Western Washington Food Systems Partnership

Dirt Capital Q&A

Responses by Amanda Zakharov and Martín Lemos

Resources:

Questions & Answers

Q:  Do fishers and value-added fisheries figure in your scope of lending?

A:   This is such an important area. And the answer is yes and no. We are not able to fund specifically just infrastructure. At this time, we are land based. So, there does need to be some kind of farmland. And that said the first investment on this fund is with an oyster company in Long Island. So, this was a buy protect sell. So, a local land trust bought it. They wanted to keep it. This is on the North Fork of Long Island. There is a ton of development pressure there and they wanted to make sure this this piece of land stayed in farming. And it is also a beautiful waterfront property, which is what made it so attractive to wealthy developers, but it also made it work for the oyster farm. So, we are building them an oyster aquaculture operation, building a dock, and renovating the house which will allow them to access their underwater farm. I love that deal, but the only reason it works for us is because there are also 12 acres of prime farmland there, and we are seeking another farmer to be on that land as well, which we’re excited about. Being able to have two partners on that one project. But yeah, that’s the only case in which we’re able to make aquaculture work for us.

Q:  How many of your projects have been successfully sold to farmers at this point? What happens if you reach the 10-year point, and the farmer is not able to qualify for financing?

A:   That’s a great question. And something we think about a lot, because it’s so important for us that the impact portion of our that that transition to farmers is achieved at the end. So far, we’ve had 10 exits, and they’ve all basically gone to farmers. There was one that was not a farmer that we would have normally worked with someone expanding into organic. But a couple were not the farmers that we started out with. That is a part of why Dirt like to take temporary ownership of the land – that it is easy for a farmer to leave if you decide not to farm anymore, which is obviously not the outcome we’re hoping for. But is part of why this tool is a way for us to facilitate farmland transitions going forward.

If you’re not able to qualify for financing and not ready to exit, we will typically extend and restructure the lease

We are actively talking to all our other partners, particularly our peer groups in this space that are designed to hold long-term leases. Or we may be able to hold it ourselves in another fund. To continue with that lease, we can restructure it as a long-term lease. We also have some farmers that won’t want to purchase the whole thing from us. We will consider that as well. Our goal is to keep the farm, and the land in farming. So, we’re solving for the best outcome for everyone and working with our peers to do that. There’s certainly no termination event. We’re never going to force you to leave if you’re actively successfully farming.

That’s a big part of the work that we offer and the support that we offer farmers is preparing them for executing that exit and that purchase option. Whether that’s helping them get their materials ready for financing or applying for a loan. There’s a farmer right now in their tenth year, so this is a relevant question. Because we’re getting to this place where we’re reaching the end of some of these agreements. We’re working with one farmer to access FSA financing as well. And looking to be the partner that joint financing on that FSA loan as well. It’s a big part of how we support farmers in our portfolios. We’re helping them think through that exit option. And connecting them with the resources they need to do that.

Q:  Would a property that is already conserved or zoned agricultural work within your model?

A:   It’s just taking one tool out of the toolbox.  With a conservation easement in place, that affordability piece is already there. Sometimes there’s an opportunity to do more. If it’s an old easement, for example, the land trust really wishes they had had an AC, active agricultural easement. There is potential to do that. We would explore if there were ways to add protections to get more funding. But it’s just a financial thing at the end of the day. It’s one way that we get financial return that’s not from a farmer, and if we’re not able to do that, then it’s just going to affect how much the lease and purchase options are for that property. But I would also say, if something’s zoned agricultural, it doesn’t mean that it can’t be conserved. There’s still definitely conservation value because zoning can be changed often.

Q:  What is your easement value based on, especially for smaller farmland that doesn’t have water or forest resources? How would you do an easement based on what? How do you value those easements?

A:   We work with a local land trust to do that. It’s land trusts, who usually have an agricultural focus, specifically on keeping farmland in farming. The way that that works is that they basically purchase the development rights of that property. It’s keeping a certain amount of the property not developed perpetually. That’s when I was mentioning how we’ll work with a farmer to figure out what their future plans are. That’s where that becomes important. We will carve out an area that’s called the building envelope, where you can do whatever you want, or you can do certain things that are as long as it fits agricultural use. Basically, it’s up to the parties involved to negotiate. What the goals of that local Land trust are, our goals, and your goals, so that we kind of bring all parties to the table to figure out what restrictions are appropriate for that farmer that also maximizes funding. Every group is different. And it’s going to depend on the region, there’s many great land trusts in Washington. That would be part of our job to figure out which land Trust is the most appropriate to work with.

Q:  If there’s no development rights, then there’s probably not going to be an easement, right? Also, does the local land trust that you work with get any kind of subsidy for that yearly monitoring of the land for the easement?

A:   The lower the development value of the land, he lower the easement value. For example, we’re looking at a property in California that is highly restricted on development. So, it may only be 5 or 10 percent of the value. But most of the time we see something between the range of 20 and 50 percent of the value of the land.

I don’t know specifically where all the funding from all those local land trusts comes from. There may be separate funds they receive for monitoring.

Q:  What do your lease payments look like, and are they monthly or twice a year or

A:   It’s up to you. We’re flexible on working with farmers, on what makes the most sense for their business. As long as it’s within a reasonable spectrum of risk for us. You know, we just had our last farmer want to do specific amounts in different parts of the year, and we’re cool with that. We’re very flexible.

Q:  How do you determine the value of natural resource rights such as timber and mining- do they factor into the value?

