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AcreTrader 101

February 27, 2019

Five Ways AcreTrader Helps Farmers

While the value AcreTrader provides to investors is clear, we are often asked “what do you do for the farmers?” The answer is: a lot! Our management team has historically been involved with farming before founding and working at AcreTrader, and we understand many of the challenges today’s farmers face. While we don’t have a magic wand to solve every farm problem, we do help farmers in a variety of ways.

Ability to Expand Operations

Perhaps most obvious is AcreTrader’s ability to offer farmers access to capital. For example, there are times when a farmer wants to expand his farming operations onto a neighboring parcel of farmland but doesn’t have the funds to purchase it. This farmer can present the land to AcreTrader’s investors. The investors would then purchase the land and rent it back to the farmer, providing him something he might not otherwise have gotten - economies of scale. He can now use his existing farm equipment and labor on the newly-leased neighboring farm, helping him to grow his business and his bottom line. Another avenue for expansion would be for a farmer to sell a portion of their ownership in some land in order to purchase additional land. Where traditionally farmers would go to a bank and get debt (backed by their owned-land), they could instead just sell some portion of that parcel on AcreTrader and use the funds for expansion. AcreTrader can provide another tool for farmers who hope to grow their businesses.It’s one of the qualities of our business about which we are most excited. With more financing options, farmers can choose a solution that helps them reach both their financial and personal goals.

Quick Access To Capital For Improvements

Almost 40% of U.S. farmland is owned by absentee owners that rent the land to farmers. In many of these relationships, the farmer pays a cash rent that is typically up-front before planting season. While some owners will reserve cash for potential capital improvements, others do not or are unable to. This can result in serious problems. For example, the farmer may have the water pump on an electric well break in the middle of the hot summer. If the owner is unavailable, or does not have cash on hand, this can put the farmer in a very difficult situation. The farmer will either have to pay for the well himself (if he has the cash at hand) or risk his crop dying in the field from lack of water. When working with AcreTrader and its management partners, our farmers have support when improvements are needed. Making enhancements and maintaining a farm’s drainage, ditches, and roads not only helps the farmer, it improves the resale value of the farm. In addition to having capital available for on-farm improvements, we move fast. We are always here to answer the call and take action in partnership with our farmers.

Independent Valuation and Information

We work with farms of all sizes and many types of complex situations. From small conservation-focused farms to mega farms, wholly owned parcels to complex family dynamics and ownership structures, we have seen it all. Importantly, we help farm owners and farmers understand their land value and the options available to them as sellers. While we don’t always engage in a commercial relationship with these farmers and owners, we are happy to share our thoughts regarding the value a farm and work through the potential opportunities and options. Understanding the value of a farm and the process of selling can be complicated and stressful; having someone walk you through it can be an invaluable source of both relief and information.

Respectful Farming and Technology Expertise

Farmers know their own business and their land, and we don’t pretend to know better than they do. However, having operational experience over tens-of-thousands of acres has provided us the opportunity to see a lot of problems and solutions. For example, all the new technology offerings from planters and seed solutions to financial software and satellite mapping can, at times, be overwhelming. We have evaluated a myriad of products, and we have seen a lot that are a waste of time and money - the proverbial “solution in search of a problem.” However, we have also seen some true technological advances and products that can immediately help farmers with their business. Here’s an example recent conversation:

Farmer: “Have you guys seen XYZ’s new software for planting season?”
AcreTrader Farming Operations Team: “Yes, but we noticed they were unable to complete their fundraising round, and they have recently gone through layoffs. It’s likely their product functionality and support will suffer. Have you considered solution ABC instead?”

A farmer's localized history and knowledge of the land is irreplaceable. We help our farm partners through our nation-wide knowledge of the agtech industry as well as the nuances of the legal, land improvement, and farm valuation pieces of the business. In short, we let farmers do what they do best and support them wherever we can.

National Presence and Brokerage

As mentioned above, we work with farms of all types and sizes. Farmers usually know their local market dynamics better than anyone around, but our national footprint and years of cumulative regulatory, valuation, and brokerage work help us present additional thoughts and assistance that might otherwise not be available. In addition, we maintain an incredibly unique and large set of relationships with individual and institutional farmland investors alongside a nationwide footprint of partners.

