[P1-DROP] MIP6 Application: Peoples Company DROP: US Agricultural Real Estate

MIP6 PEOPLES COMPANY

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[P1-DROP] MIP6 Application: Peoples Company DROP: US Agricultural Real Estate

This MIP6 Proposal will finance an special purpose vehicle (“SPV”) established by Peoples Company or owners or affiliates thereof (the “Issuer”) to acquire U.S. farm properties. Upon acquisition of a farm property, the Issuer will be the legal owner of the farm property and will hold the title to each farm property.

This is the sixth MIP6 application to use Centrifuge’s model.

1. Who is the interested party for this collateral application?

The Issuer will source and manage farm properties. It will create and own non-fungible tokens (“NFTs”) that represent each farm property title. It will lock their NFT’s into the Tinlake protocol to serve as collateral. The Issuer will pool its assets and offer ERC-20 tokens to investors, specifically DROP Tokens and TIN Tokens.

Centrifuge: will provide the technology and framework for bringing real-world assets to MCD. The main contact on Tinlake for the application is Jason Jones (@Jason, [email protected]) as well as Lucas Vogelsang (@spin, [email protected]) of Centrifuge.

2. Provide a brief high-level overview of the project, with a focus on the applying collateral token

Peoples Company farmland real estate is part of Centrifuge’s real-world assets series. The Issuer will utilize MCD as a revolving line of credit to purchase new farmland. The Issuer expects to draw Dai up to its assigned debt ceiling in roughly six to nine months and will seek an increase to its debt ceiling once 75% of the initial line amount is disbursed.

Farm land assets have the following characteristics:

US Farmland offers several investment benefits including portfolio diversification, low to negative correlation with public equities and positive correlation with inflation. There is more than $3 trillion worth of farm real estate in the US and close to 400 million acres of cropland. The farmland asset class has been one of the best performing asset classes over the past twenty years.

The following describes an exemplary use case

In January 2020, SPV Larsen Farm, LLLP (the “Farm”), an affiliate of Peoples Company, acquired an 80-acre property located in South Central Iowa just outside of the Des Moines Metro area for approximately $320,000. The asset includes 70 acres of land suitable for transition to tillable farmland and a 5-acre building site. The Farm is eligible to receive USDA organic certification to produce organic fees grain products. Peoples Company owns and manages the farmland.

Located in Madison Country, Iowa, the Farm was enrolled in a Conservation Reserve Program (CRP) through the Farm Service Agency in 2009. Due to there being no application of synthetic chemicals or fertilizer on the Farm throughout the ten-year duration of enrollment, the Farm became eligible for organic production immediately after exiting the program in October 2019. The Farm is eligible to grow organically certified corn, soybeans, oats, and edible beans. Organic certification is actively being pursued by the Farm through International Certification Services, Inc.

Being in the heart of the Corn Belt and just outside of the Des Moines Metro, the Farm is highly sought after by farm operators. This location is associated with strong agricultural production and therefore experiences consistent tenant occupancy.

The Farm has been transitioned to tillable farmland through a ground preparation process that entailed controlled burning, clearing trees and brush, and discing the land to prepare for planting, while improving soil health and stimulating growth. Opportunities exist for yield optimization through soil drainage improvements that will improve crop health and provide better condition for completing field operations.

This collateral application uses the Centrifuge model and proposes the DROP token [P1-DROP] of Peoples Company’s asset pool as collateral. A detailed overview of Centrifuge’s technology stack can be found here.

Legal Setup

While the specific details of the legal setup are forthcoming, at a high level Peoples Company will form its own SPV for the acquisition of farm properties. The SPV will enter into a service agreement with Centrifuge to get support from Centrifuge while using Centrifuge’s open and decentralized infrastructure. The SPV will tokenize the titles of each of its farm properties into NFTs and will add those NFTs to Tinlake as collateral. The SPV will utilize Tinlake to issue P1-DROP and P1-TIN backed by the pool of NFTs that are locked in Tinlake. Peoples Company will purchase the P1-TIN tokens and will lock the P1-DROP tokens into a MakerDAO Vault. Find the documentation to the two-tranche structure here.

3. Provide a brief history of the project

About Peoples Company

Peoples Company’s history began in the 1960s and was established in the farm management department of Peoples Trust and Savings Bank in Indianola, Iowa.

