Step 1. Evaluating fair rental values
The values you uncover while filling out this next section are just a starting point. You’ll need to consider why the rental rate on your land should shift up or down based on factors unique to your situation.
Of course, the final decision isn’t up to you alone! Your job here is to choose your target numbers to be prepared for negotiation.
You can write your "ideal" rental rates in your preferred term or unit, i.e., price per acre, price per month for the entire parcel, or price per year for the entire parcel. Just remember to be consistent when answering the following questions so that you can easily compare and average the answers.
Even if you don’t have land or a landowner at this point, you can still enter prices per acre for the general area where you’d like to lease in the future. First, pause for a moment and ask yourself what rental rate you are hoping for? What number instinctively comes to mind? Second, let’s consult your business financials and determine what rental rate is affordable for your operation. It might be helpful to state this as a range, so you know what amount would be comfortable and what amount would be a stretch. If the “pause” exercise above was a instinctual response to how much money you’d like to pay, this exercise is more of a reality check. Third,
we want to get information from the landowner. We want to enter negotiations with some idea of what the landowner’s expectations are and what their financial goals are.
Questions for the landowner:
What are your costs related to owning the land? This could include mortgage payments, insurance, taxes, maintenance, upkeep or several other monetary factors (more on these factors in the following pages).
What goals are you trying to reach with collecting rent? For example, are you only interested in covering your costs, or do you want to turn a profit? Is this an investment property or are you interested in farming/conserving the land? Fourth, let’s consult outside sources. Consult your friends, peers, Extension Agents, and other resources like your state’s FarmLink to find at least three examples of rental rates for farms in your area that are similar to your operation. Keep records of your research for reference during negotiations! Average the three rates together and enter them below. Identifying factors that affect the rental rate
In the previous questions, we asked about the "ideal" rental rate. But, no one piece of land is perfect, all parcels will have their pros and cons. Each of these pros and cons can impact the rental rate.
So, here, you are going to indicate how each of the following factors will impact the rental rate. This will be a helpful reference for you as you enter negotiation–all cons can be used to argue for a lower rate, and all pros the opposite!
Is the parcel near the markets you plan to sell to, or a major thoroughfare that would make delivery easy? Is there an adequate water supply and delivery system? Has the land been in production similar to what the tenant is planning on doing, or will there be a transition period? Does the land have adequate infrastructure other than water (outbuildings, storage, equipment)? How is the soil quality? Choose three factors from above that stand out to you as the most important influences on the rental rate decision. Are these pros/cons on this particular piece of property? Are there more pros than cons or vice versa? Take notes here: Based on these factors, I believe the rental rate for this parcel should be: Step 2. Improvements: valuation and ownership
Now we are moving on to what your contribution to the land is worth. For this exercise, we aren’t trying to determine a cost directly associated with the lease. Instead, we are trying to put a value on improvements you as the farmer might add to the leased land. These improvements could be a reason the rental rate fluctuates at some point. Or, they can remain separate from the rental rate and the question becomes about ownership–if the farmer pays for the improvement, can she take it with her when the lease is over? If that isn’t feasible, does ownership of the value of the improvement transfer to the landowner over the term of the lease?
It's essential to consider and decide on path upfront for assessing the ownership and value of improvements, to prevent conflict and headaches down the road.
The following provides two options to consider.
Option 1: Allocating ownership of improvements across the lease term
Option 1, of course, requires an agreed upon value of the improvement. Value is rarely calculated by the amount you paid for a service, meaning you can’t expect the value to be an exact reflection of the amount you paid to have the improvement installed. Another, more objective way, of determining value will need to be decided and written into the lease.
Option 2: Develop cost-sharing plan Reflections on determining valuation and ownership of improvements Based on the above, what would be your ideal way of handling the valuation and ownership of improvements you plan to make during the lease? Take any notes here, including sample language to include in the lease. Step 3. Insurance
Now, take some time to reflect on insurance. Who will be responsible for what?
What types of insurance are relevant to your operation? At this point we are not considering who is responsible for purchasing the policy, just which policies are needed. Questions for the landowner about insurance: What insurance policies do you already have for the land? Can I be added as an additional insured? Which policies do you want me to carry? In what amounts? Can any of the costs of insurance be shared? Jot down other questions here: Annual taxes on the land Is the land you are interested in in a special tax assessment program? Will the farming you do on the land continue it in that program? Do you understand the ways in which a particular use might change the status of the land? Research the special use tax status in your state. What are the requirements? Does your parcel meet them, and will it continue to meet them if the lease is signed? Write your answer in the space provided below. Special use taxes Is the landowner willing to give you a copy of last year’s tax bill? Are you planning on adding structures that might increase the annual tax bill? What is the property tax rate for the county the land is in? Write what information you were able to gather regarding the questions above in the space below. Your use of the land
In "the Land" section of this interactive workbook, we talked about the importance of defining the land you will farm and have access to. Compare this to the taxed property.
Are you farming the entire parcel? If not, what proportion of the taxes would you be responsible if you agree to cover them? Step 5. Maintenance & Utilities
Generally, rights to define maintenance schedule fall within ownership rights. Generally, rights to use the equipment dictate who must perform or pay for maintenance.
Use this equipment list to give you a quick overview of how one might apportion maintenance responsibilities. The landowner and yourself will need to agree on a maintenance schedule and how costs will be allocated.
Who is responsible for maintenance of equipment, buildings, or infrastructure? For example, who is responsible to maintain access roads? When and how will it be done? Are costs shared? List any other questions you have for the landowner about maintenance costs and schedules here: Who pays for any utilities to the property such as electric, trash, etc.? If irrigation water is provided, who pays for the running of the pump and any repairs that may be necessary? List any other questions you have for the landowner about utility costs here: Putting it all together Additional questions I have for the landowner about "costs": Notes for negotiation regarding "costs":
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