Determining a Rental Rate for Farm Buildings

Whether vacant or in use, farm buildings cost the owner money. The owner must pay real estate taxes as well as insurance on the structure. On the other hand, some farmers want to diversify or expand their operations and are hesitant to initially invest funds to do so. The opportunity to rent farm buildings could be advantageous for all involved. When both parties decide to move forward with a rental agreement, establishing a fair rental rate is the next step.

There are several methods for establishing a fair rental rate for farm buildings.

A Cost-Based Method is used to determine the rental rate based on the owner's costs of owning the structure. The costs of owning the structure include insurance, property taxes, repairs and maintenance, interest on investment, and depreciation.

• Insurance: Insurance costs can be determined from the insurance policy. Farm buildings should be insured for liability and physical damage. Insurance costs could be higher with more frequent use.   
• Property Taxes: Property taxes can be obtained from your local county assessment office. This information is usually available online.  Property taxes must be paid regardless of whether the building is in use.  
• Repairs and Maintenance: Repairs and maintenance are necessary to keep the building in a usable condition. These costs can vary depending on usage, but are considered a cash-fixed cost.
• Interest on investment: Loan interest is a cash-fixed cost if the building is financed. There is also the opportunity cost of ownership (a non-cash cost), which reflects what could be earned if the building were sold and the funds invested elsewhere.
• Depreciation: Depreciation can be defined as the amount an asset or building loses in value over the course of time. This is counted as an annual expense.

Add these costs on a per-year basis, then divide them by the square footage or functional use area of the structure to determine a rental rate based on the cost of ownership.

A Market-Based Method is researching rental rates for similar agricultural buildings in your region. Even though this method reflects real-world prices, data might be scarce or vary widely by location.

The Farm Building Rental Rate Survey is available from the North Central Farm Management Extension Committee. This publication was a summary of the results of a survey of farm operators, farm owners, professional farm managers, and rural appraisers in the north central region of the U.S.

The Income Potential Method is based on the tenant’s expected income from using the building. This method usually applies to specialized structures (milking parlors, greenhouses, poultry houses). Using this method, the amount the tenant has available for rent payments after subtracting costs associated with raising livestock can be calculated. The tenant is then aware of the maximum rent that they can pay to break even. This is a great starting point for discussion with the owner to determine a suitable rental rate for each party involved.

The Commercial Equivalent Method is used to compare a farm structure to nearby commercial storage or rental facilities and their prices. Farm structures often rent slightly below commercial equivalents due to added responsibilities for tenants.

There are several additional factors to consider when determining rental rates for farm buildings.

Size: Is the size appropriate for how the tenant intends to utilize the building?

Condition: What is the current condition of the building?  Is there appropriate flooring, ventilation, insulation, and current technology if necessary?

Repair and Maintenance: The building's current condition will affect the maintenance costs. Consider who will handle repairs and maintenance, as well as who will monitor the building for needed repairs.

Location and Local Demand:  Lease markets differ by region. If there is a higher demand for the structure, that might be reflected in determining the final rental price. Also, the distance from the tenant's current location should be considered to account for additional travel time and costs. The proximity to markets for your product, as well as infrastructure, is also important to consider.

Both the owner and the renter should understand their costs when negotiating a fair rental rate and lease agreement. The owner should be aware of all the fixed costs associated with owning the building. The prospective renter should be aware of their production records, including all costs associated with production. A written lease should accompany any agreement. Visit Ag Lease 101 website for a sample farm building lease form (located in the document library).

Resources:

Edwards, William "Computing a Livestock Building Cash Rental Rate." Iowa State University Extension and Outreach, File C2-26, June 2015.

McClure, G. "Determining a Fair Rent for Farm Buildings." CAP Series 24-0903, Center for Agricultural Profitability, University of Nebraska-Lincoln, Sept. 23, 2024. DOI: 10.32873/unl.dc.cap047.