{"id":465,"date":"2022-06-23T07:49:29","date_gmt":"2022-06-23T07:49:29","guid":{"rendered":"https:\/\/bravantefarmcapital.com\/?page_id=465"},"modified":"2022-06-23T22:56:52","modified_gmt":"2022-06-23T22:56:52","slug":"value-add-strategies-for-farmland","status":"publish","type":"page","link":"https:\/\/bravantefarmcapital.com\/education\/value-add-strategies-for-farmland\/","title":{"rendered":"Value-add Strategies for Farmland Investments"},"content":{"rendered":"\n
Most real estate investors are at least loosely familiar with the concept of “value add” investing which is, in short, a real estate strategy in which an operator purchases a property and then makes various improvements to increase the profitability of the asset. These improvements can run the gamut, from light renovations to wholesale redevelopment of a property. In the multifamily realm, this might look like replacing outdated kitchens, baths, and fixtures. Value-add investments can also be targeted toward operational improvements that result in stronger returns.<\/p>\n
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Value-add farmland investing is no different. The strategies deployed for farmland may look different, but the concept is the same. It usually entails making some combination of land, crop, resource and\/or operational improvements that, in turn, generate stronger returns for investors. Rather than renovating kitchens like someone might with a value-add multifamily deal, a farmland operator might instead redevelop the land by planting higher-value crops. But again, the goal is the same: to increase the value of the property.<\/p>\n\t
Sign up to our educational newsletter and be among the first to learn of our investment opportunities.<\/em><\/p>\n\t\t\t\n\t\t\t\t\t\t\tLEARN MORE\n\t\t\t\t\t<\/a>\n\t\t\t\n Value-add strategies should be thought of along a spectrum. On one end, an operator might make modest, low-cost property improvements like increasing the amount of tillable land, optimizing irrigation, or employing a different pruning regimen. At the other end of the spectrum, an operator might make costlier investments such as clearing old, lesser productive trees from the land – for example by removing those producing raisins and redeveloping a farm to grow higher margin crops like Cara Cara oranges or stone fruit, like plums.<\/p>\n While the value-add strategies for farmland can run the gamut, there are a few key tactics that farmland operators will generally consider.<\/p>\n A significant portion of California Central Valley farmland is owned by long-term operators. In many instances, the farms have been in the same family for generations. Some of the crops being cultivated today are no longer as profitable as they were in years past, but the returns are sufficient for the current owners’ needs. These types of farms are acquisition targets for Bravante Farm Capital in much the same way a 20-30 year vintage apartment building owned by the same person might be a target for a value add multifamily company.<\/p>\n <\/p>\n As farmland increasingly trades for a premium, it is more important than ever for the new operator to identify the highest-value crops for that farm based on climate, water availability, soil conditions, crop profitability, and consumer demand.<\/p>\n <\/p>\n A savvy farmland operator will be able to identify the highest-value crops for any given block of land. Those operators also need to carefully monitor market trends. Just as office trends wax and wane-like the preference for open office space and communal work areas-so do preferences for specialty crops. While specialty crops can be highly profitable, here at Bravante, we focus on those that have predictable, long-term demand like lemons and mandarins, for example. This helps in maximizing long term profitability while reducing income volatility that can come from planting row crops that are more susceptible to commodity pricing variations driven by consumer demand.<\/p>\n Another way farmland operators can add value is by vertically integrating farmland operations and this means by owning the packing facility too.<\/p>\n <\/p>\n By way of background, vertical integration includes all the stages by which produce grown on the farm reaches the consumer’s table. Consider this flow chart below:<\/p>\n <\/p>\n <\/p>\n Whether a farmer has owned his land for decades or, like Bravante Farm Capital, is a value-add player, both grow crops – stage #1 of the process.<\/p>\n <\/p>\n Once the crops are ready for market, they are harvested at the farm, stage #2, and transported to a packing facility, stage #3. At the packing facility produce is sorted by size, sugar content, appearance, and other qualities, and packed accordingly so that pricing can be set according to overall standard of the produce – stage #4.<\/p>\n <\/p>\n Once the produce has been sorted it is packed into boxes or bags and boxes, branded according to the end customer, typically the retailer, stage #5, and then shipped by truck or, for our overseas customers, by ship, in stage #6.<\/p>\n <\/p>\n The packing function typically includes all five stages 2-6 in the diagram above, from harvesting to shipping.<\/p>\n <\/p>\n Ownership of a packing facility is a major capital commitment that only larger scale, institutional caliber farms can afford to own outright. Here again we see parallels with the multifamily world. A sponsor owning and operating 3,000 apartment units, for example, can afford to have in-house architects, construction teams, and maintenance staff, but someone who owns only 10 units cannot.<\/p>\n <\/p>\n In the same way, a smaller scale farm such as those we are acquiring, has a competitive disadvantage because it is impractical for them to own their own packing facilities. They must depend on independent packers and are, therefore, subject to the whims of these companies. Maybe the packer does not show up to harvest at just the right time in a crop’s lifecycle, arriving too early or too late to capture the optimal quality of fruit from the trees. Maybe they only harvest half a crop one day and then decide they have enough other customers to handle the demand their own downstream customers want to buy.<\/p>\n <\/p>\n And here, yet again, we see a parallel with the world of bricks and mortar real estate ownership and development. A small-scale real estate sponsor needing to build a new building, renovate an old one, or simply add upgrades to an existing facility is subject to the whims of his general contractor who, in turn, is subject to the whims of his sub-contractors. Maybe the general contractor has too many jobs and delays showing up on site for a few days. Perhaps the plumber is backed up (if you’ll forgive the pun) and is a no-show when scheduled causing a ripple effect in the entire project timeline.<\/p>\n <\/p>\n A large-scale bricks and mortar developer will either have purchasing power leverage over their general contractor and sub-contractors or will own and operate those functions themselves – just as we own the packing facility at Bravante.<\/p>\n <\/p>\n Rather than simply growing crops that are then packed, sold to, and distributed by independent packers, institutional scale, vertically integrated farms like Bravante have brought these functions in-house. This gives us economies of scale because we can harvest, pack, and ship all the farms we acquire using our one packing facility (with some minor exceptions), which reduces costs at the farm\/ranch level and so increases profitability.<\/p>\n <\/p>\n This also allows us to sell our produce under private brand names for a premium-one we can charge given the quality-control measures integrated into our packing operations. Furthermore, by owning the packing facility, we are control the harvesting process, stage #2 in our chart above. This allows us to decide the optimal time to harvest produce from our own farms to ensure the highest possible quality produce is delivered to our customers while minimizing waste at the farm, and so maximizing profits to our investors.<\/p>\n <\/p>\n To be clear, owning the packing house is not the be-all and end-all of successful farming. The trifecta of owning good farms, with a good packing house, and good operations and sales is what drives maximum profit to the bottom line and returns to investors.<\/p>\n Technology is transforming every aspect of the commercial real estate industry. Farmland is no exception. The use of “AgTech” – hardware and software specifically designed to for agricultural purposes – can dramatically improve the profitability of farmland.<\/p>\n <\/p>\n\n\t\tValue-Add Strategies that Boost ROI of Farmland Investments\n\t<\/h2>\n\t
\n\t\tRedeveloping Farmland with Higher-Value Crops\n\t<\/h3>\n\t
\n\t\tVertically-Integrating Farmland Operations\n\t<\/h3>\n\t
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\n\t\tAdding Value Through AgTech Innovations\n\t<\/h2>\n\t