Renting Farm Land
Farm Business Management Update, April - May 2009
By Tom Stanley (firstname.lastname@example.org), Extension Agent, Farm Business Management, Northwest District
Rented farmland is essential to virtually every full-time farming operation and many part-time Virginia farmers. One common question landowners have is, “We have not raised the farm rent in 15 years during which time assessments have gone-up astronomically; shouldn't I be getting more rent?” In general, land rental rates have not risen because profit margins in farming have not risen and 2009 promises to be an extremely difficult year in terms of net returns to farming. Our leading animal industries are struggling and input costs are still so high as to limit profitability in crop production.
A recently completed survey on land rental rates in the Shenandoah Valley and Alleghany highlands indicate that some land rental rates have gone-up since 2006. This can perhaps be most closely tied to a period of high cattle prices from 2005 to 2007.
Where rental rates have risen, it has most often been due to competition among farmers for a particular tract of land. Landowners must remember the significant property tax savings in counties that offer use value assessment. Thus, renting this land to a farmer qualifies the land for agricultural land use assessment which is in most cases is less than 10% of the normal assessed values for open land. Of course, this benefit does not cover the home(s) or other improvements that may be located on the farm.
So what factors go into determining an appropriate rental rate? First is supply and demand. If multiple farmers want to rent the land, the lease could be put up for bid. This largely explains why we see higher rental rates in some areas of Virginia where there are higher concentrations of full-time farm operators. Note to both landowners and tenants: when a farm lease is put out for bid, the expectations of both must be clearly spelled out. Sometimes going with the highest bidder can be a recipe for conflict later when the tenant does not do maintenance or other work the landowner assumed would be done.
A second factor in determining rental rates is quality of the land, water supply, and facilities on the farm. Terrain and soil types that are suitable for cultivated crops like corn or alfalfa typically command a higher rental rate. Land that has been allowed to become overgrown with small trees and brush or has low fertility will typically bring less. If the farm has poor fencing, a tenant is less likely to invest time or money in the property.
The 'non-cash' services provided by the tenant (or landlord) are a third factor in setting a rental rate. Some farmer tenants have land maintenance agreements (such as lawn mowing, driveway clearing and grading, or building maintenance) that completely offset any cash obligation they might otherwise face for using the farmland. In other cases, the landlord agrees to take full responsibility for maintenance and replacement of perimeter fences and subsequently can command a higher rental rate.
So, what is a land owner to do? Land rental surveys conducted by Virginia Cooperative Extension can be a starting point for negotiations. However, farmland rental rates can vary significantly from one locality to the next, even within a county. For example, the area around Dayton, Virginia has a high concentration of dairy farms. As a result, some of our highest rental rates are observed in this area. Most of our highest rental rates are associated with small tracts (less than 20 acres) and are highly valued based on their convenience to numerous farms that prefer land close to their base of operation.
The landowner must also consider what it takes to keep the land productive as farmland. Maintenance of fence lines and annual mowing are two of the most common considerations. If the tenant is expected to take care of these tasks, some consideration of the value of this work is warranted. One common approach is for the landowner to pay for materials necessary to maintain or replace fences and facilities while the tenant pays for or provides the labor to complete the task.
While there are no hard and fast rules for farmland leasing, a key component of a successful and happy relationship between landlord and tenant is regular and clear communication. Tenants need to know what is expected of them in addition to timely payments and should be mindful of the landowner’s wishes. Landlords need to be sensitive to market forces that are impacting their tenant's farming operation and should appreciate the benefit of the land being assessed at agricultural value for local property tax purposes.
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