduce you to Farm Together's Michael van Putten who will be talking about their latest deal, the "Antelope Almond Orchard". Enjoy!
Michael van Putten: Michael Van Putten of Farm Together.
Adam Gower: I am so happy to welcome you to the inaugural episode of Series IV of the Gower Crowd Podcast - Deal Time. Welcome. I am looking forward to hearing you pitch your deal: Antelope Almond Orchard. So, we have a series of questions. I'm going to go through them, one at a time, and then at the end, I have a series of knuckleballs. They're called knuckleballs in America. In England, we call them wobblers. So some questions that you're maybe not prepared for. So, let's just start with this.
What's your name, title and company name - even though I've already said it. Go ahead.
Michael van Putten: No worries. Yes. My name is Michael Van Putten. I am an Investment Associate with a Farm Together.
Adam Gower: And, tell me about the deal. What have you got. Just give me the high-level, what have you got on offer today.
Michael van Putten: Absolutely. So, the Tehama Almond Orchard is a 293 almond development in Tehama, California, I'm sorry. The deal is actually called Antelope Almond Orchard, but it's in Tehama County, California. Tehama County is located due west of Corning, just between Redding and Sacramento. So, Northern California. Twenty-six percent of the property was planted in 2017. So, those are fifth leaf almonds. Fifty percent Nonpareil, twenty-five percent Aldrich, twenty-five percent Monterey. And, the reason I say "development" is, the remaining seventy-four percent is going to be planted to almonds in 2022. We haven't yet determined the variety for those but that, we will finalize during DD.
Adam Gower: Aright now, tell me the story of this deal. How did you find it? How did you steal it? What's the story behind this deal?
Michael van Putten: Yes. So, like with most of our deals, we actually.... so, this one came to us. We initially saw it listed, but then the broker de-listed it. It was listed past the list period, so.... we purchased this property "off-market". But we were able to secure it by our on-site visit. So, we have an internal farm manager. His name is Dale Arthur. He did several decades at Prudential and is now on our team. He drove up to Northern California to view this property, along with one of our advisors, Ryan Metzler. And in the meeting with the farmer, viewing the 71 acres that were already planted, we're very impressed with the quality of the trees, the quality of the development in general. Irrigation system, planting, spacing, everything. So, upon their recommendation, they said, "hey, this looks like a great property. There's plenty of water up here. The existing trees look very healthy and this could be a great development if you want to develop the remaining seventy-four percent. So, yeah, that's how it came to us. Just struck a deal with the owner.
Adam Gower: Just curious. So, did you strike a deal with the owner that was above or below or at what he was asking for, when it was listed.
Michael van Putten: It was, at what he was asking for. Yeah.
Adam Gower: And this is a - so this is what you would call a "value-add deal", is it, in farming terminology, actually multi-family terminology, I should say. You like it because there is an opportunity to add value. Talk to me a little bit about that. What's involved.
Michael van Putten: Yeah. So, we purchased the deal approximately at, what you would value, raw land for, in this area. So, it's about $13,000 - let me pull up my comps right now. Yeah, so $13,700 per gross acre was what we purchased this for. And, through the development, mature almond trees - a mature almond orchard, at today's prices, should sell for about $32,000 per gross acre. So, we will be increasing the value of the property and then capturing that value with some inflation assumptions, at exit. So, our investors will get the benefit of appreciation of this property, through the development, and then we'll also get cash yield from it.
Adam Gower: I'm going to ask a lot of questions because I don't really know anything at all about farm land.
Michael van Putten: Alright, now worries.
Adam Gower: Not quite true. But, almost nothing. So, you're going - so a mature almond orchard is worth $32,000, approximately.
Michael van Putten: Approximately, yeah.
Adam Gower: So what does it take? If I'm thinking you've got bare land here. What do you do? Do you take an almond and bury it in the sand and then pour water on it and then how long do you wait? Explain. How do you get from bare dirt to a mature old orchard? And, how do you do that quickly, which I presume is what you're doing.
