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157: Harvest Returns

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Buck: Welcome back to the show everyone. Today my guest on Wealth Formula Podcast is Chris Rowley. He is a military veteran and the founder of Harvest Returns which is a crowdfunding platform for streamlined agricultural investments. Chris welcome to the program.

Chris: Thanks for having me on today, Buck.

Buck: Yeah so we talked a little bit at the beginning and you said you’ve been listening this show for a couple years so it’s always nice to actually, I didn’t know that before we started so it’s actually nice to have somebody who’s a listener come on. I’m not gonna have to explain who the audience is, you already know.

Chris: Right, right.

Buck: So tell us a little bit about yourself. I mean how did you go from military veteran you know I noticed you were deployed in Iraq and parts of Africa and all this stuff, next thing you know, and I think you had some background in finance and the next thing you know you’re in the agricultural world how did that happen?

Chris: Yeah that’s actually kind of how I got into this and set up this company. So I grew up you know pretty much a city boy without really any connection to farming agriculture, sat down and ate TV dinners in the 80s like a lot of kids just kind of took my food for granted and then you know after college I went in the Navy and as they say join the Navy see the world and travel to all these places interesting places and one thing I noticed no matter how poverty-stricken and war-torn a country was people were relying on agriculture and in many of these countries people are much closer to their agriculture system because they’re either raising their food own food or growing their own livestock than we are where we you know either call up ubereats or go to a restaurant or buy it at the supermarket. Combine that with an interest early on and investment. I’ve worked commercial real estate companies and in tech background in finance as you said and I have been a real estate investor of her a long time so after the 2008 crash I started looking into different sorts of assets, types of real estate asset classes I could invest in and one of these things that came to mind was farming and agriculture based on that previous interest and turns out it’s kind of hard to invest in farming you either need a lot of capital upfront to go out and buy a piece of land and then either farm it yourself or hire somebody to farm it there’s some farmland REITs and things like that that have fairly high minimum investments but it was pretty pretty tough at the same time crowdfunding platforms primarily focused on real estate we’re coming out so 2016, I had an idea to combine my interest in agriculture and crowdfunding and in fin tech and startup this platform Harvest Returns and we launched the platform that year, spent about a year putting together our initial deal flow getting investments out building our investor base and we’ve closed our first few deals and now we’re really in a growth stage.

Buck: So what kind of Agriculture are we talking about and where and that whole thing?

Chris: Yeah so agriculture is a wide wide Investment space just like you know there’s multiple segments in real estate that people might be familiar with multifamily, commercial, retail, whatever. Agriculture you have various things kind of your bread-and-butter agriculture that most people associate when they drive through the country is that row crop farming corn soybeans really commodity based farming and from an investment standpoint the best way to invest in those farms is just to go out buy the land and lease it to somebody, but that’s that sort of high-touch investment and you’ve got to know what you’re doing and the other part of that is you’re very reliant on the commodity prices and a lot of row crop farmers in the US are hurting these days because they’ve been in a slump. The agriculture that we sort of specialize in is is that more specialized type of Agriculture indoor growing, that’s a really interesting and growing area. Hydroponics when you invest in an indoor growing sort of operation you’re de-risking the investment because you’re taking away the biggest variable which is weather and water scarcity so that’s one of the ones that we’re really interested in. We’re doing the more sort of higher end specialized sustainable farming with livestock so grass fed cattle, livestock those sorts of things where you’re getting a higher premium you’re also reducing the volatility with those pricing so you’re not necessarily purely relying on the beef prices anytime you got a premium product you get less volatility and you’re less susceptible to market swings so that’s our focus.

Buck: So as operators, you guys are more well your selecting operators basically, right?

Chris:  Right. We’re syndicators.

Buck: You’re syndicators and you’re partnering with what you consider to be high quality operators, is that right?

Chris: That’s exactly right we have farmers from all over the country and actually all over the world approached us and we vet those down based on a number of factors the spot source track record the financials of what they’re doing there’s sort of non tangibles of sustainability and impact and then we strike up a deal with the ones we think are going to be most attractive to investors and start the due diligence.

Buck: And tell us, it’s not all US based?

Chris: No we’ve actually done some overseas deals. We worked syndication for a Belize farm, we’ve got some other things brewing in other parts of the country that I can’t necessarily talk about because of the solicitation rules or other parts of the world, but we get about 50% of our inquiries are overseas and 50% are domestic.

