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LEASING LAND WORKSHOP

LEASING LAND WORKSHOP. David Armstrong AK Consultants 19 July 2010. Issues to discuss. Leasing options/definitions Objectives, tenant and landowner Risks and rewards The lease agreement The financial value Other issues Golden Rules. Leasing or share farming.

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LEASING LAND WORKSHOP

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  1. LEASING LAND WORKSHOP David Armstrong AK Consultants 19 July 2010

  2. Issues to discuss • Leasing options/definitions • Objectives, tenant and landowner • Risks and rewards • The lease agreement • The financial value • Other issues • Golden Rules

  3. Leasing or share farming • Difference – who takes the risks • Production and market risks • Lease – tenant usually carries the risks • Share-farming; risks are shared • Leasing, for a paddock or property; short or long term. General principles apply.

  4. Objectives • Landowner and tenant – may not be “in sync” • Landowner - Income - Resources maintained or improved • Tenant – Profit - Growing his business - Increasing scale

  5. So, why lease land? • In 2008/09 69% of Tasmanian Farms had EVAO < $150,000 • So, lease to gain economies of scale. • Owner of a small operation can not justify modern, efficient and large scale equipment. • Lessee can justify newer and more productive equipment.

  6. Tractor overhead costs Example, 130 HP FWA tractor, 2007 costs Overhead costs include interest, depreciation, insurance, shedding, registration

  7. Other benefits of scale • More efficient, reliable and safer equipment is justified. • Larger businesses - better negotiating power. • More worthwhile investing in training and research. • More attractive to contracting companies. • So, a tenant may bring something of higher value to land that the landowner cannot.

  8. Risks for the land owner

  9. Risks for the land owner

  10. Benefits for the land owner

  11. Risks for the tenant

  12. Benefits for the tenant

  13. The Lease Agreement • Must have a written agreement. • Define the area & exclusions • What else is included; particularly water • Duration, options or rights for renewal. Is renewal a right for the tenant; what conditions Rolling leases. • Premature departure by the tenant; replacement with another tenant?

  14. The Lease Agreement • Agreed departure date. • Penalty for late departure Delay could preclude future cropping opportunity • Commencement date; Autumn is often a good time. • Payment; amount, timing, procedure. Annual fee adjustment, cpi

  15. The Lease Agreement Repair and maintenance issues • Agreement – maintain present condition record what that is at start • Soil fertility – agreed fertiliser.Tenant to provide evidence, or Owner applies. Apply extra to hay/silage paddocks. Consider sale of hay/silage from the property. • End of lease – same pasture area • Weed control – specify weed species • Fences, yards, buildings, roads etc.

  16. The Lease Agreement • Cropping paddocks.Specify cropping intensity Paddock to be sown down at end of lease • Access to water Who has priority of limited • Capital improvements – clarify ownership • Conflict resolution – establish a procedure • Other payments – rates, licences insurance etc

  17. Valuing the lease • Percentage of land value • Percentage of Gross Margin • Percentage of Gross Income • Check the market; real estate agents.

  18. Valuing the lease • Percentage of land value Historically, 4-6% for grazing 6-8% for cropping • These values now too high • Perhaps double what is realistic

  19. Valuing the lease • Percentage of Gross Margin25-33% of GM. Level depends on risk. • The remainder is required for:Contribution to overhead costs, including R&M Contribution to interest Return for the Tenant’s time and effort Return for taking the risks • Examples:Sheep, GM ~$25/dse, lease 33%, $7-8/dse Potatoes, GM $4,000/ha, lease 25%, $400/ac.

  20. Valuing the lease • Percentage of Gross Income16-22% of Gross More common in US for cropping land, 20%Justifiably lower here because tenant has more maintenance obligations.

  21. Value of water • Should water be valued separately? • I suggest not. • The cost of land and water should not be more than 25-33% of the GM.

  22. Leasing livestock • Sometimes considered. • Value is the interest cost, and for the risk. • Requires continuation of breeding strategy.

  23. Leasing equipment • I generally advise against including equipment in a farming lease:potential for disputes over maintenance. • Who is responsible for maintenance? • Objectives inconsistent.

  24. Leasing a centre pivot • A Pivot is fixture. • Who is responsible for repair and maintenance? I suggest the tenant. • Responsibility for negligence?

  25. Leasing cost for a centre pivot • What are the annual costs?If asset purchase ($6,000/ha capital, 6 years @ 7%), $1,258/ha. Interest & depreciation over 15 years, $925/ha.

  26. Share farming • Shares risks and rewards. • Assume a Joint Venture approach: Owner gets a lease fee for the land. Share farmer engaged as contractor. Share farmer paid for management. The JV shares cash costs. • Proceeds shared equally. • Risks are shared equally.

  27. Share farming Joint Venture Pays Owner for land Profits divided equally Pays for materials Pays SF for managing Pays SF work

  28. Golden Rules • Benefits are not without risks. • The potential for economies of scale. • Tenant may allow land to be used for higher value purposes. • Responsibility and costs borne by beneficiary. • Know and trust each other. • Ensure documentary evidence.

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