JF1665: Raising Money & Syndicating Farm Land with Chris Rawley
We’ve have talked, and will continue to talk extensively about the syndication process with real estate. For the most part, everything we talk about pertains specifically to multifamily syndication. We’re talking syndications again today, but this time it’s in reference to farm land. Chris and his company help farmers get farm land by helping them raise money via a syndication structure. Chris tell us about the different hurdles he and his company have to overcome to make these deals happen, with a great explanation of “cow math”. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
“You’ve seen one multifamily deal, you’ve seen them all, you see one agriculture deal, you’ve seen one agriculture deal” – Chris Rawley
Chris Rawley Real Estate Background:
- Founder of Harvest Returns – an agriculture investment platform
- Invested in residential, commercial, and agricultural real estate for 20+ years
- 26 years active & reserve Navy service, traveled to more than 50 countries
- Based in Fort Worth, Texas
- Say hi to him at https://harvestreturns.com
- Best Ever Book: The Lean Startup
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Chris Rawley. How are you doing, Chris?
Chris Rawley: I’m doing great, Joe. Thanks for having me on.
Joe Fairless: Yeah, nice to have you on, and looking forward to our conversation. Chris is the founder of Harvest Returns, which is an agriculture investment platform. He has invested in residential, commercial and agriculture real estate for 20+ years now. He’s got 26 years of active and reserve Navy service, so thank you sir for that. He’s traveled to more than 50 countries. Based in Cow Town, otherwise known as Fort Worth, Texas, where I am from.
With that being said, Chris, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Chris Rawley: Sure. Beautiful Fort Worth. We’re not experiencing the Arctic Vortex here, unfortunately, so…
Joe Fairless: [laughs]
Chris Rawley: After I got off active duty in the Navy, I worked for a large commercial real estate company and really caught the investing bug with real estate, in both active and passive investments. One of my philosophies has always been — after having been burned a few times in investing in various things, whether they’re stocks or real estate or whatever, is that I’m a firm believer in diversification.
As I’ve been investing in my own account for quite some time in different types of real estate, as you said, I began to look at post-2008 crisis, where we all kind of — even those of us that had been investing for a little longer, through some ups and down cycles, we all kind of had some moments there where we were afraid of what the future might look like in real estate investing, and maybe some doubts, but that drove me to look at a new asset class in the form of agriculture. So I started looking at “How can I invest in agriculture?”
It turns out it’s pretty hard. The best way to get into farming is to go out and buy a farm, but I was talking to a banker friend a few months ago and the average farm in the U.S. is 4,5 million dollars, so that’s out of the reach of most folks, especially new types of investors… So I had an idea in 2016 to create this platform to make it more easy to invest passively in income-producing agriculture, and we created this company, Harvest Returns. That’s been our focus for the past almost three years.
We help farmers across the country and even across the world raise capital… Basically, what we do is we syndicate farming projects. It’s just like a real estate syndication – we do all the legal documentation and we help these farmers promote their projects to our pool of investors.
Joe Fairless: I’m gonna really enjoy this conversation, because I’ve done about 1,600 interviews and I have not come across this yet… And I love it when I come across things for the first time, after interviewing so many people. You help farmers raise capital, so you syndicate farming projects. Please give an example of what we’re talking about here.
Chris Rawley: Sure. So we do both debt and equity projects, and our target farm size is anywhere between a half a million and a few million dollars. When we first started doing this, we found that that represents sort of an under-served market for farm sizes. There’s people that do sort of backyard farming or hobby farming–
Joe Fairless: When you say “farm size”, is that revenue the farmer produces on an annual basis, or what does that refer to?
Chris Rawley: No, that’s the actual capital raise.
Joe Fairless: Okay.
Chris Rawley: In some cases, even though we only may be raising $500,000, the actual farm is much larger. Just like in a real estate investment you might have equity combined with debt… So we’re working on a project where it’s about a $600,000 raise, but the actual project is several million dollars, with other forms of capital, and that’s just the slice that our investors are syndicating.
