The Goal? FARMLAND LEASING ARRANGEMENTS AND LAND VALUES 8/15/2017. Let s get familiar with your Farmland Leasing Arrangements book!

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1 FARMLAND LEASING ARRANGEMENTS AND LAND VALUES Melissa O Rourke B.S., M.A., J.D. FARM & AGRIBUSINESS MANAGEMENT SPECIALIST Housed at ISU Extension Winneshiek County in Decorah morourke@iastate.edu Office phone: Farm Management Field Specialists Lyon Sioux GW Plymouth Woodbury Monona Harrison Osceola O'Brien Cherokee Ida Crawford Shelby Pottawattamie Mills Fremont Dickinson Clay Buena Vista Sac Muscatine Montgomery Page Palo Alto Pocahontas Carroll Audubon Cass TE Emmet Calhoun SE Adams Taylor Greene Guthrie Adair Kossuth Humboldt Webster Union Ringgold Madison Winnebago Boone Dallas Hancock Wright Hamilton Clarke Decatur Polk Story Warren Worth Cerro Gordo Franklin SJ Hardin Lucas Wayne Marshall Jasper Marion Mitchell Floyd Butler Grundy Monroe Appanoose Tama Poweshiek Mahaska CB Howard Chickasaw Bremer Black Hawk Wapello Davis Benton Iowa Keokuk Winneshiek MO Fayette Buchanan Jefferson Van Buren Linn Johnson Washington Allamakee Delaware Henry Lee Clayton RD Louisa Jones Cedar Des Moines Dubuque Jackson Clinton Scott Key Topics Today: Trends in... Farm land values Cash rental rates Costs of crop production -- resources Negotiating a fair cash lease rate 2018 Farm Leasing Considerations: Communications Legal issues... And much more! What changes do you intend on making to your 2017 farmland lease arrangements, or lease arrangements you influence? Decrease rent Improve communication with other parties Implement conservation strategies Other No changes will be made Change type of lease Move from an oral lease to a written lease File and perfect a landlord's lien Does not apply (not directly involved in lease Apply for Beg. Farmer or Custom Farming Tax Increase rent 3% 6% 5% 10% 9% 9% 16% 14% 20% 39% 44% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Percent of responses The Goal? You leave here today with increased knowledge and confidence to assist you to - - Review current leasing arrangements... Take steps to plan for the future... and Know where to go for resources and assistance. Let s get familiar with your Farmland Leasing Arrangements book! 1

2 Get familiar with Ag Decision Maker!! Program Purpose Created in 2009 to encourage agricultural asset owners to lease to qualifying beginning farmers. Provides asset owner with credit on Iowa income taxes. Beginning Farmer must have low moderate net worth. For 2017 the cap is $645,284. Financial statement required with application. For this Iowa program, the Beginning Farmer must... Have education, training and/or experience for the type of farming required for the lease. Make all operational & managerial decisions Perform labor necessary to fulfill lease conditions. Have access to working capital, farm equipment, machinery and/or livestock to fulfill the lease. Be responsible for all financial expenses necessary to lease and manage the property. Basic Provisions: Tax Credit Calculations for 2017 Cash lease 7% Cash/flex lease 7% on base rent amount (but not the bonus) Crop Share 17% of asset owner s share of the crop 1% bonus for military veterans Examples on the website. Example: Calculating Cash Rent Tax Credit for acres cash rented $250 per acre $40,000 gross lease income $40,000 x 7% = $2800 Iowa income tax credit Can be used for flexible & crop-share leases too. 2

3 What about 2018? Changes down the road Iowa Legislature failed to act. Unless 2018 Legislature acts, big program changes. Cash lease credit to 5% Crop Share to 15% of asset owner s share of crop NO 1% bonus for military veterans Custom Farming Contract Tax Credit program created in 2013 will expire in (Taxpayer hiring Beginning Farmer to complete agricultural contract work for production of crops or livestock may qualify for a tax credit of 7% of the custom contract amount (8% for veterans)). For More Information and to Apply: See 3-page application and instructions at: IowaFinanceAuthority.gov For 2017 Crop Year: applications accepted until the limit of $6 million in tax credits is reached or September 1, 2017 (whichever occurs first). Beginning farmer s financial statement Beginning farmer s background letter Fees = start at $300 and depend on the length of the lease Why is it important for Farmland Owners and Farm Producers to think about farmland values? What are some sources of Iowa Farmland Value Data? County Assessors Offices Some county assessors maintain public (Pdf or Excel spreadsheet) document of ag land sales: 3