Michael van Putten: Yeah, no. That's a great question. So with commercial developments, you're never planting from seeds. So, we will go to a nursery. We will get year-old almond trees, and those will be on specific rootstocks to a variety that we'll decide once we do our DD. It could be Independence. There are a number of different factors that determine what type of variety we use. But yeah, we'll plant - essentially sticks in the ground, which are live trees, and we'll install irrigation systems, drill wells, booster pumps to overcome any slopes in the soil and then proceed in growing the trees. Apply nutrition to the trees, as needed, to help them grow faster. And yeah, that's pretty much it.
Adam Gower: And how long does it take to get to maturity?
Michael van Putten: About five years. And then peak production is about seven years. So, we modeled the development period to be five years, but we typically expect to be reaching peak yields by about seven years.
Adam Gower: Right. So maturity at five years. Peak yields at seven years. Sounds like a peak and then it's followed by a decline. But, is that actually what happens once it reaches peak? Does it maintain that level indefinitely?
Michael van Putten: Yeah, that's a great question. Almond trees have an economic life of about twenty five years. So, that peak level could be maintained for about ten years. And then, what we would expect to see is somewhat of a drop-off every five years after that. Almonds can continue producing far beyond twenty five years, but not at a commercially viable level. We're modeling peak yields here at, probably around, twenty-four to twenty-six hundred pounds per acre. Almonds can continue producing a thousand to fifteen hundred pounds per acre but, it's not economical to overcome your farming costs at that point. So, typically it makes sense to pull out and redevelop to something else after about twenty-five years.
Adam Gower: Right. Now tell me. What's in it for investors? What's in it for me?
Michael van Putten: Yeah, no, of course. What's in it for me. So - a) if you've already bought into the thesis of agricultural investments in general, then, it makes sense to own something in AG. But why almonds in particular? So, almonds are the most widely consumed nut in the world. If you're planning to build out a permanent crop portfolio and you're really thinking about, what are, kind of the, "cornerstone crops" that I should own? Almonds is definitely one of them. You could throw some other crops in there like pistachios and some citrus as well. But, if you're starting to build out agricultural holdings in permanent crops, then you definitely want to be considering almonds. And, this will by no means be our last deal. But, it's the deal we have now and, as I kind of alluded to.... I think I alluded to earlier, that may have been a different section. Deals come available, when they come available, right? So, we can't tell you when the next almond deal will be because we're very selective in what we select. But, if you are building out your portfolio and you want to own almonds, this is a great one to do it.
Adam Gower: Right. So, what you talked about there in one word was diversification. That's one thing that's in it for me. But, how much money am I going to make? Just get right to the - if you'll pardon it - the nuts and bolts, even though that is a little bit of a pun. How much am I going to make? That's what I want to know. That's what I mean.
Michael van Putten: So obviously, we can't say exactly what you're going to make. But, in terms of this deal, we do have expectations. So, we're expecting a net IRR of about 10 percent. So that would be a net IRR over ten years. The nice thing about AG - the unique thing about AG is, currently the federal government does allow you to depreciate your development expenses 100%, in the year those expenses are incurred. So, you have really nice depreciation benefits from developments which investors could be able to recognize. Now, I have to obviously caveat Farm Together does not provide tax advice and you should not take any tax advice or any projections regarding depreciation as advice from Farm Together. So, definitely speak with your tax advisers. That said, that is a big benefit from agricultural investments is, the depreciation recognition. In addition to that, we're projecting a net average cash yield of 8.6%. So, that's cash in your pocket before we sell the property. And then finally, a multiple on invested capital over that 10-year hold period of about 2.2. So, double your money.
Adam Gower: So we're going to actually drill down on that. But, I do have a question. You talked about target net IRR of 10%. What is the targeted net tax adjusted/projected IRR because I know that's slightly different then I have another question to follow up on that.
Michael van Putten: Absolutely. So, the target net tax adjusted IRR is about 12.8%.
Adam Gower: 12.8. Is that investor level IRR or is that project level? Those two numbers. 10 percent and then tax adjusted - 12.8%. Are those investor level or deal level?
