Investors’ appetite for a publicly traded farmland fund could soon be tested with the planned initial public offering of Gladstone Land Corp. The McLean, VA- based company filed registration papers in August to sell up to $222.6 million in common stock.
If the offering is successful, Gladstone Land will seek to qualify in 2011 as a Real Estate Investment Trust (REIT) – a mutual fund-like structure that distributes at least 90% of its income to investors and is generally exempt from corporate income taxes.
This would be the first publicly-traded U.S. farmland REIT. Other groups, such as Optima Fund Management, New York, and Chess Ag Full Harvest Partners, Clarksdale, MS, have formed private farmland REITs they hope to eventually take public.
Gladstone Land’s initial portfolio consists of two farms totaling 737 tillable acres in Watsonville and Oxnard, CA, purchased in the late 1990s.
David Gladstone, 68, organizer of the planned IPO, acquired the land as part of a seven-year private equity investment in Coastal Berry Company LLC, a controversial Westlake Village strawberry farming and packing operation purchased from Monsanto in 1997. Gladstone sold Coastal Berry to Dole Food Co. in 2004 and kept the Watsonville and Oxnard farms and continues to lease them to Dole.
Gladstone is also founder & CEO of Gladstone Management Corp., which oversees three publicly traded funds that invest in commercial real estate and make business loans.
Gladstone Land plans to buy cropland near urban areas and lease it to farmers until the property can be sold for commercial or residential development. Gladstone plans to strike mostly short-term (one to two-year), fixed-rate, triple-net leases to grow annual crops, aiming to increase its opportunities to raise rental rates as leases are renewed.
The fund also plans to market farm mortgages to under-capitalized growers or those unable to secure conventional financing. Gladstone intends to offer higher-interest, interest-only mortgages, lending up to 80% of the purchase price on land loans with an eye toward taking ownership of the collateralized land in the event of a default.
The fund will also seek to boost returns by borrowing up to $2 for each dollar of equity in its properties.
Gladstone Land expects to raise $157 million in net proceeds and invest most of these funds in land and mortgages within 12 months of its IPO. The company projects 4% to 6% initial rent-to-value income yields, and notes it intends to initially scout for properties along California’s central coast near its current land in Ventura and Santa Cruz Counties. In the future, it expects to expand to northern Florida, Georgia, the Southeast, Midwest and Mid-Atlantic.
The venture plans to utilize triple-net leases, in which tenants maintain the property while paying rent, property taxes and insurance. These leases are common in the commercial property market, but unusual for the broader farming sector.
Contact Mike at: www.farmlandinvestorletter.com or [email protected]
-- Mike Fritz