Buck: And what do you look for in operators obviously you’re looking for risk mitigation and you talked about whether for you know hydroponics. You know when you’re looking at particularly say you know I’m familiar with some of the stuff in Belize that’s going on there. I mean what do you what do you look for in an operating group, when you look at agriculture? I mean certainly I have a lot of experience doing this on the real estate side but I’m curious on the agricultural side are a lot of the variables the same what are you looking for in those teams you know are they and are they bigger teams they smaller teams are they you know mom-and-pop farms are they you know big industrial, you know I mean so how does that work?

Chris: Yeah so one thing people need to realize it you know you hear a lot of sort of bad-mouthing industrial commercial farming in the US but most of the farms even the very large ones that people would see as large commercial scale our family-run more than 95 percent of farms in the US are family-run so there’s that aspect. The teams can vary so we do see that multi-generational farmer who is looking to expand their operation or change it convert to organic or something is some sort of higher value product or put some sort of processing facility to increase the value of what they’re doing. But the other aspect of this is we’re looking for people that not only know how to have the agronomy side down know how to produce something but actually have the business side down and so the team’s are buried. You might have people coming together that have a mix of agriculture and in finance operational business background.

Buck: How do you mitigate some of the overseas risks that you know like I mean I know a lot of people get really excited about overseas investments. Personally that’s not necessarily my cup of tea and a lot of that has to do with the fact that you have to deal with a different set of laws you have to deal you know what things go south you know you don’t have necessarily have the same recourse etc how do you deal with that part of the risk?

Chris: Yeah I would say we’re we’re much more selective with what we do on the overseas side. We like to have teams one you could have footprint on the ground so in just coincidentally the two investments we’ve looked at that we have a mixture of local and expat team members together because if you don’t have the local element you’re you’re not gonna be able to maneuver in that overseas environment and the expat I think that just helps you know people understand Western investors have a Western tie to the that’s there right and visiting the deals in just a higher level of scrutiny and due diligence which is why that’s not necessarily our bread and butter but we we are interested because that’s where the demand for capital is there’s just on the farming side we do see the demand from farmers who have limited access to capital in emerging markets but also in some of these on the US side and some of these specialty industries the entire AG system AG finance system is basically optimized to finance row crops and the terms of the loans haven’t really changed much in 50 years which presents a good opportunity for us to come in and do things creatively.

Buck: I remember, you know this is not a space that I’m terribly familiar with, but I remember reading you know that you know of course farms in the US in particular this was something that big money was looking at too, has that driven up prices quite a bit and then lasts a decade or so?

Chris:  I’d say on the row crop side that institutional interest pension funds university endowments have nice allocations of their portfolio maybe ten to twenty percent in things like timber and farmland and I think I wouldn’t say it’s driven up the prices that much I think it’s maybe propping up the price or keeping the prices from falling precipitously in the case of row crops because those farms are having a tough time with commodity prices being you know especially like soy and corn being in sort of a long-term slump. That presents an opportunity for those people who want to invest in those but it also the more boutique sort of projects that we do I think there’s there’s not as much competition or awareness of them.

Buck: What would be an example of that and I know you know it’s a solicitation issue but just broadly speaking an example where you’re able to you know potentially avoid larger investors while at the same time doing something at a scale that’s not you know so small that it you know doesn’t have it becomes unstable?

Chris: Right so I can talk about a deal we just closed a week ago and that’s a greenhouse operation in Kentucky. The capital stack on that deal was about thirteen million dollars they’ve had and don’t quote me it’s it’s a range it’s up in that it’s up in that range and there was debt and equity investors in that and they just needed to top off as the project finished up with some operating capital and we raised a little over half a million dollars to get that investment closed and to get that project to completion and took an equity position. We’ve also done debt notes where we collateralize with either with assets from the farming operation themselves it’s almost like structure like a mezzanine sort of financing.

Buck: Yeah got it got it. So let’s talk a little bit about your actual platform. This is I presume since well it’s a platform but it sounds like it’s not necessarily like a regulation crowdfunding or triple A crowd fund type vehicle is it for accredited investors is it or who’s it for?

Chris: Yeah we’re doing Reg D offering so 506 C B so primarily for accredited investors although we do have you know pre-existing relationship we can bring in some non-accredited a limited number of non accredited on some of the deals when we structure that way. We take our investment minimums range anywhere between five thousand, twenty-five thousand dollars. So you know some people argue what’s the definition of crowdfunding what’s the limit because crowdfunding is $500 or $1,000 well…

Buck: You’re not really doing crowdfunding though if you’re yeah 506 B or C?

