Rental assessments for farm leases

The IRD have made it very clear that all rentals between family trusts and partnerships have to be independently assessed.

So, what are the issues around this and how are they assessed?

Given my background in valuation, farm management, farm finance, succession planning and rental assessments, I have set out the following points:
    Farm rents vary according to many issues. Broad brush rentals are around $350.00 per acre, or $865.00 per hectare for dairy land with no shares. Rents increase to $450.00, or $1,112.00 when dairy company shares are included.
    The rentals will increase substantially if your client owns the farm and he just has to open up the boundary, connect up the races and connect the new piece of land into his existing dairy business. Rentals here could be in the $500 - $600.00 per acre region. Blocks of land which are adjunct to dairy farming platform also are up as high as $1,000.00 per acre.
    Some leases have tagged the rent as a percentage of the gross income, which would be around 25 – 32%. This is slightly less than the maximum debt servicing ratio as a percentage of gross income that would apply.
    Other leases have been tagged to rental based on a dollar value per kilogram of milk solids, somewhere in the region of $1.20.
    Dry-stock farm rentals are $100.00 per acre for good land, but drop back to $50 - $75.00 for hard steeper hungry country.
    Maize growing land has a maximum of approximately $1,000.00 per acre. Potato and onion growing land would also fall into this category.
From a rental assessment point of view, there are large variations. Some of the variations that need to be factored in are as follows:
    Who owns the dairy company shares and how are they held will influence the rental.
    Access, fertility levels, proximity to the existing cowshed are all important factors.
    With dry-stock leases, fertilizer levels, soil fertility, soil phosphate and calcium levels are crucial and may well affect the rental levels.
    The term of the lease is also important. Is it a year by year lease, or is it for three years, with a right of renewal for a further three years?
    Does the land owner have the right to sell during the lease period?
    Who pays for what? And so on.
With the increase in land values, there are likely to be more leases in place. There will be more tenant farmers and more land owners or landlords. In my opinion, there is a clear advantage of leasing, over 50/50 sharemilking as a tenancy/share farming structure. The lease gives clarity definition, gives the tenant better control and also gives a set income to the owner. There is less argument and unhappiness.

But back to the main issue, IRD is requiring independent assessments for rentals between various ownership entities in all businesses, including farmers. I have set out some of the issues and must remind you that at this stage, rentals on farm land bear no relationship to return on investment.


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