We structure debt and equity deals. We help the farmer — this one example I’m thinking of, we raised about half a million dollars in notes that were collateralized and secured by cattle… Interesting that it’s basically a private loan that we were able to offer, and offer our investors a nice, safe return. It’s collateralized by an asset that’s actually ensured, and hedged, and worth much more than that value of the actual security it’s collateralized against.
Joe Fairless: In that case why wouldn’t the farmer go to a community bank or credit union?
Chris Rawley: One of the things that we’ve come to realize is that the ag credit system and the traditional agriculture banking system hasn’t changed a lot in 50 years. We talked to farmers who are multiple-generation, third, fourth generation farmers and they’re basically using the same kind of loans that their fathers and grandfathers were using. A lot of them express dissatisfaction – especially the younger farmers – because they don’t have the track record, even though they’ve been raising cattle, or growing weed or whatever since the day they were born, riding on their father’s track record; they don’t have the track record to qualify for some of these loans, or they’ve got significant student debt, or… Basically, some of the more sophisticated people we’ve talked to, they’ve got a capital stack that’s got debt and equity, and they’re just looking to either increase the equity or bring in bridge-type loans, or segregate the investment. And that’s just that one example. I provided other examples where we’re raising equity to pay for the down payment on a farm, combined with debt, that sort of thing.
Joe Fairless: So as a limited partner (versus general partner), as a passive investor — and I know you know that, but I was just clarifying for the listeners… So as a limited partner, when I’m evaluating a deal real estate-wise – let’s just say it’s a multifamily deal – the business model I come across is usually the same, and that’s a value-add business model. Go in, renovate the interiors, increase rent etc. What is the typical business model for one of these investments?
Chris Rawley: In some cases we’re doing development deals. An equivalent would be buying a raw piece of land and building an apartment building or whatever on it. In our case, they’re buying a raw piece of land and building, say a hydroponic greenhouse, or an aquaculture operation. That is one of the more niche things that we’re doing, more of these specialized projects.
One of the things that’s going on with agriculture right now is consumer tastes are changing. It’s all about food production, right? So people are getting very specific in what they wanna eat. They want gluten-free, they want high-protein, they want veganism, they’re a pescetarian – you name it, there’s a specialized diet these days… And those specialized diets require specialized growing methods, and consequently, we’re finding that these specialized projects are not well-served by the traditional banking system. That’s kind of where we’re finding our niche – in raising capital in creative and agile ways.
We could take an existing farm project where there’s just some infrastructure; maybe a farmer wants to expand the land under the acreage he/she has to add more livestock, or add more crop production, but it may also be a development project. So in some ways it’s a lot like real estate, and in other ways it’s quite a bit different.
Joe Fairless: And for anyone who wasn’t sure what hydroponics is – it’s basically growing plants without soil; so you’re using minerals to do that. How much equity have you raised through your platform to date?
Chris Rawley: We’ve been in business for almost three years. We launched the platform in late 2017, and we’ve raised about a million dollars for a few different projects. We’ve got a pretty significant deal flow that we’re winnowing down… Obviously, doing a lot of due diligence on it to make sure that we only list the best projects for our investors.
Then we’re also pretty excited about putting together an opportunity zone fund. We’re gonna be one of the first – if not the first – agriculture-focused opportunity zone funds.
Joe Fairless: Oh, cool. So just so I’m understanding – you’ve been in business for three years and you’ve in total raised approximately one million dollars in equity across your projects?
Chris Rawley: Yes.
Joe Fairless: What was the project that took up the majority of that one million?
Chris Rawley: That was that cattle operation that I just discussed. I’ve got some projects now, unfortunately I can’t talk about publically because of SEC regs, but we’ve got some other ones that are more specialized, and we’re looking forward to getting those funded here in the next few months.
Joe Fairless: So let’s talk about this $500,000 in notes that was collateralized and secured by cattle. What did they do with that 500k?
Chris Rawley: That one was purely to purchase cattle for a grass-fed operation. The project sponsor had already had land, he had already had some other equity investors involved, and owned the land, and the infrastructure, and this was simply to purchase cattle on a three-year note. Basically, almost like an annuity or a short-term loan. We structured it that way to kind of get our investors in and out.
