Secured Private Credit (SPC)
Secured Private Credit involves providing an upfront cash investment secured by real estate, with a predetermined lease/interest rate and termination option fixing total returns for a structured target-IRR. In essence, the current owner-operator of the ranch transfers the deed of the ranchland assets into long-term escrow (LTE), managed by an independent third-party administrator (TPA).
The investor, now the “Optionee,” then receives a predetermined payment plan from the rancher “Optionor” under a long-term agreement, with the rancher holding the right to terminate the option at a predetermined price and time. This arrangement benefits both parties, providing the rancher with liquidity and operational continuity while offering the investor a stable cash flow and a reliable tenant.
Who Should Join Our Exclusive Network?
We are seeking partnerships with the following demographics:
Partner:
- Sophisticated cash-flow land & livestock operators with experience in Ranching For Profit.
- Owner/operators of generational family legacy ranches who are interested in purchasing neighboring properties from retiring owners.
- Operators at scale who have experienced rapid growth and need to reallocate their balance sheet for cash flow.
- Operators at scale who can sustainably continue to grow, vertically integrate, or expand value-added services.
- Families engaged in succession planning, requiring buyouts of family members to consolidate ownership.
- Retiring ranchers with a few more years of operations ahead.
Investor:
Institutional Investors
- Pension Funds
- Fixed Income
- Endowments and Foundations
- Sovereign Wealth Funds
- Superannuation Funds
- Insurance Companies
- Mortgage Companies
High Net Worth Individuals (HNWs)
- Family Offices
- Multi-Family Offices
- High Net Worth Individuals seeking custom contracts for exclusive and unlimited recreational rights
How Does Secured Ranch Investing for Fixed Returns Work?
SPCs are organized through two interconnected agreements:
1. The current owner-operator of the ranch agrees to transfer the deed of the ranchland assets into long-term escrow (LTE), managed by an independent third-party administrator (TPA). This agreement with the investor is typically based on the current appraised value.
2. Following the LTE, the investor, now the “Optionee,” leases the property back to the rancher under a long-term leaseback arrangement while giving the rancher the right to terminate the contract at a predetermined price and predetermined time.
This arrangement enables the rancher to continue operating the property while transferring asset risk to the investor. For the investor, it means acquiring a property that already has a long-term and vested tenant in place, allowing for immediate cash flow generation, often at times superior to market rates.
Why Would Ranchers Opt for Secured Private Credit?
Many ranchers take immense pride in ownership, often equating it with control. However, traditional mortgages and SPCs share similar control dynamics.
Financial obligations, lender reporting requirements, loan provisions, conditions, and covenants may limit control with a mortgage. Through an SPC, ranchers gain a unique avenue to assert control over their future and present cash flows. Importantly, the ownership status remains unchanged on legal documents; the title still identifies the Optionor as the owner throughout the contract duration.
The leaseback provisions preserve ranchers’ fierce independence and sovereign nature. They retain full operational control without the encumbrance of an unwanted landlord or partner. This control ensures that operational decisions remain firmly within the hands of the rancher, safeguarding their autonomy and vision for the property.
For ranchers (Optionor)
SPC represents not only a financial arrangement but also a strategic tool to uphold their sense of ownership and control over their operations, ensuring continuity and independence in their management approach.
1. Capital Liberation: SPCs release the equity tied up in the property, providing liquidity. Owners can use this capital to expand ranch operations, pay down and refinance debts, consolidate obligations or liabilities, structure retirement, or diversify their investment portfolios for better cash-generating returns in other assets.
2. Operational Continuity: The ranch owner continues to operate on the land undisturbed, which is crucial for maintaining livestock and agricultural practices without any disruption.
3. Expense Predictability: Entering into a long-term lease secures stable and predictable costs for renting the land, aiding in financial planning and budget management.
4. Tax Efficiency: The ranch owner can often deduct lease payments as business expenses, potentially reducing the ranch operation’s AGI (tax liability).
For the investor (Optionee)
The benefits are also significant:
1. Stable Cash Flow: Purchasing the ranch assures a consistent revenue stream through lease payments underpinned by a long-term lease agreement hedging inflation. This stable cash flow provides a reliable income stream, offering financial stability and consistency in targeted returns for portfolio optimization.
2. Reliable Tenant: The investor gains a committed and vested tenant in the ranch owner, who is reliant on the property for their ongoing agricultural activities.
3. Tax Benefits: The investor can take advantage of depreciation deductions on the ranch property, which can provide significant tax advantages and enhance the overall return on the investment.
4. Security and Performance of the Underlying Asset: Investing in a ranch property offers inherent security backed by tangible real estate. The nature of the property ensures a solid foundation for long-term performance, as it is typically resistant to market volatility and economic downturns. Additionally, the strategic location and potential for land appreciation further enhance the security of the investment.
Types of Secured Private Credit
SPCs represent a prevalent approach in commercial real estate, spanning various sectors, including retail, industrial, and more. This method has become integral to how commercial real estate is valued and transacted in today’s market. The rapid growth of this form of “private credit” in recent years, fueled by higher rates and asset values, is expected to make it a larger portion of the investment industry for years to come.
1. Gross Lease: In this setup, the rancher makes grazing payments to the Third Party Administrator while the investor bears significant expenses related to the property, such as land maintenance, infrastructure repairs, and capitalized improvements.
2. Net Lease: The rancher takes on responsibility for not only paying grazing fees, but also covering various operating costs. This could include property taxes, insurance, utilities, and routine maintenance capped at a fixed amount.
3. Percentage Lease: A percentage lease structure entails the rancher paying a base grazing fee in addition to a percentage of their gross profits from activities on the land. This setup ensures that the investor receives a return commensurate with the success of the land’s use.
4. Variable Lease: This design is meant to flexibly accommodate fluctuations in key agricultural metrics, such as changes in livestock market prices, herd size, or grazing conditions. This percentage can be pegged to many different metrics or indices, such as the CME’s feeder cattle board, AUMs or AUDs, or average daily gain.
This type of arrangement allows both the rancher and investor to adapt to the dynamic nature of the industry and share in the risks and rewards associated with ranching endeavors.
Key Takeaways
Secured Private Credit offers a compelling investment opportunity for both ranchers and investors alike. With fixed returns and a straightforward investment process, SPCs provide liquidity for ranchers, stable cash flow for investors, and operational continuity for both parties.
By joining Ranch Investor’s exclusive network, stakeholders can learn more about the potential of ranch investment, driving growth, sustainability, and success in the agricultural sector.
To begin your recreational ranch investment journey, simply express your interest to us. Colter DeVries will reach out to you personally to verify your qualifications. Start by filling out this form.