4 Realty & Auction Websites Federal Reserve Bank Chicago Quarterly survey of ag lenders by state Annual Land Values Conference AgLetter: Quarterly Newsletter re: ag land values & credit Go to chicagofed.org and click on publications AgLetter Federal Reserve Bank of Chicago FARMLAND VALUES AND CREDIT CONDITIONS Summary In the first quarter of 2017, agricultural land values for the Seventh Federal Reserve District were unchanged from a year ago the first pause in the current downturn since the third quarter of Moreover, good farmland values in the first quarter of 2017 were largely the same as in the fourth quarter of 2016, according to the survey responses of 198 District agricultural bankers. Cash rental rates for District farmland continued their decline in 2017, falling 7 percent from The demand to purchase agricultural land in the three- to six-month period ending with March 2017 was lower than in the same period ending with March Additionally, the amount of farmland for sale, the number of farms sold, and the amount of acreage sold were down during the winter and early spring of 2017 compared with a year ago. The responding bankers leaned heavily toward the view that farmland values would remain stable during the second quarter of 2017 a shift from the sentiment that farmland values would continue to decline held widely a year earlier. Realtors Land Institute Semi-annual survey (March and September) Compares land classification by corn production Most recent survey always available on Ag Decision Maker March 2017 RLI Survey 4

5 - Dollars/acre and percent change from The Iowa farmland market is showing weakness following significant increases in value over the past decade. Based on the Iowa State University Farmland Value Survey, 2015 Iowa land values have decreased two years in a row since However, despite these decreases, current Iowa farmland values are still more than double what they were 10 years ago, 75 percent higher than the 2009 values and 14 percent Timely topics in Newsletters free to you on Ag Decision Maker Iowa State University Farmland Value Survey Conducted annually since 1941 Mailed to 1100 licensed real estate brokers; responses Released annually in mid-december November 1 to November 1 Latest and historical surveys found on Ag Decision Maker website SEE YOUR BOOK page 23 The survey is intended to provide information on general land value trends, geographical land price relationships, and factors influencing the Iowa land market. The survey is not intended to provide a direct estimate for any particular piece of property. Land Value Survey Publication - Book Page 23 5

6 2015 and 2016 Farmland Values Northeast counties 2015 (bottom #) & 2016 (top #) farmland values Percent change 2015 to 2016 Crop Reporting District 3 Crop Reporting District 2 6

7 Percent of Sales Average Land Value per Acre Land value per acre ($/acre) Land value per acre ($/acre) 8/15/2017 Farmland Value per Acre $9,000 Farmland Value per Acre $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $ % 80% 70% 60% 50% 40% 30% 20% 10% 0% Iowa Farmland Purchases by Farmers and Investors and Land Values Farmers Investors Average Land Value $10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 SUMMARY: Land Value Survey The 5.9% decline is still modest and actually lower than the rate many expected to see. Average farmland values hit a historic peak of $8,716 per acre in 2013, but declined 8.9% in 2014, 3.9% in 2015, and have now fallen an additional 5.9%. While they have declined three years in a row now, current Iowa farmland values are still more than double what they were 10 years ago, 64% higher than the 2009 values and 7% higher than the 2011 values. From landowner s perspective, with land values at the county level dropping 2 to 9 % across Iowa, landowners could still potentially make money with cash rent payments, which typically account for about 2 to 4 % of land values. Farm income & interest rates are key to watch For more info visit Landlord-Tenant Communication: It s a 2-way street Farmland owners need to be open to learning about current farming challenges, conditions, costs of productions Producers need to listen to the interests and goals of farmland owners; and be willing to share information about inputs, yields, and crop plans Communication Methods: Newsletter Facebook, Twitter, blog Phone calls Stop by for a cup of coffee Annual or periodic meetings KEY: Don t limit communication to annual rent payment and rent negotiations. 7

8 Winning Communication Strategies: Communicate regularly, not just once a year Producers: Take time to share and educate Owners about current trends in agriculture, farm costs Provide regular crop reports during growing season Maintain farm appearance Treat landowners like family with respect and kindness. On Ag Decision Maker an August 2016 article from the AgDM newsletter... Thoughts on Farm Newsletters. Newsletters can be simple or fancy.... Posted on a website, sent by or US Mail.... Or through other social media sites. Page 91: Annual Reports: Owner agrees: Info provided by the Tenant is kept confidential. Proprietary business information needs to be shared to negotiate lease terms but it is not to be shared in the coffee shop. Iowa Farmland: Keeping it in the family Communication through the generations: Allan: To 4 kids equally, each own 6.25% of 640 acres Mom & Dad: Own a section 640 acres 4 Kids Allan Bill Cathy Donna Equal Shares 25% each Bill: To 5 kids equally, each own 5% of 640 acres Cathy: To 3 kids equally, each own 8.333% of 640 acres Donna: 0 kids, leaves to the church (25% share) (and church wants to sell) Do any of the kids live in Iowa? Who is the farm manager? If you re the Owner, what do you want to see in your farm producer tenant? If you re the Producer tenant what do you want to see in the Owner - Landlord 8