Most agriculture is a long-term sort of investment, and one of the things that kind of differentiates us from, say, if you go out and buy a piece of land and lease it, is that we are structuring these more like commercial real estate or multifamily deals where you can kind of get in and get out with an exit in a reasonable period of time.
Joe Fairless: Okay. So this farmer put up $500,000 worth of cattle as collateral in order to buy more cattle?
Chris Rawley: Well, the note was secured. Basically, you’re buying — the thing about cow math is… You know, we talk about different types of math, because you’ve seen one multifamily, you’ve seen them all; with agriculture, you’ve seen one agriculture project and you’ve seen one agriculture project.
Joe Fairless: Right. [laughs]
Chris Rawley: We’re learning a lot, although some of us in the company have some farming background, or spent a lot of time on a farm growing up. We’re not agronomists, that sort of thing, so we spend a lot of time learning about financial aspects of different types of crop production and livestock production. For cow math, you buy cows, and you’re feeding them; in this phase they’re being fed grass and they’re being finished on grass. A high-demand product right now is this grass-fed cattle that a lot of people want, versus grain-fed cattle. And they grow… So they start out at, say, $700/head, and then a couple years later they’re all fattened up and ready to become steak dinner; they’re maybe $1,700, $2,000. And don’t quote me on the math… There’s probably some cattle ranger out there saying “That’s all wrong!” I don’t have it in front of me…
But basically, you’re buying an asset at a price, and then it grows… And there’s not much volatility in, say, grass-fed, higher-premium prices than traditional prices. So that’s where your security is.
Joe Fairless: Let’s talk about something that you mentioned… “You’ve seen one multifamily deal, you’ve seen them all. You’ve seen one agriculture deal, you’ve seen one agriculture deal”, because they’re so unique… So the challenge, I imagine, is building a scalable business and qualifying these deals since they’re so unique… How do you do that?
Chris Rawley: When we first started, we didn’t really know what our niche was gonna be. We’re still, as many young companies do, we’re still trying to figure out our niche; what is something that we can scale and do. And we do firmly believe that the diversification our platform provides is important, but at some point or another you wanna sort of focus so you can scale rapidly… So what we’re starting to focus in now is these specialized sorts of ag production.
We generally don’t do just raw crop commodity… When I say “raw crop”, this is commodity-based products that most people are probably familiar with, when you drive through the plains Midwest of corn, wheat, sorghum. The problem just from an investor standpoint with that — don’t get me wrong, if you own farmland, you can make a lot of money if you hold it for a long time. In fact, it generally outpaces the returns of stocks and bonds… But the problem with that is it really depends on commodity prices. Raw crops farmers have been sort of hurting for the past few years, because the commodities have been in a slump; but when you get into specialty production… Say those hydroponic greenhouses, or something like grass-fed cattle – you’re seeing higher returns. So from the investor standpoint, that scenario if you’re looking to grow your portfolio passively, that’s where you wanna be.
Joe Fairless: Smart. That makes a lot of sense. When you are educating your investors – you’ve raised a million dollars through your platform – how do you help them become educated on how to qualify a deal, on whether they should or shouldn’t invest?
Chris Rawley: Yeah, education is a huge part of what we do, because this is a new asset class for a lot of people; it’s ubiquitous, right? Just like real estate – everyone’s gotta have a roof over their head. Everyone has to eat, everyone’s probably got a cotton T-shirt, everyone lives in a house made of timber, some portion of it… So it’s ubiquitous, but hardly anybody invests in it, so it’s important to understand what you invest in.
We’ve got a lot of educational content on our blog. When we do our offerings, we really help the sponsor explain what exactly they’re putting in front of the investors in terms of what the market is for a particular crop, how it’s being produced, what makes their project unique, what is their competitive advantage, and then of course the financial aspects – how are the investors gonna get their money back, and the growth of the project.
So we’re big into education. We want people to learn about the food system, how their food is produced, and connect to it by investing in it.
Joe Fairless: From a regulatory structure standpoint, what type of structure do you have with your platform?
Chris Rawley: We’re doing Regulation D, 506(c), which probably some of your listeners, if they’ve invested in, say, a real estate syndication, are probably familiar with those terms. Primarily focused on accredited, although we do have some projects that are available to limited numbers of unaccredited investors. And you know, accreditation is based on net worth, investable assets and/or annual income, there’s limits for those.
