Des Moines, IA April 30, 2014 - A Wisconsin researcher has some tough questions of a new Farmland REIT. What is a company which just completed an 80 million dollar IPO to buy farmland doing encumbering newly acquired farms with a 50% debt load? Is it ever a good idea to encumber a farm with 50% debt? Where are the borrowed funds going? Is the loan going to affect the REIT investors whose investments are supposed to be secured by the farm? Is the same entity receiving the loan proceeds responsible for making the payments on the loan? Do farmers and investors truly understand the risks associated with lower commodity prices and the resulting lower rent returns and how that may affect the REIT values? Do investors and farmers understand the effects of contributing either money or land to a REIT that already has a high number of shares issued to insiders and how borrowing may further dilute participants beyond what would be prudent or safe? Have the Company financials been audited and are the historical rent assumptions based on arrangements with related parties?
If you've been contemplating selling your farm or becoming a part of a Farmland REIT as an alternative to an outright sale, at least one expert suggests you reconsider.
Meet T Allen Dyer of the Farmland Marketing Group. Dyer grew up in Wisconsin, where his mother’s side of the family were dairy farmers going back 100 years. His father spent his career at Transamerica Occidental Life Insurance, a company with nearly a billion dollars in farmland holdings. His family has been investing successfully in farmland since 1990. Dyer himself has been involved in the structuring and marketing of new investment offerings for more than 20 years and after reviewing a number of brand new Farmland REITs Dyer became so concerned that he contacted the Founders of the REIT, the Securities and Exchange Commission in New York and the Illinois State Securities Department where one of the new REITs already owns 33 farms. Dyer warns that this new REIT and others like it could harm further American farm families and could cause investors to lose, perhaps billions of dollars.
As an outside consultant, Dyer maintains an "arms length" distance from the people and companies he consults for; he does not handle money or hold director, officer or manager positions. His job description includes structuring, marketing and risk identification for new offerings. Dyer has spent the last 6 years traveling all over the United States interviewing older farmers. He and his employer ( a group of investors and farmers) have been working on alternative methods of obtaining liquidity for a generation of older farmers. What Dyer sees only weeks into one REIT's existence is, as he terms it, "frightening."
A REIT or real estate investment trust is a company that owns, and in most cases, operates income-producing real estate including; office buildings, apartment buildings, warehouses, hospitals, shopping centers, hotels and even timberland. The REIT itself is typically the general partner or controlling member over the parties who contribute their land into a Company (REIT). Members, or farmers in this case, who contribute their farmland receive some cash and REIT or partnership interests.
"Part of the sales pitch to a farmer is that this is good for them because the farmer will still own part of his farm. He will also own interests in other farmers farms within the REIT, therefor he is diversified" says Dyer.
Farmers contributing their land will also pay less in capital gains taxes by taking REIT or partnership interests as partial payment for their farms at sale.
Dyer says, "An important aspect for farmers to understand is that a REIT must distribute at least 90 percent of its taxable income to shareholders annually."
Here is the problem according to Dyer, "A farmer who contributes his farm to a REIT must pay rent to the REIT. The REIT or partnership interests that the farmer receives as partial payment for his farm and the value of those interests are based on the profitability of the REIT. The profitability of the REIT comes from the rents the farmer members pay. If the farmer members don't pay high rents, the REIT does not generate sufficient income to support a high market value or price. Remember, the REIT itself keeps 10% of the profits or rents paid by farmers. Rents actually must be bumped up even higher than those paid by other farmers operating independently outside the REIT to counter the 10% that is siphoned by the REIT." Dyer believes this is a serious conflict.
Additionally, Dyer believes that high partnership or REIT values are not particularly important to farmers anymore than high land values are. "A farmer who still farms does not concern himself with land values as they are a mirage unless he is going to sell or borrow."
Dyer asks, "Do farmers really need or want to be less profitable year in and year out because of high rent expenses to their REIT so that they can have valuable REIT or partnership interests they aren't going to sell?
According to Dyer "In reviewing a new REIT I saw significantly overstated rental income returns from years prior which are not a true reflection of current commodity prices or rents. Also troubling is the fact that all the farms presently owned by the REIT were owned by the insiders just prior to the creation of this REIT." This, Dyer fears, may be a red flag which could cause unrealistic expectations. http://seekingalpha.com/article/2126913-farmland-partners-ipo-offers-investors-unique-opportunity-to-own-farmland
Dyer states "If you are a farmer and plan on contributing your farmland into the REIT find out what the offering document claims other farmers are paying in rent. This will give farmers coming in an idea about what they will be paying in the way of rents per acre. "If you see a disparity between what the investors see as rents and what you as a farmer are being quoted by the REIT on a short term rental, run like hell...that's my advice. The short term rent is a carrot after which you are at the REITs mercy and their number one priority will be generating profits based on farmer generated rents."
Dyer says that he is equally concerned for investors who are anxious to invest in farmland. "This is not complicated stuff, the Company raises money to buy farmland. They then acquire farms with the cash they raise along with some of their stock or REIT interests . The investors and farmers who are part of the REIT are collateralized or secured by the farmland owned by the REIT. Simple, right? Again, "Not true" says Dyer, "If the REIT plans to borrow against the farmland as soon as it is acquired then you have effectively minimized or removed completely any collateral or security for the farmers and investors in the REIT. If the loan proceeds go to the affiliated management company and the REIT is left to service the debt with the rental income from the farm, this is an issue. This is being done at the REIT investors expense while the "insider" owned management company siphons all the cash without having an obligation to service the debt. These guys have only been publicly traded for 2 weeks. They are so brazen and bold they actually disclose their intention to borrow 50% of a farms value immediately after acquiring it. What was the purpose of raising money in an IPO if you are borrowing the minute you acquire a farm? What sharp farmer or investor would be involved in something like this? Farms with a 50% debt load don't survive. It's reckless to say the least. I shudder to think what might happen if this is allowed to continue for any length of time.
"I can see a farmer who is not particularly sophisticated being talked into contributing a farm he owns and controls 100% in exchange for some cash he may need very badly along with some REIT or partnership interests he is told will appreciate aggressively over time. What may actually happen is that the farmer will lose all control of his farm, he will be made to pay higher rents and the REIT interests he took as partial payment for his farm could be depressed in value" according to Dyer.
Dyer suggests farmers consider the fact that the guys that put these offerings together don't get involved unless there is a big pay day. The more hands "in the pot" the less money for everyone. Margins are already thin and another level of expenses is the last thing farmers need right now.
Dyer assures his group has a better path to liquidity for farmers in need.
For questions, more information or to schedule an interview with Dyer, call 563-271-2037 or e-mail at firstname.lastname@example.org