How We Underwrite Farmland: A Conversation with Our Investment Team

On Yield Forecasting

Q: When you're building a yield model for a property, what's the first thing you're trying to establish?

Any forecast for a property growing food outdoors carries inherent uncertainty — the variables are simply too numerous to model with precision. What we’re trying to establish first is a reasonable range of outcomes, not a single number. We ground that range in at least five years of the property’s actual operating history for established orchards, and in regional benchmarking data from sources like UC Davis cost-of-production studies for development opportunities or newer plantings.

We also come into every deal with a prior view on average yields by region and crop type. If a property's historical yields are meaningfully outside that range in either direction, we want to understand why before we build any model around it.

Q: Where does the yield model most often diverge from what actually happens?

Young trees are the hardest part to underwrite accurately. A mature orchard has root depth, canopy resilience, and years of performance data behind it. A property that’s ramping up in maturity is far more sensitive to weather variability — a frost event that causes tip dieback in a mature tree can shock the entire canopy of a young tree and cause widespread tissue death. The timing of that kind of event in a tree’s first three to five years can have lasting consequences for its long-term productivity.

We’ve seen a once-in-40-year cold event split citrus trees entirely. Those outcomes are, by definition, difficult to model — but they’re not unmanageable. Our process is built specifically for this: we stress-test models against adverse scenarios, evaluate the infrastructure already in place on a property — wind machines, frost protection systems — and factor in what additional mitigation may be warranted. Understanding where a crop and region are most vulnerable, and structuring the investment accordingly, is a core part of what we do.

Q: How do you think about alternate bearing crops like pistachios, where yields naturally swing year to year?

Alternate bearing is a real modeling challenge because the instinct is to smooth it into an average — and averages obscure the cash flow reality of a crop that might yield heavily one year and produce very little the next. We try to model both years explicitly and assess whether the investment thesis holds across the full cycle, not just in an on-year scenario. A property that only works financially in its high-yield years represents a fundamentally different risk profile than one whose projected economics remain viable even in the off year.

Q: Are there specific crops you've moved away from based on what you've seen in the market?

Walnuts are a good example of a commodity where the investment case has materially weakened. China has scaled walnut production significantly, capturing a large portion of the export market that California producers historically served. Their cost structure — cheaper labor and inputs — allows them to undercut US pricing even as quality has improved. The result is that walnut pricing has come under persistent pressure, and the economics of a new walnut investment look worse than they did a decade ago. That’s the kind of structural market shift that our commodity analysis is designed to surface before we commit capital — and it illustrates why we evaluate not just how a crop performs today, but where the market is likely headed over a 20-year hold.

On Water Strategy

Q: How do you prioritize water in your evaluation process?

Water availability comes before water cost. That’s the starting principle. In our view, an expensive water source that delivers reliably over a 15-year hold presents a more defensible risk profile than a cheap one that fails in drought years. Permanent crops don’t tolerate stress the way row crops do — a bad water year doesn’t just reduce yield, it can cause irreversible damage to the trees themselves.

So the first question is always: can this property be reliably watered across a full range of weather conditions, including multi-year drought? Everything else — cost, infrastructure, rights structure — comes after that threshold is met.

Q: What does evaluating long-term water reliability actually look like in practice?

It involves several layers. We review historical groundwater data for the basin, analyze the property’s irrigation district — specifically its seniority relative to other rights holders — and evaluate its standing under the Sustainable Groundwater Management Act (SGMA) if it’s in a critically overdrafted basin in California. SGMA was enacted because overdrafting had caused significant ground subsidence in the Central Valley, and the framework is designed to bring those basins back into balance by constraining net extraction. For properties in affected areas, understanding where you sit in that regulatory framework is non-negotiable.

Q: Can you explain water rights seniority for investors who may not be familiar with how it works?

Seniority is essentially the priority order in which rights holders receive water when supply is constrained. It's based on when those rights were originally established and the property's continuous participation in its irrigation district — including the payment of standby fees over time. Earlier rights generally mean higher priority. The practical implication is that in a dry year, a junior rights holder may receive a fraction of their typical allocation while a senior rights holder receives theirs in full. Underwriting a property based on its average-year water availability without understanding its seniority position is a meaningful blind spot.

Q: What is the dual-source strategy and why does it matter?

The dual-source approach means acquiring properties with access to two independent water sources — typically surface water from an irrigation district and either owned groundwater or access to transferable groundwater credits. Surface water tracks precipitation, so availability varies with the weather cycle. Groundwater serves as a buffer in dry years when surface allocations are reduced or eliminated.

