Managing Landlord-Tenant Relationships in the Digital Age – Part 1
A significant portion of cropland in the U.S. is leased, and the type of relationship between the landowner and farmer tenant can significantly impact each party’s income, risk, and comfort level, as well as the value of the farmland itself. Part 1 of this series on landlord-tenant relationships provides insight for the landowner, whether for renegotiating a lease or beginning a relationship with a new farm tenant. We’ll also cover some ideas for digital tools that can potentially streamline documentation and communication efforts.
1- Have a written lease.
Though the temptation may be to rent your farm based on a hand-shake or oral agreement, be sure to have a written lease that is filed electronically and then signed and accessible by both parties. The value of your farmland can be significantly influenced by the lease terms, so specify them in writing and ideally obtain advice from legal counsel. For example, a longer-term lease or one priced at a below market rent can impair your ability to sell your farm or to price it at true market value. Even if you don’t expect to sell, family and business situations change and unexpected events occur – it’s best to plan for all contingencies and be wary of encumbering your asset by an unattractive lease.
2- Share your objectives.
Be sure to let your tenant know your goals regarding annual income, return on investment, or maintaining and improving the land. Are there specific farming practices, crops grown, production practices, or conservation issues that are important to you? How risk averse are you and do you have preferences for certain lease types? (For example, how much yield and price risk do you wish to incur.) If practical, schedule at least one annual meeting with your tenant to discuss your property and leasing relationship.
3- Stay informed.
Research and explore farmland values, market cash rents, and leasing trends in your area. Network with other landowners in your neighborhood or region. This can be particularly important if your tenant seeks to reduce their rent on any given year. Additionally, the tenant you work with may be collecting a variety of data (e.g., actual crop yields, fertility, input applications, soil and plant tissue samples) straight from the field and syncing it with farm/enterprise management software that can provide detailed reports and analytics. Be sure to ask that these reports be shared with you over the course of each crop year, and even consider including this data requirement in your written lease. A tenant mining nutrients and diminishing soil quality, even inadvertently, can drastically alter the value of the land for future crop use.
4- Ask questions.
Make an effort to understand your tenant’s farming operation, production practices, overall management philosophy, farming values, and their decision-making process when it comes to farming your land. Review and discuss any reports shared with you over the lease term – don’t be shy! In most circumstances, progressive and business-minded farmers will welcome the opportunity to inform, educate and communicate with you.
5- Make data/information-driven decisions.
Most would argue that the best leasing relationships are longer term and “win-win” for both landlord and tenant. Reduce relationship risk by using data in decision-making. Before jumping to conclusions or relying on assumptions, collect the production or market data necessary to take rational and informed actions. This will also reduce the potential for disagreement or conflict. As W. Edwards Deming once said, “In God we trust. All others must bring data.”
For example, say your farm is located in Logan County, Illinois and you are exploring whether raising your cash rent per acre for next year is appropriate. Recent surveys suggest that cash rents for high quality Logan County cropland have increased, while those of lower quality cropland have remained stable . The USDA publishes a variety of statistics by state, and 2016 and 2017 average corn yields for Logan County have been relatively high at over 200 bushels per acre. Actual detailed yield results and other field/mapping data provided by your farmer demonstrates that your farm has typically yielded around 180 bushels of corn per acre.
The AcreValue data above demonstrates that the average Productivity Index (PI) for Logan County is 131.0 (out of a possible 147), while that of your farm is 121.4. The soil “heat map” shows a significant area of lower productivity soils (i.e., the pink and yellow areas). So data demonstrates that your farm is less productive than average, and cash rents for this type of land are stable — as such, evidence supports maintaining (versus increasing) your cash rent.
6- Set communication expectations.
Like any successful relationship, the leasing relationship depends on effective and consistent communication. As landlord, share your expectations about the extent (e.g., occasionally, regularly, weekly) and type (e.g., phone updates, emailed reports, farm visits) of communication that you prefer over the course of the crop year.
In summary, an effective approach to relationship management — using these six key factors — can help ensure that you have access to the data needed for decision-making so that the production and investment goals for your farmland asset are reached.
To explore farmland values, soil productivity, and land use in the 48 contiguous states, visit AcreValue.