In 1972, the farm management department and real estate brokerage separated from the bank into what is now known as Peoples Company. In 2002, the current ownership team acquired the majority interest of the company.

Peoples Company operates one of the leading farm land brokerages in the country, with annual transaction volume of over $400 million. Peoples Company offers land brokerage, land management, land investment, and appraisal services in 26 states throughout the US. The company has consistently been named a “Top Brokerage in America” and a “Top 30 Auction House” by the Land Report, an industry-leading publication targeted toward the American landowner.

About Centrifuge

Centrifuge has built a technology solution for businesses such as Peoples Company to use their assets as collateral, turn them into fungible ERC20 tokens and borrow money against them through DeFi protocols. With Tinlake Centrifuge has over 1M DAI locked in a number of different asset pools since the launch of v3 end of October and deployed capital from over 100 real people around the world.

Over the past months we have worked closely with the different domain teams to onboard the first two of our partners, New Silver and ConsolFreight shortly. This MIP6 application is the sixth MIP6 application to use Centrifuge (see previous applications: NS-DROP, CF-DROP, HTC-DROP, PC-DROP, KF-DROP) and there are more in the pipeline. We intend to grow DeFi massively and generate DAI from many different uncorrelated asset originators. Our goal is that Maker will be backed 30% by real word assets by the end of 2021.

4. Link the whitepaper, documentation portals, and source code for the system(s) that interact with the proposed collateral, and all relevant Ethereum addresses. If the system is complex, schematic(s) are especially appreciated.

Peoples Company mainnet deployment will be accessible via tinlake.centrifuge.io

Technical documentation about Tinlake can be found here: https://github.com/centrifuge/tinlake and the Maker specific implementation here: https://github.com/centrifuge/tinlake-maker-lib

5. Link any available audits of the project. Both procedural and smart contract focused audits.

Centrifuge has conducted several audits of its technology stack. The audits can be found here:

6. Link to any active communities relating to your project.

7. How is the applying collateral type currently used?

The SPV will be financed by issuing DROP Tokens for 90% of the net asset value of the pool of NFTs plus cash on hand (collectively “Pool Valuation”) and TIN Tokens for 10% of the Pool Valuation.

The Issuer expects to launch with 10 million Dai increasing to 20 million Dai when 75% of the initial line amount is disbursed. It will initially seek 9 million Dai from MakerDAO, increasing to 18 million.

The Issuer expects to invest in farmlands that have an average value of $500,000 to $1,000,000 and expects to hold farmland over the long period of time, potentially up to 30 years. Upon the sale of a farm property, the Issuer will repay the outstanding balance drawn against the farm property NFT and accrued interest thereon. All of the farms in the pool will have similar risk characteristics including high quality soil productivity, soil profile, slope characteristics, water availability and weather conditions.

The Issuer will provide MakerDAO with a put option, which it can utilize if it ever needs to liquidate. After the first 6 months, MakerDAO will have the right, but not the obligation to sell its ownership of DROP tokens to the Issuer, in whole or in part, upon 90 days notice. The Issuer will work in good faith on a best efforts basis to find one or more buyers for farm properties and will only purchase the DROP tokens from MakerDAO if it successfully sells farm properties to a new buyer. If the farm properties are not sold within 90 days, then the Issuer will have another 90 days to sell the farm properties. This process will continue until the Issuer has fulfilled the MakerDAO’s sell request. The Issuer has a proven long term track record of selling farm properties. Peoples Company completes about $400 million in farm auctions per year, which is about 400 transactions per year. Peoples Company average time to sell a farm is 90 days.

The Issuer is able to obtain bank financing for a revolving line of credit at about 3.26% fixed with an 80% loan-to-value or 2.67% fixed with a 50% loan-to-value (as of November 2020). The Issuer will seek a lower Stability Fee from MakerDAO because 1) the Stability Fee is variable versus the bank rates, which are fixed rates, 2) MakerDAO has a put option, and 3) the Issuer will be taking early stage risk versus taking a loan from the bank.

8. Does one organization bear legal responsibility for the collateral? What jurisdiction does that organization reside in?

Peoples Company will bear legal responsibility for the collateral.

This SPV structure creates a bankruptcy-remote entity whereby owners, debt holders or interested parties of this newly created SPV are left unaffected by the parent’s financial, operational and/or legal health.

