Rental Agreements For Farm Buildings and Livestock Facilities

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North Central Farm Management Extension Committee

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How much should I rent my building for?

• Commercial ratesExample: grain storageMay include management as well

• Farm record summaries (actual costs)• Surveys: Iowa State University Ag Decision

Maker file C2-17

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Value of Facilities to the Renter

• Condition: repairs needed, performance• Obsolescence• Size or scale• Convenience• Do they fit the renter’s needs?• Location• Alternatives available

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Value to the Owner: Ownership Costs

Step 1. Establish current value of building= replacement cost x remaining life / initial lifeExample: swine finishing building, 1,000 headReplacement cost = $200,000

Life = 20 years Age = 7 years Remaining life = 13

Current value = $200,000 x 13/20 = $130,000

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Owner’s Costs

Step 2: Estimate annual ownership costs• Depreciation: annual rate = 1/13 = 7.7%• Interest: annual rate 5.0%• Insurance and taxes: 1-2% 1.5%• Repairs and maintenance: 1-3% 2.0%• Total ownership costs, % 16.2%• Total ownership costs, in $: Current value: $130,000 x .162 = $21,060 / year

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Other Considerations

• Include operating costs only if owner pays (electricity, water, fuel)• Adjust rent for partial year’s use• May charge per unit of production Example: 1,000 hd. capacity x 2.5 turns/yr = 2,500 head per year• $21,060 / 2,500 head = $8.42 per pig

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Caution!

• Building are fixed in location.• Number of potential renters is limited.• Owner may not be able to recover

total costs from a renter.• Anything over variable costs is a plus.

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Items to Negotiate

• Operating costs (who pays?)• Repairs and maintenance (parts &

labor)• Water supply• Manure disposal• Insurance• Time and means of payment

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Flexible Building Rent

• Example: swine finishing buildings• Base rent = $10.00 per pig sold• Base selling price = $75 per cwt. (lean hog)• 900 head sold in April-June• Average lean hog price for Apr-June = $80

(NASS)• Rent = $10.00 x 900 x ($80 / $75) = $9,600

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Ag Lease 101 Website

• Publication NCFMEC-04: “Rental Agreements for Farm Building and Livestock Facilities”

• Blank lease form• Worksheet

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Renting Farm Machinery

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Custom Rate Approach:deduct for costs paid by renterExample: tandem disk

1. Average custom rate $13.602. Exclude fuel & labor (30% for tillage) - $ 4.08 (20% for planting and harvesting)3. Rental value with tractor = $ 9.524. Subtract tractor rental value per acre

$.27 per hp-hr x 150 hp / 15 a/hr - $ 2.705. Rental rate for tandem disk only = $ 6.82

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1. Estimate depreciated valueExample: round baler, 5 years old, 20 yr. lifeNew value: $48,000 x 15 / 20 = $36,000Depreciation: 15 years left = 7%Interest: 6%Insurance and housing: 1%Repairs (2-4%): 2%Total 16%

Machinery Rental Cost Approach

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2. 16% x $36,000 = $5,760 annual cost3. Divide by annual use: 1,000 acres4. Rental charge per acre = $5.76

Can use same approach for entire machinery line.Short cut: take 15% of value, 12% if older.Divide by annual use (acres or hours).

Machinery Rental Cost Approach

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Lease Publications at AgLease101.org

• Fixed and Flexible Cash Rental Arrangements For Your Farm (NCFMEC-01)

• Crop Share Rental Arrangements For Your Farm (NCFMEC-02)

• Pasture Rental Arrangements For Your Farm (NCFMEC-03)

• Rental Agreements For Farm Buildings and Livestock Facilities (NCFMEC-04)

• Beef Cow Rental Arrangements For Your Farm (NCFMEC-06)

AgLease101.org© North Central Farm Management Extension Committee

North Central Farm Management Extension Committee

AgLease 101 was developed with funding provided by the North Central Risk Management Education Center.

Providing leadership in the development of high quality research-based extension programs and publications that anticipate and meet the ever-changing business management educational needs of agricultural producers of the North Central States. Our programs and publications capitalize on the expertise of farm management faculty from throughout the region and country.