We have 360 acres of farming that require tiles. The landlord cannot bear the bill. If he pays for the tiles, our tile plow will do it. How much cash rent reduction should I ask for to offset my investment? How long is the contract?
Profit Planner panelists include David Erickson, a farmer from Altona, Illinois. Mark Evans, Purdue Extension Educator, Putnam County, Indiana. Jim Luther, former Purdue Extension educator and landlord, Greencastle, Indiana. Steve Myers, farm manager at his Busey Ag Resources in Leroy, Illinois.
Ericsson: So, do you want landlords to invest for higher yields, but expect them to rent at lower interest rates? Your landlord should avoid investing. If you really need the tiles, you might negotiate a long-term lease, such as a five-year lease, with annual adjustments based on market value and actual production volumes.
Evans: I propose flexible leasing so that landlords and tenants can mutually benefit from greater yields. Presumably, the base cash rent will be a little lower to reduce tenant risk. Prepare powerful rewards in good years to entice your landlord. For either party, long-term contracts are unwise in the event of death or other major life changes.
Instead, it amortizes the cost of the tiles. For example, say the tile cost him $25,000, the amortization took him over ten years, and the landlord died six years after him. In this case, $25,000 divided by 10 equals $2,500 in credits per year. With an annual payment of $2,500 remaining for his four years, the landlord’s heir will pay the tenant her $10,000.
Luzar: Landlords are reluctant to spend money unless they have some understanding of what the financial benefits look like. Establish a realistic budget for capital expenditure and how you can expect a return on your investment. Please discuss it with them. Let your landlord know what you contribute by focusing on the value your equipment provides.
Landlords may need to change their view of farm rentals. To recoup machine and labor costs, you may want a long-term lease. If the landlord only wants a short-term rental contract, he creates an addendum where the installation costs are amortized over, say, seven years. Every time he farms land, his 1/7th of the cost is “waived”.
If your landlord agrees to a long-term rental agreement, reward them with additional rental income, but don’t let all your financial gains lead to higher rents. Remember that both sides share the investment in this tile. Long-term leases may be indexed to accommodate future changes in the rental market. Consider a flexible cash lease that demonstrates a less aggressive flex mechanism so that both parties can improve and increase their earnings.
A simpler investment mechanism may require you to bear the full amount. It may be money you don’t want to spend right now. If agreed, an amortization agreement is required to amortize the tiling costs. We recommend legal counsel.
Myers: Yes, you can ask for rent offset for out-of-pocket labor and installation. If you have such a number, use it as a guide. If not, generate it. I do not support long term leases. Consider incorporating the same labor and installation totals into an amortization schedule over 5 to 10 years.