The discipline is in how you use it. In wet years, when surface water is plentiful, we avoid drawing down groundwater unnecessarily — both to preserve basin levels and to maintain compliance posture under SGMA. In critically overdrafted basins, we require dual sourcing or transferable credit access for every property we acquire. It adds cost and complexity, but it is designed to reduce the likelihood of finding yourself in a drought year with inadequate water and no viable alternative.

Q: What's the most common water-related reason you pass on a deal?

Vague water descriptions from brokers are the most consistent signal. When a listing describes water access in broad terms without specificity on rights, seniority, or source reliability, that vagueness almost always resolves into a problem during diligence. Roughly half of our passed deals come down to water — either the rights documentation doesn't support the representation, the pumping economics are worse than advertised, or the property has more groundwater exposure than disclosed.

Water quality is the other dimension that frequently goes unexamined. In our due diligence process, we have encountered properties with elevated nitrate levels in groundwater — an issue that, if undetected, can cause significant tree defoliation and long-term crop damage. That experience is why water quality testing is a non-negotiable step in our evaluation process. Water rights documentation addresses legal access — it says nothing about water quality.

On Farm Operators

Q: How do you find and evaluate farm operators?

Operators come to us through a few channels — network introductions, broker recommendations, industry events, and occasionally by identifying high-performing farms already listed for sale and working backward to the management team running them. When we're evaluating a new operator, we're looking at their on-farm practices, yield track record, management scale, and the quality of their recordkeeping systems. Institutional investors require detailed, auditable reporting — budget variance analysis, invoicing discipline, yield documentation — and not every operator is set up to deliver that.

We also place significant weight on touring existing properties they manage. How a farm looks tells you a great deal about how the operator thinks. Are inputs being applied with precision? Is irrigation infrastructure maintained? Is the canopy being managed for long-term health or optimized for near-term yield in ways that compromise the trees?

Q: Do you favor large operators or smaller specialists?

It depends on the property. Large operators bring scale advantages — bulk purchasing on inputs, access to specialized equipment, the ability to handle the logistics of a development deal where you’re planting hundreds of acres. For those situations, the efficiencies they bring can be meaningful.

For smaller parcels, particularly the 40-acre pieces that are common in our portfolio, a large operator's overhead structure often doesn't fit. We'll use a specialist — a smaller operator who knows that crop and that region deeply and can give the property the attention it requires. The goal is matching the management structure to the asset, not applying a single template across the portfolio.

On Investment Structure and Hold Period

Q: Why do you structure your holds at 10 years — and how do you manage the risks that come with that timeframe?

Ten years is a deliberate choice, and one we think is well-suited to the asset class when the underwriting is done correctly. It gives investors a defined exit horizon while still allowing enough time for a permanent crop investment to mature, stabilize, and move through a meaningful portion of a commodity cycle.

The discipline required to make a 10-year hold work is significant. You don't have the luxury of waiting out multiple down cycles, which means your entry assumptions — on yield, water, operator quality, and commodity trajectory — have to be right from the start. That's precisely why our diligence process is as rigorous as it is. We're not underwriting a best-case scenario; we're stress-testing against the realistic range of outcomes within a defined window.

We also structure each investment with the exit in mind from day one — understanding who the likely buyer universe is, what will drive valuation at that point, and what improvements to the property will be most accretive to terminal value. A 10-year hold rewards preparation, and that preparation starts before we close.

That said, our structure is flexible by design. If, at the end of a 10-year hold, conditions warrant extending — such as strong commodity fundamentals, continued property-level appreciation, or a market environment where selling would mean exiting at an unfavorable point in the cycle — we may present that case to investors and evaluate whether an extension is appropriate. In many cases, farmland investments may benefit from longer holding periods, particularly where permanent crops continue to mature, soil health improves with consistent management, and infrastructure investments support long-term productivity.

Q: How do you balance the trade-off between income stability and appreciation upside?

The answer shifts with the interest rate environment. When risk-free rates are elevated, the hurdle for accepting yield compression in exchange for appreciation upside rises — investors can achieve a reasonable real return without taking on illiquidity and biological risk. In that environment, we see more interest in properties that can generate strong current income from day one, even if the appreciation story is more modest.

