Wednesday, July 6, 2022

New path to ownership

A farm investment model with a focus on traditional farm ownership aspirations and cash returns is attracting strong interest. Cambridge-based Rural Business Solutions (RBS) has developed a simple mode for equity managers and landowners alike, with a progressive pathway to full ownership for the operator. Company consultant Paul Schuler said the model, RBS Invest, was prompted by concern over looming farm succession issues. For example, estimates are the number of sharemilking positions has plummeted by 1000 in the last 10 years.

In response many aspiring farm owners have made the move from lower order contracting arrangements to multi-party equity investments, often placing themselves as operational managers on the properties.

“The problem we have been seeing, however, is the development of a progression bottleneck,” he said.

“Those operating partners wanting to get ahead are unable to go forward but also unable to get out of the arrangement.”

Drawing on the extensive farming and banking experience shared among the RBS partners, the company has developed an alternative syndication template. The assets of the land-owning company are held separately from the stock, share and plant assets of the operator’s company. The operator will then lease the land from the land company, rather than having a share across the entire assets of the operation and the higher debt level that usually brings.

“Meantime, the land company itself is not indebted. It has equity put into it by investors, usually a minimum of $250,000.”

The owners in the land company receive a return from the lease, typically based around a percentage of the milksolids (MS) income relative to the land’s productive capacity and payout. It will typically equate to a return of 4-5%, received as a steady cash return paid monthly.

Schuler emphasised there was no rocket science behind the template, which is not an unusual one to find in many family farming operations. The simplicity of the model was enhanced by recognising the desire of the operator to progress through to whole farm ownership. The plan has a 10-year timeframe for that to be achieved.

The company’s own budget modelling indicates it would be achievable for an operator with about a 20% equity share across the entire farm business to achieve sole ownership within 10 years.

“For that operator, it also enables them to choose their own management system, company structure and operation style. They stand alone within the business, subject, of course, to performance reviews every year.”

The operator will also be required to have a small percentage of ownership in the land from commencement with rights to purchase additional shares as investors wish to divest.

The company’s calculations show after 10 years an operator on a 140ha, 400-cow property starting off with $1.2 million equity could expect to have doubled that equity and be able to shoulder the debt required to buy the entire operation.

From an investor’s perspective, the land-owning company would expect a fixed annual return paid monthly, based on the lease payment made by the operator.
Schuler stressed there was no emphasis or expectation of capital gain in the RBS Invest plan, nor are models based on inflationary values.

“We are leaving it up to individual investors to make their own estimates on what, if any, capital gains may come over the 10-year period, on top of the annual cash return,” he said.

Obviously the success of the investment is strongly dependent upon the ability of the operator but this is no different to any operator-owner arrangement.

“Like those, the operator will be subject to a yearly performance review. However, unlike some equity schemes, RBS doesn’t require parties to use its consultants to conduct that review.

“It could well be the investors have enough expertise within their group to make any performance assessments on the operator,” he said.

“We have the skills if required but the end result for investors is admin overheads are lowered.”

RBS was established in 2006 by Duncan Coull, 2000 Taranaki Sharemilker of the Year. Other partners include Dave Kilbride, Schuler and Rob MacNab. All share extensive banking and dairy project experience and own their own farms.

Investor interest has already come from the likes of farmers who have retired and want to keep some investment in the industry.

Schuler believes there is also an industry-good angle for some investors who are concerned at the shrinking pathways to farm ownership and can see one in RBS Invest.

The company bases its charge for setting up the scheme as a percentage of the actual equity value put into it, rather than the total capital value invested, again in contrast to some schemes.

Interest has also been strong from young, motivated operators wanting to advance down a clearer pathway to farm ownership with the model a template suited to a range of farm sizes and locations.

“Banks have also expressed an interest with the scheme offering a constructive solution for heavily indebted farmers on banks’ books. It means if investors are found for the land, the operator can stay, with a plan to ultimately buy back into where they were before.”

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