9 Negotiation Process Tips: Start early, use data Base conversations on facts Producers: Know your costs, overhead, breakeven points Producers: Understand challenges landowners face with declining revenues Producers: Share information on yields, prices, records, satellite photos, fertility records, government payments, crop insurance Landowners: Know your costs, know what you need Landowners: Learn about production costs Negotiation Setbacks? Ask for more time Be aware of your non-verbal communication Focus on what the other person is saying and what they really mean Request more information to clarify points. Ask if other party has areas of compromise or negotiation. Stick to building trust, use tact and logic Try to understand the other party s perspective new truck Use a third-party to help mediate, guide discussion Farm Lease Basics: A Few Pointers Strong preference for written leases See your book page 88 (short form) Legal issues, including lease termination Communication fundamentals Shouldn t a handshake be good enough? Don t rely on selective memory. Be sure that you cover all the provisions that you intend to cover. Define meaning of terms. Put things in writing because you value the relationship... and because you don t want there to be later misunderstandings! Why should a farm lease be written? Provides more assurance that the parties understand one another. Lease of more than 1 year must be in writing to be enforceable. Lease of 5 years or more must be in writing and recorded at the county recorder s office. A Few Examples.... Fencing Hunting rights Crop residue (stover) 9

10 Assuring the Rent is Paid How can parties assure one another that the rent will be paid? First Step? -- Use a written lease. And, be sure that: (1) The legal description and parcel number in the lease is accurate. (2) The parties to the lease are properly identified. (3) The lease terms are clear. Additional tools to assure rent payment may include: Require all rent paid on March 1. (Reduction for interest paid by the borrower may be a consideration.) Require irrevocable letter of credit from the Producer/Tenant s lender. Require Landlord s name be included as Payee on checks for crops. File and perfect a Landlord Lien this includes recording the lease seek professional legal assistance for this. Farm Lease Termination: Does lease termination mean the end of the Owner Tenant relationship? Not necessarily but it means either the Owner (or the Tenant) want to make some changes for the next year. See your book page 95 Without written notice of termination, lease automatically renews under the same terms and conditions for the following crop year. Farm Lease Termination: Iowa Code 562.6: Amended in 2016 to clarify that whether the lease is oral or written, the termination notice must be in writing! Notice cannot be contained within the lease it must be a separate written notice. Serve written notice on or before September 1 (this terminates the current least on the following March 1). Serve in person (have them sign the notice and keep a copy); or by Certified US Mail (keep copy of receipt, return receipt optional); or by publication if neither in-person or mail can be accomplished. Turn to page 31 in your book We ll look at the 2016 Cash Rental Rate survey and walk through some calculations and ways to think about how to arrive at a number that is fair to both the Owner and the Producer. When you have time, read through this page that explains the survey methodology and information. 10

11 Average/Typical Cash Rents for Corn & Soybean Acres p 32 What is the Iowa Nutrient Reduction Strategy? Voluntary, science-based program to reduce Nitrogen and Phosphorous impact on water Includes cities, industry and agriculture A practice-based approach to show meaningful and measureable progress A framework for innovation and verification of new practices and technologies Financial Impact? If cover crops result in a decreased level of profitability, will the Landowner decrease the cash rental rate to provide an incentive to the Producer-Tenant to adopt the strategy? $-50 $-40 $-30 $20 $-10 $0 $10 $20 Questions to ask producers: Are you raising cover crops? Yes How many acres? Why? Does it work financially? What s happening with your production (yields, weed pressure, burn down, differences from year to year)? Are there social pressures? What is cost of production? It is the sum of costs related to making or producing a product. - Land - Crop Inputs - Machinery - Labor - Page 72 starting point for cost of production data. ISU Estimated Costs of Production Released late December or early January each year Numbers from several sources: Iowa Farm Business Association ISU Department of Agriculture and Land Stewardship Survey of input suppliers around Iowa Used as a gauge for planning purposes by ag businesses and financial institutions Page 72 in your book... 11

