Land Holding Corporation

Has anyone ever considered what the cashflow of something like Farmland LP would be?

I am not sure if the numbers can make sense. Let's say that the price per acres is $2000 and one can rent it for $55/acres (I am throwing a number here), the return on the investment without even taking the taxes off is 2.75% per year which is pretty low for most investors.

I've crunched some numbers around with different plans/ideas involved. I'm finding 10% to be a high rate of return in many scenarios, but the land has to be had for a song.
The best rate of return I'm finding is with owner-operators and sharecropping/cooperative efforts.
Famland LP uses economies of scale to their advantage. The scenarios I tinker with involve small plots with 1 to 200 owners.
Just a farm company can perform to some degree, but the return becomes the priority. This is fine when the investors are megafunds and pension plans.
When the a group of people organize to operate a farm, the ancillary benefits become the dominant factor in making the endeavor worthwhile.

Using some real numbers from Purdue's annual land price survey in 2013 an acre of average farmland in west central Indiana went sold for about $9,000 while the rent on that same acre of land was $282. Property taxes on farm land are not based on what the land actually sells for, and instead are calculated on a government specified base rate. For 2013 that base rate was $1,810, and Indiana has a 2% property tax rate on farm land, so taxes on that acre of land would be about $36 ($1,810 x 2%) for a profit of $246. Even ignoring the taxes due on the rental income, that $246 would be a 2.7% rate of return on the $9000, which doesn't seem too bad until you realize the inflation rate for 2013 was about 1.5% thus bringing your real rate of return down to 1.2%.

That being said, farm land has been a good investment for the past 20 or so because people have been willing to pay more and more to buy the land regardless of what they are getting in rent. In many ways, buying farmland today is a lot like buying residential rental property in the San Francisco area. In both areas, the annual rent off the property is running about 3% of the purchase price, and investors are buying these properties not because of the rental income, but because they think they will be able to sell the property for much more than they paid. Sometime this is called the "greater fool theory." Side note: given equal rents, I'd much rather rent farmland because your farm tenant will never call you in the middle of the night about a leaking water heater...

While an increasing world population and a very fixed quantity of farm land bodes well for the long term (50+years) increase in farmland value, there are several factors that could seriously decrease the value of farmland in the next 10 years. For example, rising interest rates or a rapid decrease in ethanol demand, could cause a 1970s/80s type of farmland crash.

What John said.

Looking at Farmland LP, a lot of numbers and profit forecasts on their website are based on the growth of value of the land, not it's actual cashflow. This is the type of business that only thrives in market environments where the farmland constantly appreciates and the interest rates are low.

But their assets are secure, and any drop in farmland prices is going to be temporary, and minimal.

If the land they own is prime farmland, I can see decent cashflow if the land was bought for cheap (aka a distressed property) and a bit more than market value rents are imposed.

Ok, so I was not missing something. What they are doing is a bit like flipping a house. I guess this is a model, but I wonder if their would not be a way to make the land produce so much income that it would be foolish to sell it.

For a property that sells $3000 per acres, the income generated to get a 8% return, would have to be $240/acres. For a 5% return it would be $150/acres. Last summer I saw a case where a 50 acres was renting for $1000 to a local grazer, that is $20 per acres, which is really far from the 5% return, let alone 8%. It would probably get leased for more if it was cropland, but then the price per acres would probably be double. On the other hand generating $240/acres does not seem impossible. Thoughts?

One thing about that $1000 price tag is what else does it include? We have family land that is rented out well below that $250/acre pricetag right now BUT if you add in the costs of what we aren't having to do for it (the leasees are maintaining fences and crossfences for the cattle lease (I think about 1800 acres) and handling spraying/trimming (yeah, it's not organic, it's not my call to make, unfortunately) AND replanting for the orchard (44 acres). To not have to do those things ourselves works out to a fairly significant paycheck in terms of energy and time given the family member who is the primary decision maker on these things is no longer physically capable of doing them all himself, nor does he really want to.

To further clarify what I was talking about above see: The Power of 200 Organized People.