Happening NowAgricultural Land / Farmland

Working through whether $8,400 an acre pencils on cash rented farmland

A live scenario worth working through: 240 tillable acres in a corn and soy county listed at 8,400 an acre, well above a regional cropland average closer to 5,830. The seller's case for the premium is soil productivity in the top band for the county plus documented tile dating back to 2009. On the income side, say the current tenant pays 305 an acre cash rent on a one year lease that rolls annually, eleven years in place. Property tax runs 41 an acre. A farm manager fee at 6% of gross to handle the lease, tenant relationship and reporting leaves roughly 245 an acre net, which is about 2.9% on the purchase price before any appreciation. Paying all cash removes financing risk, and it's worth noting that at current farm loan rates the spread on borrowed capital in a case like this is often negative. A solar option letter frequently gets waved around in these situations, something like 1,100 an acre per year if a project gets built. When the option is unsigned and the interconnection timeline is entirely queue-dependent, it shouldn't be underwritten as income. An alternative often on the table is a larger, cheaper parcel, say 400 acres at 4,900 an acre with only 180 tillable and the rest uncruised pasture and hardwood. That pencils closer to 3.6% on the tillable portion alone, with real uncertainty on the value of the rest. The core question in cases like this is whether the premium buys genuine soil quality or simply reflects the previous buyer's optimism. Income investors chasing farmland without leverage should treat anything near 2.9% as closer to a savings account with weeds than a return worth the illiquidity.

priya_n21 PB2BPRO 21

Answer

nicole_adeyemi SS3APRO 13

On the solar letter, it matters what class of paper it is. An option gives the developer the right to sign a lease later, usually for a small annual option payment, and the big per acre number only starts if they exercise and build. The clause that matters is the exclusivity period and how many times it can extend, because during that window the ground generally can't be shopped to another developer, and drainage work or new structures may be restricted. Setbacks, decommissioning bonds, and whether the county allows utility scale solar on prime ag soils at all differ by state and often by county ordinance, so pulling the actual zoning text is the step before assigning the option any value. Underwriting the deal at zero for solar and treating any payment as a surprise is the disciplined approach. Also worth asking who owns the drainage tile outlets and whether any of them cross to a neighbor. That gets expensive in ways the soil map won't show.

nicole_adeyemi SS3APRO 13

3 replies

jessreyes12ActivePRO

The question I'd want answered before anything else is what happens the fall the eleven year tenant retires. His rent is a relationship price as much as a market price, and you're buying a one year lease. Have you asked the manager what three other operators within ten miles would actually bid on that ground, blind, no history? If the real number is $270 you're at 2.6 percent, and the whole case is appreciation.

jessreyes12ActivePRO

tashaford30 SG2CPRO 16

The 6 percent management fee is what's worth pushing on. Ask what it does beyond depositing one check a year.

tashaford30 SG2CPRO 16

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