12 Fixed Cash Lease Determining a Fair Rental Rate Interactive Decision Tool Computing a Cropland Cash Rental Rate see page 59 We ll walk through calculations for 4 different bases for cash rent calculations: 1. What others are charging 2. Average rent for production (yields) 3. Average rent for CSR 4. Return on Value Other flexible methods Do Your Farmland Fact Finding 1. Land value estimate for tillable acres ($/acre) 2. Number of Tillable Acres (If you don t know, check county USDA FSA Office: Form 578 completed annually) 3. Corn Suitability Rating? (CSR/CSR2) (See County Assessor's Office or NRCS Soil Survey) 4. Special features? Drainage issues, irregular field shapes (See tile, terrace maps, aerial photos) 5. Most recent 5-Year Actual/Average Yields on that farm (Corn & Soybeans). Source: Johnson, ISU Extension, May 2011 Do you know the yields on your parcels whether you re the landowner or the producer/tenant? See pages Method #1: What s the going rate? Rumors often inaccurate. Compare to many others, not just one Seemingly small differences in land quality can make a big difference in appropriate rents. 12

13 8/15/2017 Let s take an Example... a fictional parcel in Winneshiek County: Location: Winneshiek County Tillable Acres in parcel: 75 Acres Corn Yield: 167 bu/acre Soybean Yield: 45 bu/acre These are the yields on that farm/parcel ideally, a 5-year rolling average. Corn Suitability Rating: 82 CSR2 p 35 Method #1: Typical Cash Rent Start at page 31, then go to appropriate District page (1, 2, 3 etc) Example parcel in Winneshiek page 35 Determine Overall as well as High, Middle, Low averages for county Determine where your parcel fits Select an appropriate figure from the survey information Note on Example parcel CSR2 is high, but yields a little below average. Method #1: Typical Cash Rent... continued.... Example parcel CSR2 (82) is higher than county average (78); but yields (167 & 45) are lower than county average (179-corn; 52beans). Winneshiek County high quality rent is $265, medium quality rent is $231. Average ($265 + $231) /2 = $248 We ll use $248 as a typical rent for this parcel, based on the ISU survey. p 35 Method #2: Average Rents per Yield (corn & beans) Corn Yield calculation Parcel s average corn yield = 167 bu/a Times rent per bushel of Corn yield Average Rent for Corn Acres: $ 1.30 $ X $1.30 = $ Soybean Yield calculation Parcel s average bean yield = 45 bu/a Times rent per bushel of bean yield Average Rent for Bean Acres: $ 4.46 $ X $4.46 = $

14 Method #2: Average the corn & bean calculations p 35 Average Rent for Corn Acres: $ Average Rent for Bean Acres: $ ($ $200.70) / 2 = $ ($209) Average Rent, Corn & Soybean Acres: $209 Method #3: Corn Suitability Rating calculation Corn Suitability Rating calculation Parcel s CSR2 = 82 Times rent per CSR index point $ 2.97 Average Rent for Corn Acres: $ CSR X $2.97/CSR point = $ ($) Rent based on CSR2 only = $244 Method #4: Rent based on Return on Value/Investment Market value of cropland/parcel = $/acre Winneshiek County average: $6,592 (ISU Survey-Nov 1, 2016) My Parcel value = $7,200 My Desired return on value = 2.9% $7,200 X 2.9% = $208.80/acre ($209) 2.9% Return on Value? where does that come from?? See your book Page 43 Check the column Rent as % of Value Overall Average Method Average of all 4 Methods Method 1: Typical Cash Rent $ 248 Method 2: Average Rent per yield $ 209 Method 3: Average Rent per CSR2 Point $ 244 Method 4: Return on Investment/Value $ 209 $910/4 = Average $ /acre $ /A X 75 Tillable Acres =$17, But we don t stop here. Consider.... Source: ISU Extension Publication FM

15 See p31 in Leasing book: or landlord! Also Consider Costs of Production Whether you are the landowner or the producer/tenant the costs of production need to be considered. The arrangement must work for both the Owner and the Tenant. Page 72 in your book... These are estimates actual costs are even better. Additional Methods of Farmland Lease Valuation? See your book on page 63 Flexible Farm Lease Agreements: Share of Gross Revenue Base Rent Plus Bonus Share of Gross Revenue Page 63: We ll also look at Crop Share Equivalent Method: See book page 61 for discussion and an example. Base Rent plus a Bonus page 64: Crop Share Equivalent Rent Page 61 15

16 Crop Share Lease Landlord Tenant Labor Land ½ inputs ½ inputs Machinery Management ½ income ½ income Other Flexible Cash Rent Examples: File C2-22 on Ag Decision Maker Other Resources: Inside Back pages of Your Book Thank-you! Please contact ISU Extension with your Farm Management questions! Melissa O Rourke B.S., M.A., J.D. FARM & AGRIBUSINESS MANAGEMENT SPECIALIST Housed at ISU Extension Winneshiek County in Decorah morourke@iastate.edu Office phone: