Analysis: Key factors in how much to pay for a land lease in today's market
The land letting market has started with gusto for 2018, as dairy, beef, sheep and tillage farmers eagerly await newspaper adverts from local auctioneers to see what's coming up for letting in their area.
Whether it is new land being let for the first time, or land coming back to the market looking for a new tenant, it all generates lively conversation in rural communities. Why is the land owner getting out? Why is it up for letting again? What price will it make? How long is the lease? All these are questions to be asked and answered.
In today's market, the extra profitability in dairy farming places it in pole position when it comes to leasing a holding new to the market. Of course, those wanting to lease in the land will find all the negatives such as, it needs reseeding, the poor fencing/ water supply and of course the ubiquitous 'wet patch'. In contrast, the owners of the land want the best price per acre and their land well cared for the duration of the lease.
However, these two components don't always go together, as the saying goes "an empty house is better than a bad lodger". I have seen land leased for free where the tenant commits to improving the land and at the other end of the scale, payments in excess of €500 per acre by vegetable farmers looking to rotate crops. So, what should be considered when determining how much one should one pay for a land lease in today's market? The following are the factors to consider:
It is fair to say that there is no point in leasing land if you will not make a profit on that land. However, many lease land thinking that farming more land equals more profit, which in my experience is often not the case. More farmers, blindly lease land out of pride just to keep another farmer out or in anticipation of expansion. It is critical to know your plan and profit levels before leasing additional land.
Quality of land
The tonnes of grass or corn grown per hectare is directly related to the profitability of that land. Quality of land is the key to good productivity. What is often called 'warm land', ie dry, low lying, sheltered, south facing, brown/red soils, deliver the best productivity, and paying a premium is justified.
Fertility and capital investment
What is the lime, P & K status of the land, is it starved, or has it been well fertilised? The cost of reseeding and correcting fertility deficits are often underestimated by farmers. Reseeding at €250 per acre and improving fertility can cost anything up to €150 per acre, when combined, this an additional €400 per acre. This is before any investment is made in hedge trimming, fencing, water or roadways. Farmers like to 'put their mark' on new land, but they should think long and hard before they spend the cash, especially if they don't have a long-term lease.
Basic Payment Scheme (BPS) entitlements, nitrates regulations and agri-environmental schemes such as GLAS all influence the price paid for land. Naked land, ie land with no BPS entitlements, present an opportunity to claw back some of the land cost by buying or leasing in additional entitlements. Similarly, schemes such as GLAS or the organic schemes can bring in additional income. Lack of planning in respect of the Nitrates Directive leaves some farmers facing a desperate need for land or face a significant penalty in BPS payments. Every case is different, but doing the maths and early planning is the key.
Length of lease
There is €40,000 of tax-free income available to a landlord who leases out land for terms of 15 years or longer (€80,000 if joint owners). This incentive has seen a huge increase in the number of long-term leases in recent years. A long-term lease provides security of tenure for the tenant farmer which enables them to invest in their business, eg banks are comfortable investing in a dairy farmer leasing additional land within grazing distance of the milk parlour who wishes to invest in the home farm. A 10-year loan is a safe bet for the bank, knowing the land will be in place for 15 years. The longer the term of the land lease, the better for all parties.
Farm buildings are often undervalued in land leases. Pollution compliant farmyards are an attractive proposition in long-term leases when compared to the cost of building the facilities on the home farm. Again, this is case specific, but it may prove more cost effective to pay a little more for the land and spend on improving the buildings in the leased land as opposed to investing large sums at home. Remember, impressing the landlord is the key to lease renewals; paying on time and improving the farmyard are the two key ingredients.
When the potential tenant does the analysis properly and calculates the projected benefits from leasing in additional land into their farm business, it is easy to decide the maximum price to pay - Plan A. Too many get caught up in the excitement of the auctioneering process and bid with abandon just to show 'my chequebook is fatter than yours'. This, I suggest, is neither good for the landlord nor the tenant. Plan B is to walk away, don't be afraid to do so - it may be the cheapest land you will ever lease.
Mike Brady is managing director at Brady Group: Agricultural Consultants & Land Agents, email: email@example.com.
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