Chris: Right, right we’re not doing reg C and or Reg A plus I’d like to get into those someday but frankly when they’re you know the SEC finished working that legislation and taken an eight-page legislation turning it into a 384 page set of rules they made it arduous to raise money from the crowd.

Buck:  And it’s expensive to do that.

Chris: Yes.

Buck: So the let’s talk about like you know when you think of agriculture, right it’s you know again from a from a purely practical standpoint it’s like the idea hey you know I mean I’m sort of fantasized myself about me and one day I’ll own a farm and I’d live off that farm and you know whatever although you know I’m about as a white-collar and not able to do anything as they get you know I can learn to use a drill by drilling through skulls in neurosurgery sure sure all right but the idea is very romantic almost and it’s almost like gosh you know with all the talk of the zombie apocalypse and everything like that maybe they’re right maybe I ought to be part of this and own some food. Now let’s talk about the yield side though how does that look because that’s where at least things that I’ve seen in the past have been like wow that’s not that attractive. So how I know you can’t talk about talk about forward-looking things but tell us kind of what you know the types of yields that one can expect in the types I’m doing.

Chris: Right so that the specialty types of projects that we’re doing and some of them are development projects are quite similar to what you might see in a commercial real estate deal, say maybe IRRs internal rate of return of 8 percent to 15 20 percent depending on various risk reward components and there’s really three ways you drive returns from agriculture one is the price of that underlying commodity and as I said we tend to focus on this premium products like grass-fed beef because you have less price volatility and less risk. There’s the base asset so price of the land maybe price of the infrastructure in the operation and then you know where you get your alpha from the investment as how well as the farm operated this is where you create the value or destroy the value if you’re if you’re not operating it well and that’s kind of the three things. But the nice thing about agriculture is that is the demographics you know it’s just like real estate people have to have a place to live and people have to have something to eat in the population continues to increase.

Buck: Now is your particular project or is your business project specific or is it like an open fund?

Chris: So right now up until this point we have been project direct project investment so you look on our platform you get to learn about the sponsor and get to learn about the specifics of the deal at the individual farm and all the economics behind that and make a decision after you review their documents to invest. That said we are putting together a multi asset fund that takes advantage of the opportunity zone legislation and we’re going to focus on sustainable agriculture so we’re excited about getting that launched here fairly soon.

Buck: Interesting and the opportunity zone how does that work? Do you have a lot of opportunity zones in areas where there’s agriculture is that…

Chris: There are in fact you know yesterday Sonny Perdue the secretary of agriculture was at the white house and he mentioned that forty percent of the 87 roughly 47% of the 8700 opportunity zones are in rural areas and of course most of those or a large number of those are suitable for agriculture.

Buck: Interesting. So one other question that always comes that for me at least is of real interest, is there any outside of this opportunity zone stuff in general with agriculture are there are there tax benefits to investors?

Chris: There can be. It’s very you know there’s a depreciation piece if you’ve got infrastructure in place so that’s just like real estate depending on which state you’re in there are some tax and in some of the overseas jurisdiction there’s some tax favorability it’s a little bit I’d say there’s you know there’s a new market tax credits there’s all those sorts of things depending on deal by deal specific that you might see in commercial real estate or say multifamily.

Buck: So what’s your argument right now like why agriculture why not why now?

Chris: A couple of reasons I talked about the demographics. 10 million hungry mouths to feed in the next 20 years or so of 20 or 25 years as the other thing that you see globally is is wealth increases across these populations there’s a shift from plant protein to animal protein the second piece is that people are getting increasingly specialized diets so we’ve talked keto vegan high-protein all fish pescetarian you name it organics only gluten-free all these specialized diets require more fragmented agriculture production and that those fragmented in specialized agricultural production methods can be capital intensive you also see this revolution in agriculture technology where you got biotech the you know GMO seeds there’s a lot of controversy around that but overall it’s a good thing for the food system you’ve got drones that are surveilling and sensing fields and in saving water in this indoor agriculture all these different tech things are capital intensive and we you know our bread and butter is raising money for these sort of specialized ways to meet the need for this increasingly diverse food system.

Buck: So how do we learn more about what you’re doing, what you are up to?

Chris: Yeah so easiest ways go to HarvestReturns.com we’ve got a lot of educational material on the website a lot of blog posts and things like that where you can learn about specific fragments of the agricultural investment class and then you can register and if you’re qualified look and invest in one of our offerings.

Buck: Chris thanks so much for being on Wealth Formula Podcast.

Chris: Thanks for having me on Buck.

Buck: We’ll be right back.