Conclusion

The above are just a few of the ways we work with farmers to make their lives easier and their businesses more profitable. However, every farm is unique, and so are the solutions for its situational improvements. If you are a farmer or farm owner, or someone interested in learning more about investing in farmland, please don’t hesitate to contact us anytime.

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We have watched with excitement and awe as the online commercial and residential real estate crowdfunding market has grown from practically nothing 5 years ago to a multibillion dollar industry today. As a whole, we view the real estate crowdfunding market as an exciting alternative asset for accredited investors, and we note that most platforms and offerings look great at first glance. However, buyer beware; those 13% IRR figures don't come without significant risks. Below we note several risks that may or may not be obvious when it comes to online real estate crowdfunding.

Leverage

As we note in our post "Leverage: A Dangerous Amplifier," debt is a great tool of modern finance that is not without risk. Most real estate crowdfunding sites offer properties with Loan-To-Value (LTV) rates of 75% to 80%, though some of them are even more levered. In an investment with an LTV of 80%, the owners' equity portion is only 20% of deal value, while the debt accounts for the remaining 80%.

While this leverage can amplify your returns, it also amplifies the downside. An economic recession, poor site selection, poor management, increases in local competition, government regulations, or even just a negative cycle in commercial real estate can drive down the value of the property by 20% or more pretty easily. If the value is down just 20%, this means that the investors' portion of the deal is worth ZERO.

Deal Terms

While often overlooked, the articles of organization and subscription documents can hold important information. Sometimes, the grizzliest of these limitations are buried in legalese that is hard to decipher. While most real estate industry terms are standard, look out for predatory terms or unfavorable treatment in the case of default.

Unknown Sponsors

Many of the well-known crowdfunding sites work with established multi-deal sponsors on their sites. However, that isn't always the case, as we have witnessed well-funded deals that relied upon sponsors that had little or no experience. Even in the case of well-experienced deal sponsors, local real estate knowledge is important, and we have seen examples of seemingly well-intentioned sponsors putting together dangerous looking deals in unfamiliar territory.

Due Diligence Limitations

For an example of the above, we recently came across a hotel recap and remodel offering from one of the industry-leading crowdfunding sites in a southern state. The sponsor had experience in neighboring Texas, but none in the target state where they were (successfully) raising millions of dollars to do a heavily-levered hotel deal. Unfortunately for the investors, and likely even the locally-inexperienced sponsors, there is a mostly-unannounced $100 million development being planned across the street that includes two hotels. At the time of capital raise, it is possible that only local developers knew the massive development was going to break ground soon. While the investors' pitch on fixing up an old hotel looked great on paper, a flood of hotel room supply across the street may end up destroying a lot of value... all because the developer was speculating in a new market.

Heavy Cyclicality

As multi-billion dollar commercial real estate lender Bank of the Ozarks said during its July 2018 conference call, competitors that are getting more aggressive with credit structures and pricing may "set of concerns across the banking industry." It is no secret that commercial real estate is a very cyclical industry. In fact, it is not uncommon to see the real estate industry go through 10%, 20%, or greater corrections (see chart below). For this reason, as well as the reasons listed above, we remain cautious about real estate crowdfunding online. Screen Shot 2018-07-21 at 3.34.09 PM.png

Note: The information above is not intended as investment advice. Data referenced herein and in the chart above is through year end 2017 and is sourced from Bloomberg and NCREIF, with additional calculations and analysis performed by AcreTrader. Past performance is no guarantee of future results. For additional risk disclosures regarding farmland investing and the risks of investing on AcreTrader, please see individual farm offering pages as well as our terms and disclosures.

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The farm crisis of 1985-1987 was amplified by large amounts of debt in the system, as farm price appreciation of the early 1980s drove heavy amounts of investment from speculating farmers that placed large amounts of leverage on their farms. When prices began to go down, this set into motion a spiral of defaults, forced resales, and lower prices. Debt-to-equity leverage ratios peaked in 1985 at nearly 29%. Compare that with today, where the USDA estimates leverage at a near-record low of 14%. Debt to Equity.png

This small amount of leverage, or total debt, involved in farmland makes the return profile even more impressive when compared to other assets like commercial real estate. While debt can often help amplify returns for real estate investors, it also greatly increases the risk. For example, if you buy a retail center with a 20% down payment, the other 80% is covered by debt from the bank. If the value of the property goes down by 20%, the value of your investment becomes zero. Not only that, but don’t forget you still owe the bank the other 80%. AT Debt.png

Unlike most real estate investments, typical plots of U.S. farmland have little or no debt on them. Typical properties on AcreTrader have no debt on them either, meaning investors own 100% of the subject property without the involvement of banks or significant debt.