That said, a well-constructed portfolio typically includes both. Turnkey properties with strong current yield and development properties where the return is weighted toward appreciation and long-term compounding serve different roles in a portfolio. High-quality turnkey properties are rarely available on the open market — owners with well-performing assets have limited incentive to sell — which is why our sourcing process emphasizes proprietary relationships and off-market access. Finding those opportunities before they reach the broader market is a meaningful part of how we construct portfolios for our investors.

On Operations, Portfolio Construction, and Exits

Q: How do you structure the operating agreement with a farm manager — and how does that affect investor returns?

The farm management agreement is really about establishing expectations and alignment. It outlines reporting timelines, operational communication, insurance and liability standards, sustainability expectations, and compliance requirements — but it’s not dictating every farming decision day to day. The operator is still bringing their expertise to the property.

A big part of the diligence process upfront is making sure the operator’s management philosophy already aligns with how we want the property farmed. We’re evaluating everything from irrigation practices to labor management to recordkeeping systems before we enter into a relationship. The agreement then formalizes that working relationship and creates accountability around it.

From an investor perspective, operator quality matters enormously. Better operators tend to manage water more efficiently, maintain healthier orchards, and preserve long-term productivity rather than maximizing short-term output at the expense of the asset. Over a 10-year hold, those operational differences can materially impact both annual cash flow and terminal value.

Q: What does a typical capital improvement plan look like for a property you acquire, and how do you underwrite the return on those investments?

Most of the capital improvements we evaluate are tied to water infrastructure, irrigation efficiency, or long-term crop performance. That might mean installing new drip systems, improving pump efficiency, adding district water hookups, evaluating well development, or upgrading irrigation design to improve uniformity and reduce stress on the orchard.

We also look at agronomic improvements. Sometimes that’s reassessing fertilizer programs based on soil, water, and tissue sampling. In certain crops, particularly citrus or vineyards, we may evaluate grafting projects where an older variety can be transitioned into a stronger-performing one without fully replanting the orchard.

The key is that those projects are modeled during underwriting before acquisition. We’re evaluating not just the upfront capital required, but the expected timeline for improved yields, lower operating costs, or stronger long-term valuation. And importantly, not every improvement is worth doing — some redevelopment projects simply require a longer hold period than a typical investment structure allows.

Q: When you eventually exit a farmland investment, who is the buyer and what drives valuation at that point?

The buyer universe depends heavily on the property, the crop type, and the market environment at the time of exit. In some cases it’s adjacent operators looking to expand existing acreage. In others it may be family farming operations, high-net-worth buyers, or institutional farmland managers.

Adjacent operators are often logical buyers because scale and operating efficiency matter significantly in production agriculture. If someone already has labor, equipment, and infrastructure operating nearby, contiguous acreage can be substantially more valuable to them than to an outside buyer.

As for valuation, water reliability, historical production, infrastructure quality, operational efficiency, and location tend to drive a significant portion of long-term value. We think about those exit dynamics during underwriting — not just how the property performs operationally over the hold period, but who the likely buyer universe may be when we eventually sell.

Q: How do you think about geographic diversification across a farmland portfolio?

Diversification matters because agricultural risk is highly localized. Two farms growing the same crop in the same region can still have very different economics depending on water access, soil quality, microclimate, operator practices, or infrastructure.

From a portfolio perspective, diversification across crops, regions, and water sources can help reduce exposure to any single weather event, regulatory issue, or commodity cycle. Different crops move through different pricing cycles, and different growing regions carry very different operational risks.

That said, farmland underwriting is ultimately very property-specific. We spend much more time evaluating the individual characteristics of each asset than trying to fit properties into a broad allocation model.

Q: What's something that surprised you about farmland investing that you didn't expect before doing it at scale?

Probably the degree of variability between properties that, on paper, initially look very similar. Two farms growing the same crop in the same county can have materially different economics because of differences in water access, irrigation design, soils, historical management practices, or even how a particular block handles wind exposure or heat stress.

That’s something you only really appreciate after spending time directly on properties and managing them over multiple years. The deeper you go into diligence, the more nuance you uncover. Sometimes the most important insights come from physically walking the farm, asking targeted operational questions, or identifying small sections of acreage that aren’t performing the way the model initially suggested.

It reinforces the idea that farmland investing is highly operational. There’s no true “commodity” farmland investment where every property behaves the same way.

This piece reflects the views of our investment and farm management teams based on direct operational experience. It is intended for informational purposes only and does not constitute investment advice, an offer to sell, or a solicitation to buy any securities. References to past experience and deal outcomes are illustrative only and are not indicative of future results.