From the desk:Agricultural Land / Farmland

Cash rent pencils to 2.9 percent on ground at $8,400 an acre

A broker sent me 240 tillable acres in a corn and soy county at $8,400 an acre. That's a long way above the USDA average cropland number around $5,830, and the seller's case for it is soil productivity in the top band for the county plus tile documented back to 2009 with maps.

The numbers I have: current tenant pays $305 an acre cash rent on a one year lease that rolls every fall, he's been on it eleven years. Property tax is $41 an acre. A farm manager wants 6 percent of gross to handle the lease, the tenant, and the reporting. That leaves me about $245 an acre net, so 2.9 percent on the purchase price before any appreciation. All cash, no debt, because at current farm loan quotes the spread is negative and I'd be buying appreciation with borrowed money.

The agent keeps waving a solar developer's option letter at me. Something like $1,100 an acre per year if the project ever gets built, but the option is unsigned and the interconnection timeline is whatever the queue says, which nobody will put a date on.

The alternative on my list is 400 acres two counties over at $4,900, of which 180 is tillable and the rest is pasture and mixed hardwood that has never been cruised. That one pencils closer to 3.6 percent on the tillable alone, and I have no idea what the back half is worth.

What I can't decide is whether I'm paying for quality or paying for the last guy's optimism. I want income without a second job, and 2.9 percent is a savings account with weeds.

Answer

1nicole_adeyemiPassivePRO5

On the solar letter, read 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 they can extend it, because during that window you generally can't shop the ground to another developer, and you may be restricted on drainage work or new structures. 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 pull the actual zoning text before you assign the option any value. I'd underwrite the deal at zero for solar and treat any payment as a surprise.

Also ask 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 you.

3 replies

2jessreyes12AU1APRO8

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.

1tashaford30PB2APRO7

The 6 percent management fee is what I'd push on. Ask what it does beyond depositing one check a year.