9. Where does exchange for the asset occur?

The SPV enters into a subscription agreement with lenders who receive DROP from the SPV in turn for providing DAI. The DROP token can be redeemed against the cash flows of the underlying collateral directly from the SPV by any DROP holder. This is ensured by the Tinlake smart contracts and the primary way for interacting with these tokens.

10. (Determined by Legal Domain Team) Has your project obtained any legal opinions or memoranda regarding the regulatory standing of the token or an explanation of the same from the perspective of any jurisdiction? If so, those materials should be provided for community review.

We do not have any materials we can provide at this time.

11. (Determined by Legal Domain Team) Describe whether there are any regulatory registrations for the token and provide related documentation (including an explanation of any past or existing interactions with any regulatory authorities, regardless of jurisdiction), if applicable.

The issuance of DROP and TIN tokens is handled via Securitize, with AML/KYC procedures and compliance with US securities guidelines. Investors based in the US must be accredited investors (generally defined as having a net worth of at least $1 million). The SPV issues DROP tokens for the Maker vault, and Centrifuge will post legal discussion about potential implications for Maker.

12. (Optional) List any possible oracle data sources for the proposed Collateral type.

The Issuer will provide annual appraisals for each farm property, which will be used to value the NFTs.

If an appraisal submitted by the Issuer shows a decrease in the total appraised value of a farm property then the value of the NFT will be marked down. If, as a result of such mark down, the outstanding value of the DROP Tokens increases to more than 90% of the Pool Valuation, then Tinlake will lock the Issuer from drawing any further Dai and will lock the TIN investors from redeeming. The Issuer may restore balance and unlock Tinlake by: (1) buying additional TIN tokens so that the proceeds will increase the cash reserve in an amount necessary to cause the value of outstanding DROP Tokens to be no more than 90% of the Pool Valuation or (ii) redeem DROP Tokens in an amount necessary to restore the value of outstanding DROP Tokens to no more than 90% of the Pool Valuation.

If an appraisal submitted by the Issuer shows an increase in the total appraised value of all farm properties, the Issuer may: (i) draw additional amounts from the Financing Line to be funded by DROP Tokens up to the amount that would cause the total outstanding DROP Tokens to equal 90% of the Pool Valuation or (ii) withdraw TIN Tokens to restore the ratio of the value of the outstanding DROP Tokens to the value of the outstanding TIN Tokens to 90/10 or (iii) do nothing, which will effectively over collateralize the pool of assets by the excess value of the TIN Tokens.

13. (Optional) List any parties interested in taking part in liquidations for the proposed Collateral type.

The Issuer will provide MakerDAO with a put option, which it can utilize if it ever needs to liquidate. After the first 6 months, MakerDAO will have the right, but not the obligation to sell its ownership of DROP tokens to the Issuer, in whole or in part, upon 90 days notice. The Issuer will work in good faith on a best efforts basis to find one or more buyers for farm properties and will only purchase the DROP tokens from MakerDAO if it successfully sells farm properties to a new buyer. If the farm properties are not sold within 90 days, then the Issuer will have another 90 days to sell the farm properties. This process will continue until the Issuer has fulfilled the MakerDAO’s sell request. The Issuer has a proven long term track record of selling farm properties. Peoples Company completes about 400 farm auctions per year worth over $400 million. Peoples Company average time to sell a farm is 90 days.

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...The SPV issues DROP tokens for the Maker vault, and Centrifuge will post legal discussion about potential implications for Maker.

This is forthcoming when?

Hi @mamoore930 and welcome to the community!

Agricultural real estate has the potential to be a highly interesting use case for crypto collateral.

If you look at the above chart the value of farmland is steadily growing and has since 1970 only had a few years with lower year-on-year prices. Farmland is however already used as fiat bank collateral so my question is more from a legal aspect: if a foreclosure should happen, what priority would be given to P1-DROP if Peoples Company already has fiat bank financing?

Sidenote: @spin, @SebVentures, @mrabino1 I think maybe it is time to think about adding an abstraction layer to the Centrifuge real world assets. There are how many farms and businesses similar to Peoples Company? Multiple thousands in the US alone? There is no way Maker governance can handle this on a company level.
I am going to make a bold suggestion: we need a fund with structure similar to 6s Capital but focused on agricultural real estate. Then the Centrifuge applications go there instead of directly to Maker. At least the applications would have a chance of getting processed in a better timeframe.

