Farmland Partners (FPI), the listed farmland real estate investment trust that buys and leases out farmland, has started issuing loans to farmers in an opportunistic move to bridge a gap in funding that chief financial officer Luca Fabbri says traditional lenders have left open.
In the wake of a prolonged period of low row crop commodity prices, a large number of farmers in the U.S. are starting to feel the pinch, which is impacting their ability to pay their expenses, Fabbri tells AgFunderNews.
“Banks are not equipped to deal with the short term cash crunch that some farmers are experiencing at the moment,” he says. “Their strategy in this environment is to retreat and retrench when they see any cash flow issues that might impact a borrower servicing his or her loan.”
Noticing an increasing struggle for farmers to pick up operating loans from banks, FPI has stepped in and the REIT issued its first loan late last week to a large Midwest farm operation. The short-term loan, which matures in January 2016, charges 8 percent in interest, plus legal and insurance costs, and is secured by first mortgages on farm real estate at a 50 percent loan-to-value.
While some commentators have told AgFunderNews they believe this is a high rate compared to some operating and equipment loans that are closer to 5 percent, Fabbri said the borrower was “delighted” with the deal, which will allow him to bridge his operating expenses until after the harvest.
He also said that borrowing from FPI had added benefits such as a short lead time — this first loan was agreed after three weeks compared to several months for some banks. FPI is also better equipped to lend to farmers than banks, according to Fabbri.
“We are in a better position than banks are if a farmer defaulted, because we are in the business of owing land,” he said. “We are also able to potentially lease that land back to the farmer in question and help him stay on the farm. If it ends up in a bank’s hands, they will auction it off at below market rates, most likely to a competing local farmer.”
While this loans business will not be “transformational” for Farmland Partners’ bottom line, it is a useful tool for building relationships in the market, said Fabbri adding that he wasn’t sure how long this opportunity would present itself to the firm.
“This is quite a nice opportunity and we don’t see any other lenders out there doing the same, so we don’t have any comparables,” he said. “We are in a unique position because of who we are. This hasn’t been our core business so we are still exploring this market. It could be a short term opportunity until crop prices rise again and farmers are more cash rich, so we are definitely being opportunistic, although currently there is probably more business out there than we can serve.”
FPI will lend at a conservative LTV ratio — under the 60 percent ratio that Farmer Mac lends to the firm under its $30 million secured note purchase facility — and will lend between $500,000 and $5 million at fixed interest rates for no more than two years, according to a press release.
To apply for a loan, email FPILoans@farmlandpartners.com.
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