Ohio Farmer

Considerations for livestock building rental pacts

The best method to determining a rental rate for livestock buildings is to actually calculate some building ownership costs.

November 14, 2018

4 Min Read
LEASE SMART: The most important piece of any building rental is a written lease. The lease spells out not only the rental rate but also specifies the dates of rent payments, what happens if rent is late, and how the rental agreement is renewed or terminated.Visivasnc/Getty Images

By Rory Lewandowski

Recently I have received some questions about rental of livestock buildings, specifically dairy facilities. Typically, callers want to know a charge per square foot or a rental rate on a per-head basis — or, for a dairy facility, based on number of freestalls.

The reality is there is no one right or correct answer. There are some basic methods or approaches that generate a dollar figure. However, view that number as a starting point in a rental negotiation. There are additional factors that affect the final rental rate.

Those factors include the age and condition of the building, location of the building, the functionality or obsolescence of the building, the demand for rental of this type of building, and the character and personality of the parties involved in the rental agreement.

Possible ways to calculate rental rate
The simplest and most direct way of calculating a building rental rate is to use a commercial rate, a known market. While these types of figures are available for grain storage and some equipment storage markets, they are not available for livestock building rentals. We don’t have a commercial livestock building rental market.

A second method is to use survey data. Custom farm rates and cropland rental rates are based on surveys. The issue with livestock building rental surveys is that there are a very limited number of surveys, and those surveys generally have a small number of responses — so use results with caution. You can get an answer that is fast, easy and totally wrong for your situation. The most recent farm building rental survey that I know of is a May 2014 document by the North Central Farm Management Extension Committee.

The best method to determining a rental rate for livestock buildings is to actually calculate some building ownership costs and use those figures as a starting point in coming to a rental rate agreement. There are two basic categories of building ownership costs: variable and fixed.

Variable costs are dependent upon building use and the level of building use. Those costs include utilities, use-related repairs and maintenance, and possibly costs of additional wear and tear beyond depreciation.

Fixed costs are incurred regardless of the level of building use, or even if the building sits empty. The fixed costs of building ownership include depreciation, interest, repairs, taxes and insurance. The low end of any building rental agreement must cover at least the variable costs of using the building. The building owner realizes no gain until at least some portion of the fixed costs are included in a rental agreement.

The North Central Farm Management Extension Committee publication “Rental Agreements for Farm Buildings and Livestock Facilities” contains a good worksheet to help building owners estimate ownership costs.

Figuring costs
A basic starting point for determining ownership costs requires an estimate of the current value of the building to calculate depreciation. One method commonly used is to determine a replacement cost for the current building along with an estimate of the useful life, generally in the 15- to 25-year range.

Next, determine how many years of useful life remain in the current building. Depreciation is the replacement cost divided by useful years of life remaining in the current building. If the building is under loan, then the interest cost is the actual interest payments on the building loan. With no loan, calculate interest costs as a return on investment by multiplying an annual interest rate times the current value of the building. The county auditor’s office can provide the building tax rate.

Use the actual insurance policy for insurance costs. Alternatively, multiply the current building value by 1.5% to get an estimate of tax and insurance costs. The most accurate way to get cost of building repairs is from farm records, but according to the Iowa State University publication “Computing a Livestock Building Cash Rental Rate,” a value of 2% to 4% of the replacement (not current) value of the building provides a reliable estimate if records are not available.

I have found a couple of spreadsheets available online that can help to calculate building costs and potential rental rates. They are available at Kansas State University's Building Cost-Rent webpage, and the University of Wisconsin-Extension's Dunn County  Farm Lease Information webpage. For user ease, click on “Lease payment evaluators” and then “Building rental evaluator.”

The most important piece of any building rental is a written lease. The lease spells out not only the rental rate, but also specifies dates of rent payments, what happens if rent is late, and how the rental agreement is renewed or terminated. The lease contains provision about how repairs are handled, how water and utilities are paid for and maintained, limitations on modifications to the building, how many livestock can be housed, rights of entry and inspection — and even how manure will be handled and where it will be applied.

Lewandowski is an Ohio State University Extension educator in Wayne County, Ohio.

 

 

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