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Serving: IA
farmers at a field day Kapil Arora
LONGER LEASE: It’s probably best to talk with your landlord and negotiate a longer rental agreement to ensure you see the benefit of the tile.

Finding a fair way to share tiling costs

Timely Tips: While an owner-operator reaps the most benefit from installing tile drainage, a tenant can also benefit.

Each month in Wallaces Farmer magazine, the Timely Tips panel answers questions sent by readers. Members of the Timely Tips panel are Alejandro Plastina and Wendong Zhang, Extension economists, Iowa State University; Leslie Miller, Iowa State Savings Bank, Knoxville; and Rob Stout, Master Farmer, Washington, Iowa.

My brother wants to talk to our landlord about tiling 80 acres after harvest. He wants the landlord to help pay for it. I want to leave it alone and not risk losing the farm. If we approach the landlord, what’s a fair arrangement to share the tiling cost? Would you talk to him?

Stout: Depending on existing tile mains, and what width spacing is used, it could easily cost $1,100 per acre or more to pattern-tile a field. That land is then worth that much more should the owner decide to sell in the future. If you are crop-sharing the land, it is worth more to both of you in increased yields, and timeliness of planting and harvest.

If it is cash-rented, it would bring a higher cash rent. If you are going to offer to share the cost of installing tile, then you need to insist on a long-term lease at a price that can allow you to get your investment back. This also ensures that you are farming it in the foreseeable future. The owner may actually be willing to pay for the whole project, to get the tax benefits of depreciating the cost of the tile, depending on their cash flow situation.

Miller: When prices are high, tiling can pay for itself quickly. When prices are low, it takes a long, long time to earn that money back. So, unless you have cash sitting around — or unencumbered assets — it might make financing even a portion of the cost a challenge. I recommend you talk to your lender about what you can handle before you approach your landlord. If the lender says you cannot borrow money to put tile on an unowned farm, then you have no option other than a pledge to pay more cash rent as an enticement for the landlord. The landlord may accept an argument that tiling will make the land more valuable, but most landlords are not thinking about selling their land, so that benefit may not gain you much traction.

Zhang: If your parcel has drainage issues, which should be noticed with this year’s excessive precipitation, tile drainage could be one of the most beneficial investments for the land. It typically would cost $800 to $1,000 per acre and could be capitalized into higher land values. However, given that drainage tile enhances the land value to the extent that it could pay for itself, it is not uncommon for the landowner to pay for tiling.

But in that case, you and your brother as producers may be charged higher cash rent for the potential improvements to the land and resulting yield increases. You should examine similar parcels nearby with better drainage to get some idea about the extent of yield and revenue gains to see whether it is worth it.

Given the current stagnant farm income, your landowner may not be willing to put in the $80,000 for the land for worry of possible continued declines in land values. If you pay for a significant portion of the tile yourselves, you should negotiate to have either a long-term lease or have a series of one-year leases, with a separate agreement that covers the cost of the tiling. The agreement buyout would decline over time as the cost of the tiling is paid off. Also, examine how the outlays impact your working capital and financial condition of your farming operation.

Renegotiating costly cash rent

What are your thoughts on the cash rent ground I have where the rent I’m paying is way too high for the productivity? Should I suggest a flexible cash lease with a lower base rent instead of the existing high fixed cash lease amount? Or renegotiate the current lease for a lower fixed rental rate?

Stout: The fairest would be to suggest a flexible cash lease with a lower base with the option of a higher value if a combination of yield and price dictate that, which can work out to benefit both of you. That said, a small percentage of leases are this type, so good luck with that option. If that doesn’t work, you can try to negotiate a lower rate for next year, but you might have to be willing to give up the farm if they are not willing to go with a lower rate.

Plastina: It is important to remind ourselves that cash rent is not only determined by land productivity, but also by the competition among farmers for farmland in the area. It might well be that a relatively low-yielding parcel located in a highly desirable area (for example, due to its suitability for seed corn production) might collect a higher cash rent than a high-yielding parcel in a less desirable area.

However, if your goal is to renegotiate your cash rent, it’s important to understand the pros and cons of each alternative. In particular, while a lower fixed rental rate provides predictability for both parties and is easy to implement, it might be a tough sell for some landowners (especially if they had already gone through a first round of renegotiations after 2013).

A flexible lease with a lower cash base might be more appealing to landowners (willing to exchange a lower rent today for the possibility of a higher rent in the future) than a lower fixed rate lease. However, it would be up to both parties to define the terms on which the “bonus” part of the lease is triggered and the amount.

Trust between landowners and tenants plays a big role in the selection of the factors that will be used to calculate the final rent. It’s important to agree ahead of time on those factors. An ISU Extension publication discussing alternative ways to structure a flex lease is available online as Ag Decision Maker File C2-21.

Miller: Remind your landlords that a flexible lease based on yields and prices might reward them with more money on their best ground even more than it penalizes them on their poor ground. With that being said, if your landlords have little or no farming background, a flexible lease negotiation could be intimidating. Thus, I recommend flexing the lease the simplest way you can.

Maybe you use the average of prices set at the local elevator two or three times during the crop year — coupled with the actual yields. If your landlords have more background or are concerned about the weather impact on yields, maybe they will want to include a portion of your crop insurance indemnity as part of the revenue included in the calculations. If that is the case, make sure you outline the need to subtract the premium cost and factor in a discount because those monies are not paid until you have already lost 15% to 25% of your crop.

We have found more acceptance of the flex lease conversion when the first-half flex rent payment is equal to the original first-half fixed cash rent payment (this means it is only the last half payment that gets adjusted by the flex).

 

 

 

 

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