Michael van Putten: Those are investor level. So that's net of all fees, all expenses, debt service, CapEx. That is, to the investor.
Adam Gower: OK. And, forgive me if I stump you. I'm not trying to. But, do you know what the deal level IRR is? Targeted net, deal-level IRR.
Michael van Putten: I don't have that on me. I could pull up the model and look at it, but I don't have an answer for you right now.
Adam Gower: Alright. Get that to me later, will you? It's one of my favorite numbers. I like to see the difference between the deal level and the investor level.
Michael van Putten: Absolutely.
Adam Gower: What's the - what is... so talk to me about some other numbers, right? The what's in it for me numbers. What's the minimum investment? Let's start with that. What's the minimum investment?
Michael van Putten: $15,000. So, that's the smallest amount we can accept, from accredited investors.
Adam Gower: And then, how do you structure the deal? Is there a preferred return? Is there a promote of some sort? Tell me about that.
Michael van Putten: So, all investors own an equal pro rata share in the investment. There is no "promote" for any of our deals and no preferred return. So, you invest into one of our special purpose entities. You own whatever percentage of the total capital we raise that you invested, and then all distributions, both the cash yield during the whole period and the sale proceeds, net sale proceeds, are distributed to you on a pro-rata basis.
Adam Gower: Interesting. OK. Is that common for farmland that there's no promote, it's just a flat, straight ownership piece, together with the management team, I presume.
Michael van Putten: Yeah, you know, I honestly can't speak to whether or not that's common in agricultural investments. That's how we do it. I do think some of our competitors have higher fees, but I can't speak to that. But yeah we just want to keep it very simple. Annual management fee, expense reimbursement fee, and that's it.
Adam Gower: Alright. So, tell me about the business plan itself. You've already talked about it a little bit. But, how are you going to add....what's the process of adding value and what's the exit plan?
Michael van Putten: Yeah, I mean, so... we did touch on that, to a large extent. So, the other process is, we're going to be planting almond trees next year. We'll be nurturing those trees until they begin producing. When they do start producing almonds, the 200 acres - then we'll be selling that to a wholesaler and then we'll be getting cash payments for that sale. And then - so those cash payments, when they come in, then they'll be distributed to the investors, according to their ownership percentage in the deal. At exit, the property will be at its max production. And so, the trees will still have approximately 20 to 15 years of economic value left in them. And so, we're hoping to capture the maximum value of the property at exit. And, most likely, this deal.... no actually, let me back up a little bit and kind of describe our sourcing and portfolio strategy. So, whenever we go into a region, our aim is to actually stake a satellite property and then build-out a portfolio around that. And the reason for that is, at exit, we plan on selling a basket of properties to an institutional investor who would be looking for a 20, 30, 40 million dollar acquisition. So, this will likely - I mean, I can't speak to exactly what else will own the region because those come up as they come up. But, we would look to sell this at its maximum value to an institutional investor.
Adam Gower: That's interesting. So, the exit is to sell it to an institutional investor together with other assets.
Michael van Putten: Most likely. Most likely - can't guarantee that. But most likely. That's our strategy.
Adam Gower: What other exits are there? What happens if there isn't an institutional investor or what happens if you can't find enough critical mass in this area? What's your plan B?
Michael van Putten: So, the deals - this is highlighted in all of our PPMs - have two, one year extensions. Where, we can hold the deal beyond 10 years if we're not getting a very good market price to sell it. We have gotten a lot of requests from investors on more evergreen holdings. You know, if a property's doing very well - and they just want to continue holding, getting the cash yield, can we do that? That's something that we still have to decide, at a company level, if we want to structure our deals that way. But for now, kind of, to build up credibility and trust with our investors, we do have 10-year exits and we have a little bit of flexibility as to whether we sell it at ten years, eleven years, twelve years. But yeah, we would list it and hire a broker and sell it.
Adam Gower: Right. So, OK. So, let me ask you this. Are you actually - you're not actually farming this, are you? Are you leasing it to a farmer? Like, explain that whole process.