EDIT: I question the above rates of 2.67% - 3.26%. https://www.farmlandinvestorcenter.com/landowner-resources/farm-mortgage-rate-watch#:~:text=Banks%20charged%20an%20average%206.0,in%20the%20Minneapolis%20fed%20district the rates listed here are far higher.

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Fully agree, soon, IMO, we will do wholesale and expect the SPV to be managed by an asset manager that has no link with the borrower. That is needed to avoid any conflict of interest and having strong diversification. Currently, the cleanest structure is NS-DROP. Adding a trust doesn’t change much this problem.

But I don’t feel we are BlackStone ready to ask them to manage assets under a Tinlake pool. And I personally like the fact that we have asset originators who really know their business.

I like the farmland idea, but always a bit stressed when I see an asset that a performed so well in the previous years. We will see (just saw that the chart exclude dividends :slight_smile: ).

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Maker needs to manage supply and demand of DAI. Typically the DAO uses the base rate to adjust interest rates on collateral types to incentivize Vault holders to repay their vaults when DAI demand goes down. Farm Land is slightly less liquid but this is structured never the less with this goal in mind:

  • Quickly scale up DAI supply by offering an attractive interest rate
  • Reduce DAI supply whenever necessary through by making the debt in the Vault callable within 90 days

There isn’t really a comparable rate in the traditional world as all of these bank line of credits and traditional rates are for multiple years. The rates that are stated in the MIP6 above are the rates that Peoples Company is currently (as of November 2020) able to obtain depending on the LTV (3.26% with 80% LTV and 2.67% with a 50% LTV). As shown in the source you provided the average interest rate projection for December 2020 are at 3.55%. Peoples Company is asking Maker to be competitive with these rates as the loan would be callable by Maker short term (upon 90 days notice). This means for Maker that they have flexible Dai supply in substantial volumes and Peoples would profit making use of the low interest rates instead of the fixed rates they’d get from their bank. This short term option to liquidate comes at a cost for Peoples: they can’t just build up the portfolio and forget about it but need to have capacity to shrink the vault whenever necessary

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Like Warren Buffet says farmland they aren’t making any more of it. And people need to eat, so it is recession-resistant. Commodities like corn, soybeans, etc. are good inflation hedges. Buffett bought a 400-acre farm 50 miles north of Omaha in 1986 for $280,000. “Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid. I still know nothing about farming and recently made just my second visit to the farm,” he writes. Farmland is far less volatile than malls, offices, or apartment buildings, especially during these uncertain times. I am a big fan of this asset and hope to see it succeed.

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The 3.55% figure is the rate for 10-year Treasury Bonds. The linked article indicates the average long term farm mortgage is 6.1%.

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Oh I jumped to the 2020 projection too quickly. Maybe @mamoore930 can provide additional info on how the rates have developed in the last couple of years. Peoples stated their recent terms from Nov 2020

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Hi @Planet_X. The farmland investments will not be levered with commercial banks so there will be no mortgages on these properties. Also, the interest rates you reference are from 2018. Interest rates have come down substantially. The rates quoted in the MIP6 are taken directly from rate sheets that we receive from relationship banks that we work with and are very reliable. Also, the 10-year treasury rate is now .98% compared to the forecasted rate of ~3.5% referenced in the link you provided.

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Farmland overall should be a good asset for diversification. I actually work agricultural lending space and am knowledgeable as well. Farmland has good properties that often diverge from other asset classes. It is a decent hedge against modest inflation, but not sharp inflation, and has obviously been a very investable asset class over time. The questions that I would ask are 1) this particular farm with CRP is going to be a higher risk fringe farm. Which is why it was taken out of production to begin with. Nothing wrong with that, as there might be huge upside to converting it to organic tillable, but it isn’t the same as high quality Iowa farmground. 2) My worry is that there is an inherent risk of peg breaking between dai and the real world asset. In the case of farmground, would be lucky to get cash rents in the 2-3% range. If the long term, dai appreciates vis a vi the dollar, there is a risk that the USD denominated rents can’t keep up. This is why, it might make more sense in the near term to focus on higher risk, higher return real world assets. 3) I do think that Peoples company would be a very good and reputable partner for these types of “property” management. 4) The asset risk of depreciation is mitigated by the leverage rate obviously. For lack of better term, the industry standard is probably 65% loan to value, with some periods of loan to asset going as high as 75%. My 2c

