On-farm Storage Space is Valuable

Farm Business Management Update, August - September 2007

By Tom Stanley (stanleyt@vt.edu) Extension Agent, Farm Business Management

Barns and sheds that dot Virginia’s pastoral landscape are often an asset taken for granted and, unfortunately, neglected.  Barns and machine sheds represent valuable storage space for agricultural and non-agricultural purposes.  Since many farms are not farmed by the owner, the barn storage space is available to tenants.  How does one assign a value to the privilege of using a barn?  This question is beginning to go beyond farmers as non-agricultural commercial interests in some parts of Virginia are increasingly turning to barns for use as warehouses or equipment shelter.

The acronym D.I.R.T.I. can be a place to start in assessing the value of on-farm storage.  D.I.R.T.I stands for depreciation, interest, repairs, taxes, and insurance.  Together, these items account for the cost of ownership of a building.

Depreciation in this case is “real” depreciation.  Not necessarily depreciation as it is calculated for tax purposes but rather a realistic assessment of the anticipated life of the building and the subsequent annual loss of value as the building ages.  It can be argued that if repairs are conducted in a timely manner, then depreciation is virtually zero.  Some of our Virginia barns still in use are well over 100 years old!

Interest is intended to express the owner’s opportunity cost of owning the asset.  The appropriate interest rate can be determined by the owner when he/she answers the question, “What rate of return could I expect on my money if I invested the value of the building in another investment of similar risk?”  Since ownership of a building is relatively low risk, typical rate of returns on certificates of deposit or money market accounts are often the benchmark.  However, rates of return on assets in the agricultural sector can be quite low, especially with the current value of most Virginia real estate.  Here is where the reality of the marketplace may over-ride reasonable expectations of return on money invested.  In general, barns leased for agricultural purposes in the Valley region cannot expect the same rate of return as commercial property.

Repairs can be a costly item and are often neglected because they are so expensive.  It is too easy to let a small leak in the roof ‘wait until next year’ and in a relatively short span of years, the structure has been seriously compromised.  It is in repairs that the tenant has an opportunity to assume some of the risk of owning the building by agreeing to participate in the up-keep of the structure.

Taxes and insurance are often easily determined.  However, if a barn space is leased, both parties need to discuss the storage facility and how it is used with their respective insurance agents.  Both parties need to make sure it is understood who is responsible, respectively, for the structure and what the structure contains at any given time.
            Some guidelines developed by Ohio State and Iowa State Extension Specialists provide some useful benchmarks for calculating D.I.R.T.I. for a farm storage building (Table 1). 
What to pay for the use of a farm building for storage ultimately is a matter of negotiation between the two parties.  Owners need to have a plan for insurance and maintenance regardless of the building’s use; tenants need be sensitive to the costs of ownership.  Either way, farm buildings are an asset too valuable to be ignored.

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