What is a Fair Land Rental Rate?
Farm Business Management Update, February - March 2009
By Peter Callan (firstname.lastname@example.org), Extension Agent, Farm Business Management, Northern District
Every year both farmers and non-farming landowners call their Extension Office to inquire about current rental rates for farmland and these rates are dependent on several factors. First, soil type determines the potential productivity of the land. Land that is hilly and has limited top soil due to erosion has significantly lower potential yield than deep, well drained soils. Second, what is the current fertility history of the field or farm under consideration? Have previous producers fertilized and maintained the soil or have they “mined” the soil? With fertilizer levels at all time highs, producers are reluctant to pay high rental charges for land that has been drained of nutrients. Third, know the topography of the land. Land with steep slopes is not conducive to crop farming and is limited to being used as pasture. Producers are willing to pay more for land that has the potential to generate higher rates of return (crops or hay). Fourth, appraise the buildings on the property and there usefulness to your farm business. Can they be used for crop storage and/or housing of animals? What is the condition of the facilities? Are the buildings efficient to use in today’s agriculture?
In an era of high input costs, land management practices play a dominant role in determining rental values. Who pays, tenant or landlord, for fertilizing the land, bush hogging to eliminate the opportunity for brush and weeds to grow on the land, and maintaining fences are important questions to resolve before signing a lease. Producers that fertilize, bush hog and maintain fence incur major cash outlays to perform these practices on rented land. Charging high rental rates may result in producers cutting back or not performing these essential land management practices. Common sense dictates that producers will not rent the land if they will incur a loss. Producers must generate a profit to stay in business! Land owners must decide how important these land management practices are in the stewardship of their land. Remember all farms will be sold at some point! Will buyers be willing to pay a premium for property that has been poorly maintained?
Real estate taxes saved because the land is taxed for agricultural purposes are a benefit most property owners do not consider. Virginia law includes a use value assessment program for qualified agricultural land. This program preserves agricultural land and encourages its proper use. The program reduces the taxable assessment of qualified land to reduce tax payments for the farmers and landowners.
This land use program has two general categories. First agricultural and horticultural, real estate devoted to the bona fide production for sale of plants and animals or enrolled in a federal government soil conservation program (applies to all categories). There is a minimum of five acres necessary to qualify for land use taxation. Second, forestland devoted to tree growth in such quantity, spaced and maintained as to constitute a forest area under a timber management plan is required. A minimum of 20 acres is required for this activity.
Landowners must provide proof that the land has been used agriculturally for five previous years. Federal schedule F (Profit or Loss from Farming), Schedule E (Supplemental Income and Loss) and lease affidavits and or forest management plan are acceptable means of meeting this requirement. Schedule E has a section for documenting income or loss from rental real estate and royalties. Eligibility, validation, and enforcement are left up to each locality.
There is a huge difference in an owner’s real estate taxes when the land is taxed for agricultural or forestry purposes compared to fair market value. The following example can be used to illustrate this point.
We assume that 10 acres of land has a fair market value of $10,000 per acre, agricultural assessed value $300/acre, tax rate of $.60/$100 ($0.0060) of assessed valuation. The tax rate for this property is calculated as follows: $10,000 (fair market value/acre) X tax rate of $.60/$100 of assessed valuation X 10 acres = $600. Taxes paid when the agricultural assessment rate is used are as follows: $300 (assessed agricultural value) X tax rate of $.60/$100 of assessed valuation X 10 acres = $18. Thus, the landowner saves $582 in taxes by enrolling his 10 acres in the land use program.
|10||Acres of farmland|
|$0.0060||Real property tax rate ($0.60 per $100 of value)|
|$100.000||Fair market value at $10,000 per acre|
|$600||Taxes based on fair market value ($100,000*$0.0060)|
|$3,000||Agricultural assessed value $300/acre|
|$18||Taxes based on agricultural assessed value ($3,000*$0.0060)|
|$582||Tax savings ($600 - $18)|
Land owners need to give serious consideration to the value of land management practices in setting rental rates. A conscientious producer, who fertilizes, performs bush hogging and maintains fences is preserving the value of the landlord’s property and saving the owner property taxes. Minimal rental rates encourage producers to conduct value land management practices that will increase the value of your land in the long run. Good rental relationships that are in writing can create win-win situations for both the producer and landlord.
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