A:   Yes, for sure. And water, I think Marci also mentioned water rights as well, and that’s a big one. So, we will figure out all of that to find out: How much is the property worth? What’s the right thing here? We’ll go down the path of who do we need to talk to, to maximize funding. My colleague, Dominick Grant, has a ton of experience in this area, more than I do. But we view that as our value-add in this, to really figure out what all those potential sources of funding are for that particular property. Mineral rights are an unusual, interesting one in the West, too, because if they may have been severed and someone else has those mineral rights, it can be tricky to do conservation and easements, because typically a land trust is not going to want to conserve a property where someone else has the right to come in and mine. We did run into that problem in Kansas. But it’s an interesting one. It just depends on the circumstances. Whether they’re leasing the mine or have an actual claim on it. It’s complicated, but you can get a study done that shows how likely it is to develop those rights.

Q:   Do you have a minimum or maximum acreage and a minimum or maximum loan or purchase price that you require?

A:   We’re looking to investover $1 million and that’s including the land building infrastructure – anything that you’re additionally asking for us to fund.. So, if it was a $750,000 purchase with another $500,000 to build a new wash pack facility, for example, then we could do that. Our sweet spot is $2 to $5 million. But we could go up to $10 million (assuming we raise our full fund, as we are still in fundraising). As for acreage, we don’t have a minimum preference. We have on our website 40 acres, and we prefer to do a little bit more. But that’s not a major factor for us. If it’s an important piece of land for you and meets our overall project size and meets our impact threshold overall, then we’ll look at it. And I also say, please reach out, even if it doesn’t check every box. We’re not a box checking type of organization.

Q:  How much money does a farmer need to bring to the table when Dirt Capital purchases the land?

A:   Nothing, except for operating capital. So just make sure you can keep running your business if you’re expanding, for example. But none for the purchase of the land.

Q:  Are you able to structure lease and mortgage payments in a way that makes sense and works for farmers?

A:    We’re not looking at traditional debt service coverage ratios. So, we are going to work with you on projections and figure out what the farm can support. And we will kind of skew that to be there. But that is an important part of it. If it doesn’t support, it doesn’t support it. And that is why conservation easements are such a big tool, because that gives us that return from somewhere else and allows us to make it that much cheaper. So, if you’re looking at property that’s conserved, and then a property that’s not conserved, put a 50% haircut on the one that that isn’t. It can be a big number, especially in your area [near Seattle].

Q:  For the conservation easement, do you project the value initially and then you settle what the lease payments will be after you do that?

A:    We will figure out what we think the value of the easement will be (a few years down the road), andwe’ll reduce your lease payments from the beginning to reflect that projection. We’re taking the risk on that. We’ll set your lease from day one, and that’s not going to change, regardless of the conservation funding. If we’re off, then that’s on us one way or the other, but you also get the value directly as a reduction to your purchase option. But again, that’s an option.  With a mortgage, you must pay it off. You’re going to have to sell the property if you want to leave.  With the lease you’re able to pick up and leave if you don’t want to be there. And there’s nothing to do at the end of the lease term. It’s just an option.  If the market value changes drastically, if the purchase option is above the market value, which is not how we intend on structuring these, but it’s certainly possible. You don’t have to buy it, or you can negotiate with us at that time.

Q:  How are the impact investors and how is the organization funded? Can you talk a little bit more about your investment committee, and how that plays into the larger structure of the organization.

A:    We’re a traditional GP-LP model. We’re a real estate fund that raises money from its investors, and we get a fee for that, and we get fees for performance overall, some of which is tied to impact. Those funds pay for the management – our salaries and all that good stuff. So, we are on our fourth fund, and we’re actually getting to a real scale and size, which is very exciting for us.

We have a group of four external individuals on our investment committee, most of whom have some tie to being an investor, plus our founder, Jacob Israelow.[AZ1]  Our investment committee members have a lot of experience, as farmers and impact investors, and co-founders in this space. They are absolutely mission aligned and view everything through this lens of the impact framework. However, their recommendation is not binding. We have a monthly investment committee in which we talk through our deals, our pipeline, what we’re doing, and we do get approvals for things. But it’s up to the team on moving forward. So, yeah, they are incredible resources for knowledge for us. And they’re listed on the website.

Q:  Could you speak a little bit more on the timeframe that you all need for due diligence? The typical 30 closing day period is what on-market sellers are expecting. Whereas off-market gives you a lot more flexibility to ask for more time. But we are always asking when we’ve inquired about properties if folks would consider a longer closing period to see if we could use an FSA loan. And most of the time we’re getting those. So, I’m curious how you manage that due diligence and timeframe, maybe both?

A:    Yeah, I mean, I’d say off market, as you mentioned, is not as hard. So, we are happy to be involved. And if it’s a tricky situation, we can also step in and be the voice of those conversations. And sometimes neighbors are harder to deal with than third parties. As for on-market transactions, we can, as I said, move at the speed of real estate. 45 days is as tight as we can go. But most of the time sellers are willing to go to 45 days. Six months, obviously, is a big ask. But we usually start at 60 days, and if the sellers are really pushing, we could go to 45. We prefer to give ourselves a little more time if we’re able for underwriting both the farmer and real estate, I If we’ve gotten a chance to underwrite all of the farmers financials and ask all those important questions and figure out if there’s anything funky in whatever area we’re operating in, whether that’s a new like for oyster farmers, we needed a little help, for example. But yeah, once we can get through all of that, then we can expedite that diligence and that closing period a little bit, because then we’re down to the real estate stuff. So, it’s just can we get the appraisal, inspections, and all that good stuff done on time? That’s a lot easier.

 [AZ1]I realized I failed to mention this and fixing it here if that’s ok.