AcreTrader Land Investment Categories

This article was edited to meet broker-dealer compliance guidelines in April of 2023.

Below we break down the AcreTrader investment categories. These categories are risk profiles within the alternative investing space based on AcreTrader subjective views of specific risks mentioned within each category. All investing involves risks, including the complete loss of principal. Alternative investments are highly speculative and are not suitable for all investors.

Chart shown is for illustrative purposes only and not intended to represent the result of an actual investment. Categorizations are based on AcreTrader subjective views of specific risks mentioned within each category. All investing involves risks, including the complete loss of principal. Alternative investments are highly speculative and are not suitable for all investors. See additional risk disclosures regarding farmland investing and the risks of investing on AcreTrader.

AcreTrader defines risk as a permanent loss or impairment of capital, and therefore we attempt to assess risk through factors that could cause asset loss, diminution in value, or impairment. We use the following terms to describe categories of investments on the AcreTrader platform: Core, Core Plus, and Dynamic. These categories vary with respect to the physical attributes of a property, its location, the hold period for the investment, and the amount of debt that may be secured to improve it. Note that while these terms do share naming conventions like those used in Commercial Real Estate investing, their characteristics are different for farmland, timberland, and bare land.

The categorization of Core, Core Plus, and Dynamic investment strategies are a way of providing investors with information about the risk/return profile of their potential investment. The table below is intended to aid in the general understanding of how AcreTrader investment strategies relate to one another and is not meant to be representative of any particular investment. Investors can use a variety of strategies to suit their needs and goals. What strategies investors choose to use depend on their own personal financial goals, risk tolerance, and time horizons. We encourage you to review the following information carefully and contact us with questions at info@acretrader.com.

The broad considerations we evaluate when assigning a category to a particular investment include the following:

Regional:

• Is the property located in a prime growing region for the given crop/tree type?
• Is there a significant presence of operators such as farmer or tenant density or institutional capital?
• Is there sufficient infrastructure to get the crop to market such as hullers, packinghouses, grain storage, reasonable crop basis, roads, sawmills, etc.?
• Is there a potential for extreme weather risk such as hurricanes or flooding that could create an impairment?
• Is the soil well suited to the given crop?

Water:

• Is there sufficient and dependable/sustainable supply of water on a cost effective basis?

Commodity:

• What is the marketability of the crop type and the quality of the income stream based on the crop produced?

Operational:

• What is the volatility of the income stream? Is income earned via cash lease arrangement, crop share, or pure operational exposure?
• Are large amounts of working capital needed?
• Is there input cost exposure?

Financial Leverage:

• Are the equity holder’s rights subordinated by debt? If so, to what degree?

Improvements:

• Is there potential liability from improvements on the land that could drive a capital impairment?

Development:

• Is capital being deployed to repair or add improvements such irrigation, tiling, permanent crops, grain bins, etc.?

Non-Farm Income:

• Is there a risk of income loss associated with non-farm operations?

Investment Categories:

Core

Core investments focus on owning land in well proven and developed regions for the given crop type. This typically includes a significant presence of growers, operators, and investors within highly desirable/liquid land markets as well as strong natural resources (e.g., water access and soil quality) and developed infrastructure for the given crop type. Typically, Core investments do not expose an investor directly to commodity or input cost risk and operate under a lease or flex lease structure. Core investments contain no leverage and generally have minimal capital associated with improvements. The cash flow profile of a Core offering generally provides the investor with annual cash flows generated through yearly payments from the operator for the rights to use the land. Additionally, the investor is crop-agnostic throughout the tenure of their investment, which can provide safety during select market cycles and periods of crop price deflation.

The majority of the investment return is historically generated from land appreciation. Recurring rental income, lease structure, and minimal capital expenditure can provide a hedge to investors during periods of rising inflation and market volatility. Hold periods are generally 5-7 years, and leverage is not a factor with these types of investments, allowing Core farmland investments to historically be less volatile than investments in the other categories.

Debt: < 5% of Loan-To-Value

Core Plus

Core Plus investments target higher returns by taking modestly more risk, typically associated with either the investment’s cash flow profile or expected capital expenditures. A Core Plus investment could include more operational exposure than Core, the use of minimal financial leverage, and/or value-added improvements.

Capital can be required at the beginning of an investment for modest capital expenditures with the intended outcome of increasing the productivity and intrinsic value of the land. Like Core investments, hold periods can be relatively long, e.g., 5-10 years. Leverage is typically minimal if used at all, and contributions to one’s return is mixed between income and appreciation.

Debt: < 20% Loan-To-Value

Dynamic

Dynamic investments seek to generate high returns with relatively high risk related to improvement plan execution, property operations, and the source of cash flows. Dynamic investments target properties with high development or redevelopment potential. These include agricultural properties which have underperformed due to physical deficiencies or operator underperformance, often allowing them to be acquired at a discount to the intrinsic value of the property. Capital expenditures can be a more meaningful percentage of the initial investment amount to fund value-added improvements such as development or redevelopment work. Value can be created by successfully executing an improvement plan which results in renovating the physical land (including any fixtures or appurtenances) and re-marketing the property, potentially even for an alternate use.

The most traditional method of Dynamic investing is generally permanent crop farms in which investors partner alongside operators. Hold periods tend to be longer (5-10+ years), as it can take time to refurbish the land or for the crop to reach maturity in the case of permanent crops or timber. Once operations are stabilized and a new, positive track record is established, the land can be sold, and value can be realized. Dynamic investments are generally exposed to commodity and operational risk, in addition to improvements. Finally, Dynamic investments may use financial leverage ranging from 20%-60% of Loan-To-Value. Return potential from Dymamic investment strategies are driven by income uplift rather than appreciation.

Debt: 20-60% Loan-To-Value

All investing involves risks, including the complete loss of principal. Diversification does not guarantee a profit or protect against loss in a declining market. It is important for each investor to review their investment objectives, risk tolerance, tax liability and liquidity needs before investing.