Note: The information above is not intended as investment advice. Data in the charts above is through year end 2017 and is sourced from Bloomberg and NCREIF, with additional calculations and analysis performed by AcreTrader. Past performance is no guarantee of future results. For additional risk disclosures regarding farmland investing and the risks of investing on AcreTrader, please see individual farm offering pages as well as our Terms & Disclosures here.

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All things considered, time is our most valuable resource. We are all given a finite amount, and, unlike most resources, it cannot be recovered. To maximize the potential of this precious resource, we must be wise about how we invest both our time and hard earned money. Building passive income streams can be one of the best investments of both - eventually leading to financial freedom and greater control over your time.

Make money while you sleep

One of the greatest benefits of a passive income stream is that it requires very little effort to maintain and it generates automatic income. In contrast, active income streams often involve the direct exchange of your time for money. Most of us have to work to make a living. However, if we can only produce income while actively working, we leave ourselves exposed to the threat of being unable to earn in the event of an incapacitating injury or illness. If your goal is to achieve financial freedom and have greater control over your time, the more effort you put into expanding passive income streams the better. Not to say that this process will be easy nor require a short amount time to get started. No matter which passive income strategy you choose, you will likely have to invest significant amounts of time, earning little income in the beginning. But, keep in mind that after initial setup each income stream will continue producing income with little or no involvement, and in some cases, the underlying asset will continue to appreciate as well.

If you don't find a way to make money while you sleep, you will work until you die.

Warren Buffett

Diversify your portfolio

There are many ways to build passive income streams. Whether you are using your skills to make money online, investing for rental income, or in dividend stocks, you will be hedging your portfolio against more risky investments. However, the riskier investments typically have the potential for higher returns, so you likely wouldn’t leave them completely out of your portfolio either. The key is finding a balance to protect and maximize your portfolio value and sources of passive income are great at helping you achieve this. Diversifying your portfolio is a staple of good investment practices. You wouldn’t want to put all of your money in stocks because values can fall over 30% in a few months. By contrast, you wouldn’t want to place all of your money in bonds, even though they are less volatile. Your returns will be significantly lower than they could be if combined with investments in stocks. Experience shows that is best to have a mix of both, along with other asset classes like real estate. By also investing in non-correlated assets like farmland, which has historically increased in value when stock market values drop, you can provide balance to your portfolio and protect your overall earnings. In the end, the more you diversify your portfolio the less you expose yourself to risk. The right passive income streams are great tools for this because they typically offer low volatility, higher total returns than your standard “safe” investment, and generate income without active involvement.

Compound your earnings

The beginning of any passive income strategy is building a savings plan and sticking to it. Once you have a realistic idea of how much you need to make to cover your expenses, you can begin to look at additional income as fuel for the machine. This also gives you an idea of how much passive income will be needed to achieve your financial goals. As you continue to receive income from your day to day job and passive income streams, you can reinvest what you don’t need for your expenses to continue compounding its value. This takes discipline and dedication towards your goal, but over time is one of the greatest values of this strategy. The goal is to reach financial freedom, or the point at which you make enough passive income to cover all of your expenses. Not to say that passive income vehicles are the only way to get here. In fact, your investments should be diversified to protect you during different market cycles as mentioned above. However, having steady income outside of your primary job that you can use to make money while you sleep is a distinct advantage.

Conclusion

Passive income streams are crucial to your portfolio because they can generate predictable income with little maintenance, diversify your portfolio, and increase your overall cash flow. Remember, those who are the most successful are those who have the most control over their time. The more work you put into building passive income streams, the more control you will have over your precious time in the long run.

Learn more about the impressive diversification properties of passive farmland investments.

Note: The information above is not intended as investment advice. Analysis performed by AcreTrader. Past performance is no guarantee of future results. For additional risk disclosures regarding farmland investing and the risks of investing on AcreTrader, please see individual farm offering pages as well as our Terms & Disclosures here.

Why Are Passive Income Streams Important?