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@ejbarraza touches on an important point about farmland. Growing global population and increasing wealth in developing markets provide strong demand fundamentals for high quality farmland that produces basic crops like corn, soybeans, wheat, rice, etc. Additionally, the U.S. is the #1 or #2 grower and exporter of key crops like corn and soybeans. However, the supply of U.S. farmland is actually shrinking at gradual pace as cities/towns grow and land is converted to other uses. These factors suggest (can’t guaranty of course) that farmland will grow in value. Also important to land value performance is technology. As farmers adopt technologies for better seeds, cost management, soil improvement, higher crop yields, etc., farming margins will improve and this should boost land values. Finally, sustainable agricultural practices and organic production are becoming more widely adopted due to consumer demands. These practices will protect and improve long term soil health and water resources and support land values.

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yes @mamoore930 I found a new and updated list of rates on this page scroll to bottom. I think you are right and the indicated rates in your applications sounds reasonable.

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The farm mentioned in the MIP6 that was taken out of CRP is an example of a completed investment, not one that needs financing. Other assets like it could be found. It was originally put into CRP when payments from the govt. for putting it in CRP provided a better return than farming. It is not in a fringe area but in the heart of productive Iowa cropland.

2-3% lease yields is in the right range of rents for high quality farmland. It is expected that the land would appreciate in value as well so the all in return is ~7% annually.

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And they said Maker wasn’t doing yield farming…

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The expectation of real estate appreciation might be good for a farmland investor, but this appears to be a lending relationship where the bet on the come approach, could result in a liquidation event. Farmland is actually fairly volatile. As is quite frankly DAI. I don’t see much of a buffer (if any) in the lending facility. For data purposes, here is a data source from the Kansas City Fed. Click on “Land Values” to get the year over year appreciation/depreciation of farmland values.But the late 70’s and 80’s had farmland decreases that were brutal. Farmland losing 80% of its value. Point being is that between DAI losing its peg, going to 1.07-.1.15 and/or any marketable drop in farmland would result in the keepers earning their keep. https://www.kansascityfed.org/research/indicatorsdata/agcreditsurvey/articles/2020/2-13-2020/stronger-farmland-values-support-farm-economy

@jameskmccall Would you be interested to use your knowledge to help us on this asset evaluation? You can shoot me a direct message on ping me on the chat.

Okay, I’m convinced we need to onboard it asap. Let’s run the meme printer.

Regarding the collateral application. I see some issues, but that may be just stuff to be worked on as this is a new frontier for Maker.

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I suspect the reason for this is related to interest rates being sky-high. In a world where the ten-year treasury is at 1% or less, I do not see a way for farmland to drop 80%. If interest rates do hit 15% why would MakerDAO bother lending to RWAs? Might as well just invest in treasuries and call it a day. Furthermore, the Fed has signaled that interest rates will remain where they are for the next 4 years (at least). So I expect asset price inflation to go up and interest rates down. DAI is volatile, but I hope RWAs will grow AUM enough to limit that volatility in the future.

I vote for Maker DAO to change its logo to a happy face with a piece of wheat in its teeth to represent its pivot to RWA yield-farming.

Sure, will help if I can. Not sure what all that entails or how to dm exactly on this platform

Yes, the key is knowing what Treasuries are going to do. If I knew that I would have my own island somewhere, and be farming coconuts. But take farmground at 10,000 an acre. Let’s say they can borrow $6,000 against it. At 3% interest that is $180 in interest and assuming 30 year payments, another $126. So payment is approx $306. Which is probably where cash rents are. Which are year to year, or maybe a 5 year lease. Also with credit risk of tenant. Interest rates go to 5%. Ouch, payment goes to $390 per year per acre.

Then Willie Nelson comes out and starts playing Farm Aid again. I guess my point is that 1) I wouldn’t bank or model in a 7% capital appreciation of the asset to underwrite it which really only helps if you liquidate the collateral. and 2) due to the less liquid nature of the asset and friction costs associated with disposal, the only way this works is if MKRDAO also has a long term commitment to keeping the stability fee low. But I don’t really understand the explicit guarantees that are provided by the Tinlake system. Maybe there is additional recourse to those assets drop/tin that I am not understanding. Or maybe this is just a year to year revolver.

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If they are not going to use debt, then the calculation changes. Although I do agree that the total return is not really a useful metric for debt servicing. I would like to know if there are any rent escalators or if the lease has a CPI index attached.