But we’d eventually like to get into different flavors of offerings, and there’s Reg A+, Reg Crowdfunding, there’s all these different things that would allow retail investors… Although I will say, even though we’re primarily focused on accredited investors, our ticket sizes or our minimum investments are fairly low. And when I say low – anywhere between, say, $5,000 and $25,000. We did that because 1) we wanted to make this asset class more available to more investors, and 2) we know that not everybody is familiar with it, so we wanted to enable you to put your toes in the water with a small amount of capital before you write a check for 100k, or 200k, or 500k.
There’s existing farmland funds out there that only take half a million dollar ticket sizes, and that’s not necessarily for everybody
Joe Fairless: When you’ve mentioned earlier that you’ve got some ongoing offerings, but you can’t talk about them, I thought that 506(c) can publically advertise… So how come you’re not able to talk about your current offers?
Chris Rawley: Well, the one I’m specifically referring to is a 506(b), actually, so we can’t…
Joe Fairless: Oh… There’s the rub.
Chris Rawley: Yeah… So we do have — the one exciting 506(c) that we do have coming up is our opportunity zone fund, and it’s gonna be specializing in sustainable agriculture. Sustainable agriculture is some of those things that I’ve mentioned, whether it’s hydroponics, or grass-fed, humanely-raised livestock. We’re looking forward to launching that in the next couple of months, and getting that in front of people.
The thing with opportunity zones, if people aren’t familiar with them, is they’re very tax-advantaged. They’re sort of a new flavor of 1031 exchange, where you saved your capital gains, but it’s from my perspective much more flexible. With an opportunity zone fund you take capital gains that can be from the sale of real estate, it could be from the sale of stocks, it could be from the sale of business – basically, any type of asset – you roll it into that fund and there’s sort of three main advantages.
One is that tax deferral of your recognition of your taxes, so you don’t have to pay any taxes on that capital gains till December 31st 2026, I believe… I’m not sure how they came up with that date. The second is a step up in basis; basically, if you hold money in that opportunity zone, that gain for five years – you get a step-up in tax basis of 10%, if you hold it for seven years you get a step-up in tax basis of 15%… And then there’s also a permanent exclusion; this is probably the best. It’s a long-term thing. If you keep that money in there for ten years, any gains on the money invested, you basically pay zero capital gains.
For some investors that are sitting on some gains from whatever – sale of a piece of real estate, or whatever – opportunity zones are a big deal. We’re really excited to be really the only company that’s focused on agriculture in an opportunity zone. Most are real estate-focused.
Joe Fairless: You’ve been in business for less than three years, but you have brought a million dollars in equity. What’s been the challenge for growth? Is it lack of deals, or getting the equity lined up? Because I would imagine if you had a lot of equity and a good deal flow, there would have been more than a million dollars in equity for the last three years.
Chris Rawley: The first year we basically spent gathering some initial deal flow and kind of figuring out what we want to do, and getting all the technical aspects of our platform in place, so I’d almost write that year off. The second year, a little, but we have a pretty significant deal flow. When I say “significant”, hundreds of farmers who wanna raise over a billion dollars. Now, we’ve gotta qualify that deal flow, right? We’re gonna do due diligence on it, pretty significant due diligence.
Part of that due diligence is “Can those sponsors pay our listing fee?” Because we’ve gotta make some money. We’re not a broker-dealer, so we can’t take commission-based fees. So we’re qualifying that deal flow, and it’s accelerating, and so now we’ve gotta get out in front of investors, and as I mentioned earlier, part of that is educating them on why they should invest in agriculture. There’s some compelling reasons for that I can get into…
Joe Fairless: Why? What are the compelling reasons?
Chris Rawley: Okay, so the first is sort of a longer-term, strategic reason, just from demographics. Like I said, everyone’s gotta eat; the population continues to grow. In 2050 we’ll probably be sitting on ten billion people that need to be fed, so that’s a significant growth in just the population of food consumers.
