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

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.

Understood, but that is a driving metric in farmland value. Basically the cash rents would need to be able to make a reasonable size debt payment. Just more to show why farmland values are very interest rate sensitive. I am sure these risks can be mitigated to a large degree through the advance rate, and loan terms cap on the length of the revolver. Crystal balls are better 1 year in advance than 30. But the farmland is a long-term investment. Would be nice if there is a way to have a little longer fixed rate for dai, but that appears in its infancy.

I think, what is quite interesting here, it seems relatively easy to have a security token attached to the land. Well easy, at least there is a possibility.

Hey Everyone - The CEO of Peoples Company will present on the Real World Asset - Collateral Onboarding Call on Dec 16th. Here are the details: https://forum.makerdao.com/t/collateral-onboarding-call-21-rwa-2020-wrap-up-rwa-2021-3-asset-originators-wednesday-december-16-18-00-utc/5588

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Thank you for coming to the call, guys. One thing I wanted to bring up but didn’t have a chance to is the following:

I’m afraid I don’t understand this at all - it’s just not how loans work. I think we need to have (at least) loose control over an entity that has the senior lien on the assets pledged to the facility. Do you have any ideas how to make this happen? Perhaps the structure used in MIP21?

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The put option is there because this application recognizes that we want liquidity and that we don’t want to take duration risk. For 6S we have a one-year notice period and, for New Silver, the underlying loans are for less than 24 months (which leads to an average of 12 months).

Here, the asset-originator provides the ability to sell the property if we want to end the loan. We can force the SPV to take an action.

I fear that this put option will be quite expensive. I would prefer a medium/long-term fixed-interest loan (or indexed on the rent). But it’s a bit early to tell. We will see.

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First of all–thank you for introducing the Maker Community to a collateral type that I believe represents the American spirit, and the beltway of hard work and commitment. Farmland has historically outperformed most major asset classes and I believe adding exposure to such can only benefit the DAO.

With that in mind–can you please provide a sample pertaining to the “put option”, such as the Terms, Option Fees, Option Price, terms of the option, and binding effect?

Also, will it include a clause stating that if you cannot find a buyer—the put option becomes null?

This might be an unfair comparison, but looking at the PLC Gladstone Land (Symbol: LAND–Nasdaq) it is currently yielding a modest 3.7% and the stock has underperformed in the last 60 months. Is it possible that the Yield might get stagnant if the stars do not align?

How dependent are you with regards to crop prices? And wheat and corn prices, among other crops, if they plummet–how does that effect the yield?

I just don’t think that a put option is sufficient recourse. Ideally a Trust or the SPV (being managed by someone besides the issuer) would hold the senior lien against the property. This setup assumes that the issuer is still solvent and present enough to perform the liquidation themselves. I understand how this structure operates for short term loans, but this feels like forcing a square peg into a round hole. Placing this much trust in the issuer after something has already gone wrong enough for a liquidation to take place is not going to end well IMO.

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Fully agree. If there is a big price drop on farmland, we are asking the asset manager to sell something that will materialize a loss on his side (as he is the main/only TIN holder). There is an obvious conflict of interest.

Happy to see so much interest from the community.

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Peoples Company will be on this week’s Collateral Onboarding Call, Jan 6th, 6PM UTC: [📄] Collateral Onboarding Call #22: People's Company - Wednesday, January 6th 18:00 UTC

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The slides + recording of the Collateral Call have been added in case anyone wants to review. Thanks @blimpa for the effort!

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Is my understanding of this project correct: in case of liquidation, DAO gets a put option and People’s Company makes a “good faith” effort to sell? And if it can’t, we are on the hook waiting for them until … “[the land] is sold”? That sounds … less than ideal … putting aside the fact that the SPV, wholly owned by the issuer, is highly NOT bankruptcy remote, the DAO has no recourse here. Unlike 6S, the DAO has no standing to have someone acting on our behalf to drag the SPV or the issuer to court if the People’s Company’s “good faith efforts” fall short.

I am very afraid that if we don’t pump the brakes on some of these projects, or give a very low debt ceiling for a considerable “trial” period, we are in for a rude awakening, either when this Centrifuge structure collapses or a project, like the People’s Company, after a “good faith” effort to sell their farmland, walks away and we are left holding the bag (and eating into the SB or, worse, printing MKR to cover the losses).

