Emerging Markets / June 16, 2016

Financial Instruments for Farm Real Estate Investments

The Importance of Agricultural Real Estate

High yielding agricultural land represent one of the most coveted assets of the 21st century. Several traditionally fertile areas for global agriculture are being depleted or becoming arid. Such is the case in East Asia, where the demographic explosion is leading to more urban development and increased water usage at the expense of agricultural productivity. Likewise, the historically productive Sahel region in Africa is falling victim to the Sahara desert’s southward expansion year after year. Therefore, land for food production in regions like Central and South America are today more important than ever. Furthermore, Latin America has steady demographic growth projections when contrasted with those of Africa and Asia. This means that Latin American agricultural surpluses, achieved through investment, enhanced technologies, and new farming techniques, will play an essential role in filling the gap needed to achieve food market equilibrium in the future. The unique asset classes found below represent an opportunity to participate in the global supply chain for food production, while owning socially responsible real estate that offers sustainable growth. They allow investors to benefit from the yields of Latin America’s food production and export future.

Real Estate Investment Instruments

Property ownership represents a unique asset class that is tangible, has high potential for value appreciation, and provides additional opportunities for economic yield by way of its usage. Real estate can be rented, developed, or destined for agricultural production. However, participation in the profits of real estate investment through sole proprietorship is out of reach for many individual investors. Nevertheless, direct ownership is not the only way to benefit from the considerable yields that real estate investment can offer. Here we will explore two different instruments that investors of all sizes can employ in order to further diversify their portfolios through real estate ownership. The first financial instrument is the Real Estate Investment Trust (REIT). REITs represent participation in a pooled trust, which owns income producing real estate property, be it residential, commercial, or agricultural. Either listed on an exchange or privately held, REITs are generally liquid investments as they tend to be purchased, held, and traded as equity. Likewise, REITs have certain benefits and requirements under the United States IRS code. By law, they must pay most of the income generated out to the holders in order to maintain their legal status. This means that, since most of the Trust’s income must be passed onto the shareholders, no institutional taxes must be paid. Rather, REIT income is taxed at the individual level. Traditionally, REITs have invested in retail and residential property. Agricultural and farmland REITs, thus, represent a unique opportunity for investors to capitalize on the growing demand for agricultural commodities worldwide. Farmland REITs are an innovative financial instrument that are becoming increasingly common, thus allowing access to an asset class still largely dominated by family farmers. As of 2014, two exchange listed REITs already specialized in U.S. domestic farmland. Another mechanism by which to safely participate in the gains of 21st century real estate investing is the Limited Liability Company (LLC). Investors can pool their resources by acquiring participatory shares in a property owning LLC, in this case farmland. Unlike other forms of incorporation, LLCs usually do not have limitations on the quantity of participants within the company. Likewise, LLCs can avoid double taxation on income by passing most of the yields directly through to the investors and only being taxed at the individual level, similar to REITs. Therefore, a Delaware based LLC is amongst the safest and simplest ways for investors worldwide to benefit from the yields of agribusiness in Latin America, while having the security that a U.S. based corporation provides. Finally, LLC participation can offer liquidity through membership in an exchange network.

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