Then there’s the other aspect of that – as populations across the world get wealthier, whether that’s in the U.S. or any sort of emerging country, they tend to eat more protein, and they also shift from plant protein to animal protein as their wealth increases. That results in more land is needed to produce food, to produce livestock, and along with that is urbanization. People have to live somewhere, and that mostly results in these urban areas sprawling out and covering what was one arable farmland. They’re not making any more land, as they like to say, so land is shrinking…
And then, as I said, increasingly specialized diets – that’s an opportunity from an investment side. So the second piece I think agriculture is compelling is just the return aspect. As I said, U.S. farmland, that little particular piece of the asset class has surpassed the Dow and the S&P 500 over more than a decade. It’s also competitive with real estate returns over the long-term.
And finally, diversification. I’m a huge believer that the best way to reduce your risk is to diversify. That’s diversify across asset classes, geographies and property types. That all applies in the agriculture, as well as real estate.
Returns from agriculture are positively-correlated to inflation, just like in real estate, and they’re negatively-correlated, for the most part, with other financial assets, stocks and bonds.
So if you look at the alternatives – multifamily, everybody loves multifamily; smart investors love multifamily. I do. I’ve invested in it, I’ve done deals… But cap rates are compressing, so people are looking for alternatives, and I think agriculture can be one of those alternatives.
Joe Fairless: Yeah, fascinating. I’m really grateful that you were on the show and we’re having this conversation. I love learning about new stuff. What is your best real estate investing advice ever, based on your background and your current focus?
Chris Rawley: Yeah, I would say diversification. Don’t put all your eggs in one basket. There’s ways to diversify; to be focused, but also diversified, if that makes sense. You can focus on multifamily, but if I was in multifamily – and I am – don’t look at one market, because people tend to momentum-invest, and then they keep riding that momentum until it drops off, and that’s not necessarily good. So consider putting your money into different markets, into different asset types and geographies and different property types.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Chris Rawley: Okay, let’s go.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Best ever book you’ve recently read?
Chris Rawley: There’s a book called The Lean Startup, by Eric Ries. I’ve got a lot of favorite books, but that one is kind of our mantra of experimenting and iterating as you do a startup company.
Joe Fairless: Best ever deal you’ve done?
Chris Rawley: I did a small commercial building. I just sold out of it last year, and I ended up having a tenant that was going to leave, so I kind of freaked out, and then I ended up marketing that space, and ended up having a new buyer buy the building, and I made pretty good, ridiculous returns on that.
Joe Fairless: What’s a ridiculous return?
Chris Rawley: That was like a 300% in a year and a half, two years. Something like that.
Joe Fairless: That’s a ridiculous return. What’s a mistake you’ve made on a transaction?
Chris Rawley: I told you, I’ve been doing this for a while; I’ve been in a lot of different types of property. I tried to flip a house – and this was way before people were doing short sales, and all those things. I didn’t know what a short sale was, and I just didn’t negotiate with the bank. I had an opportunity to do a better job and negotiate it but I didn’t, and I basically just kind of broke even on it.
Joe Fairless: Best ever way you like to give back?
Chris Rawley: Our current focus now is helping farmers stay in farming, and new farmers. That’s what we’re doing to give back right now – getting more people into farming, and keeping them in business by giving them alternative sources of capital.
Joe Fairless: And how can the Best Ever listeners learn more about what you’ve got going on?
Chris Rawley: Yes, the best way is to go to harvestreturns.com. We’ve got a lot of educational material on there. You can set up an account and look at our current offerings. And of course, we’re also on social media – we’ve got Twitter, and LinkedIn, and Facebook, and a YouTube channel with some educational videos… Pretty much all of those.
Joe Fairless: Well, thank you so much for being on the show, Chris. I really appreciate you discussing your business model and your focus, and how you syndicate farming projects. And the ways that you all differentiate your projects and where you focus, which is the specialty production, versus the raw crops that get more commodity prices… Just educating, I imagine, a lot of the Best Ever listeners on this. Certainly me.
Thanks again for being on the show. I really enjoyed it. I hope you have a best ever day, and we’ll talk to you soon.
Chris Rawley: You’re welcome, Joe. I appreciate it.Follow Me: