Cornhusker Economics: Negotiating Cash Rent Like a Pro
The number one question I receive is about cash rent prices. Many landlords and tenants are working to find an equitable arrangement before February 28, 2019. Given the constraints on both sides, real estate taxes and the farm economy finding that arrangement is difficult. Becoming creative in how you analyze and value different cash rent options is necessary. Before sitting down face to face, here are some suggestions and preparations I recommend that can help maximize success.
Identify the Facts
Cash rent has numerous variables, and ground that is just a mile down the road could command vastly different amounts of rent. Researching cash rent provides a needed understanding of market conditions. Both the U.S. Department of Agriculture and the Department of Agricultural Economics provide survey results for cash rent rates across Nebraska. These provide a useful start, but they are far from accurate enough to use as a base for an entire negotiation. Contacting your local ag bank loan officer, ag real estate professional, or professional farm manager may provide additional information.
To truly drill down those results into personalized information for the given negotiation, adjustments normally should be made. Those adjustments are fairly straight forward. One way is to take the county rental rate from the USDA survey divided by the county yield to obtain a county rent per bushel. Take the calculated county rent per bushel times the average production history of the farm in question and you have one estimate for farm level rent.
Another point worth investigating is a farm’s suitability rating. Calculating a corn suitability rating can help narrow down the farm in question. The USDA NRCS provides a Web Soil Survey and a detailed instruction guide was created by Ann Johanns with Iowa State University. This information is useful if access to production history is limited.
Some negotiations involve land held solely for investment purposes. To calculate a return on investment, take the land value per acre times a rate of return. A step to include in this is comparable investment returns. Stopping by your local financial planner’s office or bank would be a great place to begin this search. Having what market rates of returns for savings accounts, T-bills, certified deposits, bonds, and some mutual funds provides a much-needed comparison base during discussions.
There are some that are in the process of negotiating a previous crop share arrangement into a cash rent arrangement. For those in this process, calculating the crop share equivalent and/or the tenant’s residual will provide a glimpse of a status quo arrangement under the cash rent method.
Contine reading this week's Cornhusker Economics by Austin Duerfeldt at Negotiating Cash Rent: What It Takes to Negotiate Like a Pro.