7 ways to compute cash rent
A fixed cash rent agreement is the simplest rental arrangement there is. But it is not as simple as it first seems.
“Determining a fair rate is not easy,” says William Edwards, Iowa State University (ISU) Extension economist. “Cash rents are likely to be too low during periods of rising prices and high yields, and too high during periods of declining prices and low yields.”
Here is the crux of the problem:
“Rates often reflect the results of the past few years more than the upcoming year,” says Edwards.
“It is always in the tenant’s and landlord’s best interest to develop their own lease,” says ISU Extension economist Mike Duffy. “But sometimes it is helpful to know what practices are being followed.”
Here are seven different methods of computing a cash rent, as put forth by Edwards and a colleague, Don Hofstrand. Several of these methods are used throughout the country. One, using corn suitability ratings (see #3), is peculiar to Iowa. Although the titles in the seven-point list come from Iowa, some of the information comes from other sources.
1. What Others Are Charging/Paying
Edwards says the most common way to establish the amount of cash rent is to base it on what other people in the area are charging. He lists three potential pitfalls with this approach.
• Simply charging what others are charging may not be appropriate for a particular farm.
• Rumors about cash rental rates may be quite different than the actual rates, especially in a rapidly changing market.
• “Differences in the quality of land should be taken into account when comparing your rental rate to those of others. Landlords who are unfamiliar with farming often assume that all land is of equal productivity,” Edwards says.
Kansas State University ag economist Kevin Dhuyvetter says, “In areas where there is sufficient cash renting, the prevailing cash rent should provide an approximation of the appropriate measure of fair rent. In some situations, however, there is no established rental rate. Or if there is one, the rate has extenuating circumstances that preclude it from being appropriate.” Those circumstances are things like buildings on the land or rent between family members.