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@Tosh9.0 as discussed in the posts above, everyone that commented agrees that this kind of put option is not really ideal.

The current proposal has some flaws in it from a Maker perspective. Most are here to address some expected Maker needs that are not really important from my point of view. Nevertheless, the community shows interest in the underlying collateral is good. All that is needed is to find a good middle-ground. Work is being done on this front. But just thinking about how to structure that is not an easy question.

I would recommend that, in the future, asset originators work with a Maker’s team first in order to present a term sheet that is already worked on. But this is a learning process for all parties.

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Hey everyone -

Jason here from Centrifuge. I just want to give an update on the status of Peoples Company. So far they have introduced their management team and the farmland asset class to the community. Peoples has brought in their CEO, their head of Asset Management, and a leading professor on farmland assets to talk to the Maker community. The purpose has been to give the community enough information to determine whether this team and this asset should pass the community greenlight process so that the Maker domain teams can work on structuring a deal. Hopefully Peoples has established that farmland assets are stable, that Peoples is a legitimate team, and that this project is worthy of a community greenlight. I think the community greenlight poll will start next Monday.

If Peoples receives a community greenlight, then the next step will be to structure terms that work with Peoples and with Maker. Peoples will work through a framework for key terms with the RWA risk team with the premise that we should work together to design terms that will be conducive for the Maker community. We will look at how Peoples has previously structured deals with banks and then we will design something that works with Maker. We are at an early stage with this process and we invite anyone who wants to get into the details to join the risk team in these conversations as we focus on designing a term structure.

Once we design the terms, then Peoples can present a proposed term sheet to the community for comments and we can iterate if the community generates legitimate ideas.

We see the commentary in this thread and we will address every one of these concerns with the risk team as we design this structure. This is a collaborative effort. If we like the asset class and the team, then let’s vote for a greenlight and get to work on structuring the deal.

If you have an questions, please feel free to share here, reach out to me or other members of the Centrifuge team, or reach out directly to Mark at Peoples.

Thanks all!

Jason

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The idea with the put on the loans came up when we were thinking about how we could give Maker short term liquidity when unrelated to the asset’s performance Maker needed to reduce exposure to the asset class (for example the target DSR went above the stability fee of the collateral type or just in general DAI demand issues). If farmland as an asset class isn’t performing then indeed the PUT option is not the ideal structure here, but would still work:

Peoples (and other junior investors) stand to loose all of their junior investment if the senior investors (incl. Maker) can’t be repaid.

Why would you say the SPV is not bankruptcy remote? In case of an asset originator bankruptcy, the assets in the SPV can not be used to settle the AOs debts before any claims against the SPV are settled (this would be the junior & senior investors). A way to ensure these loans are serviced even when a the AO is not operational anymore is to instate a professional backup servicer to manage the SPV. This is a rather common structure used in the credit world.

As @g_dip mentioned, a rather interesting option for this collateral type could be to adopt the structure that MIP21 proposes. And in the long run this might be the safest option however there are still many open questions around it and to date I don’t think the trust with MakerDAO as a beneficiary has been formed yet. I’m looking forward to seeing the progress here!

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FYI Bill Gates is investing heavily in farmland.

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Most farmland is used to support animal agriculture. If you know anything about nutrition, you should know that vastly better health outcomes are obtained on a plant-based diet in comparison to a diet that includes animal products (see What the Health). Hence, I expect agricultural real estate to decline in value dramatically over the next few decades because plant-based food takes a lot less space and water to grow in comparison to animal-based food products. A lot of this currently occupied land can be dedicated back to nature, rewilding, even as human populations grow numerically.

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I just saw this MIP6 application and I think that this is a great suggestion from @Planet_X. I can not agree more that reviewing company by company is not gonna be a working model in long term. That is why we are working to provide a working solution for this problem and will submit an official proposal by the end of the month.
However, our proposal is not gonna solve the problem with all potential RWA as our expertise is in Commercial Real Estate. Nevertheless, the right teams are going to be able to replicate the model in other RWA as well.

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Interesting thought! A few remarks:

  1. Pasture-fed cattle meat will become more popular. Its nutritional values and less presence of hormones, antibiotics etc compared to cage cattle farming will harvest a premium price. This requires more extensive agriculture leading to demand for quality pasturing land
  2. You assume that people will change behaviour because it is better for their health. Humans have been omnivores for millions of years, so I am not too sure easy it will be to go against evolution