Leasing diversity

This week I have spoken to various contacts about the buy-and-lease farmland investment strategy on the back of a new report released by Colliers International, the real estate services company, which is promoting the strategy in Australia.

The approach provides benefits to both investors and farmers: it’s more passive than taking on farm production risk and it can help to release capital among the farming community to expand operations or help first-time farmers access land – something Western Australian farmers are positive about, according to a recent survey.

And some investment firms are now turning their attention towards this strategy as an addition to the own-and-operate model.

This idea is nothing new – I first extolled its virtues last April – but it is still relatively underdeveloped. Andrew Hill, co-founder of National Land Lease, a firm dedicated to matching the two sides, thinks that it takes time for people to understand and change their mindset around farmland ownership. “Some people find it tricky,” he said.

The relatively few examples to draw on can’t help and there are numerous leasing strategies to consider, as reflected by the diverse models employed in the US.

In an interview with David Gladstone, founder of Gladstone Land, the first listed farmland REIT, I discussed the trust’s leasing strategy. The REIT implements three- to 10-year leases and Gladstone told me that many tenants are happy with 10 years so they can secure the farmland for a long period. Under a 10-year lease, the rent will increase each year in line with inflation and is subject to further adjustment every three years if needed.

Gladstone operates mainly on the west coast of the US and in Florida, although it also has some holdings in the Midwest. Its leasing strategy contrasts with other managers that tend to employ one-year contracts such as TIAA-CREF does across much of the Midwest. This has largely resulted in the same tenant renewing their lease over 15- to 20-year periods, according to sources.

At Farmland Partners, the NYSE-listed REIT, the standard is a flat, three-year lease. “We feel that it strikes a good balance between giving the tenant a good operational horizon and us the ability to capture lease increases,” Luca Fabbri, chief financial officer, told me.

There are also of course various different strategies within these terms such as sharing the upside of production in a crop sharing arrangement. But just looking at the term lengths alone, Australian investors and farmers have a lot to consider.

There are strong arguments for medium-to-long-term leases that enable a lessee farmer to have a greater sense of ownership over the land he is farming and therefore take more care over its management. “Three- to five-year leases engender greater stewardship of the land, while retaining a competitive element to prevent complacency,” said Jonathan Pendock, chief executive of Vulpes Agricultural Land Investment Company.

On the flipside, the one-year contract system is a good way to extract more value for investors when farmland and commodity prices are increasing, but could put the landowner in an awkward position if the reverse happens and farmers have no obligations beyond 12 months.

As a much more entrenched system among farming communities in the US, it would be no surprise were leasing contracts to differ overseas. As one source put it: “there is an element of protocol and precedent”. And the psychology in moving from an owner-occupier farming community to one dominated by tenant farmers is also worth bearing in mind.

But there still may be merit in using the US market as a reference point as to which strategies have produced consistent returns, which have properly incentivised the farmer as a caretaker of the land and so on. It will be interesting to see how this market develops.

What is your view? Which leasing term do you employ and why? Get in touch at louisa.b@peimedia.com.