Michael van Putten: No, that's a great question. And yeah, different deals are structured in different ways. So, for this almond deal, we are actually farming it. Now, Farm Together is not on site farming it. We will hire a farm manager and pay them a per acre management fee to farm it on our behalf. But this deal is not leased. So, you brought up a really good point. Some of our hazelnut deals, which we've done in the past. Those have been lease deals where we'll buy it. We'll lease it to a hazelnut farmer and then charge a base rent and then some sort of crop share and that would be the revenue to the investor. And most of our row crop deals are also structured that way, where we're leasing it. Many of the permanent crop deals and Antelope being one of them - we own the land and we also get the net operating income from the farm. So, the farm skill, the farm manager is earning a per acre management fee and that's what they get and we get the net proceeds.
Adam Gower: Right. And so, just talk to me about some basic ballpark numbers - just kind of, not price per pound, but some real ballpark numbers. So, for example, if I operate a multi-family building, I know that my total cost - my total operational cost is going to be 35 percent of revenue, or something along those lines. So, what about with this property, when you reach maturity and this thing's ticking along and you're paying - you're producing almonds and you're selling them. What is the total operational cost look like, relative to total top-line revenues?
Michael van Putten: Gotcha. Let's see, so. Let me look at a little bit right here. Yeah, so your total operating cost is probably going to be somewhere around... and this is taking into account for our management fee, cultural cost, harvest cost, everything - probably about 60 percent, 60 to 66 percent of your top-line revenue. And that's. Yeah, yeah. So about - between 60 and 70 percent.
Adam Gower: Is the total cost of managing, in this case, managing the farm, and the rest of it.
Michael van Putten: That's correct. That's correct.
Adam Gower: Ok. And when can investors expect to get paid? When can they expect to get paid? So, I invest $15,000 today. When am I going to see the first check and what will that check look like?
Michael van Putten: Yeah so, the first check will actually be delivered in 2022. And, that's because you already have a small portion of the acreage that is reaching maturity. So that 2017 planting will be mature by 2022 and it will continue to mature ahead of the 2022 planting. So, you will see a small cash yield in the first year and that percentage will be - here, hold on, let me pull up the number. Yes, it would be approximately a half a percent cash yield in the first year, but that would increase over time. Peaking at about 11, 12 percent cash yield in the later years.
Adam Gower: Yes, so actually preempted my next question, which was... So I noticed that - basically this is a development deal, right? It's a value-add but it's also a development deal. You're planting. You do have some income from existing crops and you're expecting revenues to build fairly substantially as the new acreage comes online. But I did notice something interesting here. So at year 5, in 2016, you've got - it looks like 8% cash-on-cash. Let's see, payout as percentage of investment. It then spikes to almost 15 percent in 2027 which is very nice. But then it drops. So why does it drop? What is that drop about? Then it builds up again over the next four years to 15, almost 16 percent cash-on-cash. So what's causing that little drop there, Michael, between twenty-seven and twenty- eight.
Michael van Putten: Yeah. So because... this has to deal with the way we structure our deals relative to some other forms of, let's say, private equity investments. So, these platform deals, we don't do capital calls. And so what that means is, we have to raise all the capital we think we could need to do this development on the front end, including potential debt service. So, one of the requirements that lenders have is that we raise more capital than we actually project for debt service, just in case. So, that little spike is the return of our excess debt service reserve back to investors, in that last year.
Adam Gower: Got it. That's the $894,000 of reserves, is it?
Michael van Putten: Yes. Wait, wait, wait. No, not the whole amount, no. So there revenue. You are getting net operating income, but the reason it's a little bit higher relative to the year after that, is it also is bolstered by that return of capital.
Adam Gower: Right, OK. In twenty - whenever it is....2027.
Michael van Putten: Yeah, 2027.
Adam Gower: And there is - so you're paying 4 million for the land and you're going to invest 2 million of CapEx, plus a new well for $250,000. So, two questions, kind of related. Number one, just explain to me, what's the breakdown of that two million. What's that going into? How are you spending that 2 million and why is it a separate line item for a new well? Just curious, because that sounds like CapEx to me as well.
Michael van Putten: Yeah. So that 2 million that you see there in the development equity, that is for the special inputs that need to go into the young trees. So, there is additional pruning that needs to happen when the trees are young, extra nutrition that needs to go into the trees. There's just extra labor on the property when you're developing a new orchard. And so, that's what that is. It's separate from the well for that reason.
Adam Gower: But you're also investing in irrigation. Like what goes into that 2 million? What's the basic line item breakdown for that?
Michael van Putten: Let's see.
Adam Gower: OK if you've not got it. I don't think it's in the pitch deck.
Michael van Putten: Yeah, it's not in the pitch deck. Let me see. Well, it's broken out over five years. So, yeah - in the first year, you have a lot of physical capital, that is being put into the property. So you mentioned irrigation systems, booster pumps, things like that, but then also the years after that, it may not be actual infrastructure, but there are special development inputs that go into the property. I don't have something itemized that I can, kind of, break out for you right now, but I can follow-up with that.
Adam Gower: No, no problem at all. Alright so, what are the biggest risks to this deal?
Michael van Putten: Yeah, so, I would say the thing that everybody's talking about right now is water, right? California, I think just recently declared that we will be in a drought this year. So, water is on everybody's minds. With regards to this property, we feel like we've hedged water risk pretty well. SGMA - so are you familiar with the Sustainable Groundwater Management Act?
Adam Gower: Tell me all about it - no.
Michael van Putten: Ok, yeah. So, the Sustainable Groundwater Management Act is a plan to make sure aquifers are in balance in California in the near future. So, there are ways of rating properties on 6 key metrics to determine whether or not that they are high risk, medium risk or low risk. So, with regards to this property, even though it's a single source, water property, meaning it's only getting water from wells, we still feel like it is fairly well hedged against water risk. So, 75% of California's precipitation occurs north of Sacramento, which is where this property is. So, from a precipitation standpoint, we're in a better region than most of the almonds that are produced in California. The 6 key features of SGMA are: lowering groundwater levels, reduction of groundwater storage, sea water intrusion, degraded quality of water, land subsidence, and then surface water depletion. So, with regards to this property, we really don't see any issues on these three levels. The only one that could be something to just pay attention to, is lowering groundwater levels. But, just given its location and the robustness of the aquifer, we feel like we're pretty well positioned.
Adam Gower: Fantastic and last question. I do love that you guys do this. You've got an upside and downside. In my career, one of the most sophisticated companies I've worked for always did a best case, worst case and most likely scenario. And you've done an upside and a downside. Is that something you guys do on all your deals?
Michael van Putten: Absolutely. Yeah. We want to see, hey, if things don't go quite according to plan, where do we think we could end up? So, yeah, that's standard for us.
Adam Gower: And what could be the - what could cause you to exceed expectations on this deal?
Michael van Putten: Yeah. So, one of the reasons we only want to buy properties in Northern California is, as much as people are concerned about the drought, if the drought affects producers in the south and production is lower then that would benefit prices, right? So, you want to be the one holding almonds when other people are having trouble growing almonds - that helps your pricing. So, as much as the drought could be a risk, it could also be an opportunity if we've hedged water risk correctly and we're able to produce when other people are under-irrigating their fields.
Adam Gower: Michael Van Putten, thank you, Farm Together, for telling me all about the Antelope Almond Orchard.
Michael van Putten: It's been a blast. Thank you.
Adam Gower: That was Michael van Putten at FarmTogether, pitching their latest deal, the "Antelope Almond Orchard". If you want more information on this deal and on all the others in this new series, Series IV of the podcast, plus, if you want access to the latest news from the real estate crowdfunding industry and if you want to be the first to know about some amazing proprietary industry data that we're putting together, subscribe now to the Gower Crowd newsletter at GowerCrowd.com. It is totally free and it's the most comprehensive source of news and information about real estate crowdfunding anywhere on the planet. All there at GowerCrowd.com. Thank you for joining me, Michael van Putten, and for telling us all about the Antelope Almond Orchard deal, over there at FarmTogether. That is it for today. Thank you for listening. This is Adam Gower wishing you well and signing off.
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