Leasing

Looking for different career options? Below is a summary of the leasing roles in the dairy industry, including pros and cons. Investigate the different farm business types and consider what would work best for you.

Leasing

A land lease agreement is when rent is paid to the farm owner (lessor/landlord) for the use of dairy land.

• How it works

  The lessee (tenant) pays the farm owner to use the land, buildings, and infrastructure in running their farming operation and each party is responsible for different property expenses and the upkeep of the farm.

  The lessee or tenant will run the operation independently of the farm owner and pays an agreed rental (monthly) and maintains the farm as per the lease agreement.

  Ensuring the lease is well-written and obtaining professional advice will help both the farm owner and lessee understand expectations, obligations, and responsibilities.

  Determining a realistic and fair rental will help increase likelihood of success for both parties.

  The lease rental can be calculated in different ways, for example:

  1. productive potential of the farm from a pasture-based system, or
  2. using a percentage of capital value.

• Advantages

  For the Lessee

  • Full control over the management of the dairy operation without borrowing to purchase land.
  • Ability to influence and improve profitability of business and grow wealth.

  For the farm owner/lessor

  • May suit farm owners looking to exit from the day-to-day running of the property but still want to retain land ownership.
  • Less input in farming policy but receive a secure income.

• Considerations

  • Where dairy company shares are involved, one option is to transfer shares to the lessee (held in trust) for the length of the lease. Another method is where the farm owner retains the ownership and financial benefit from these. Seek advice on the best option and legal requirements.
  • The lease must be clear in terms of environmental obligations.
  • Any farm owner concerns regarding management that can affect the land and assets, such as winter pugging damage, should be addressed in the lease agreement.
  • Accurately documenting the condition of the farm assets at the start of the term is important.
  • Additional factors include the number of houses on the property. Houses surplus to requirement can be priced into the lease or excluded from the lease and rented separately.
  • Retiring farm owners leasing their properties for the first time, may have a temptation to influence the lessee's farm management decisions. Farm owners should be aware that the lessee has full management control, assuming they are meeting their obligations set out in the agreement.

• Keys to success

  • Determining a realistic rental. As a basis, parties need to appreciate that both the productive potential of the land and any additional feeding assets are valued fairly. For this reason professional advice is recommended.
  • Clear expectations around improvements and maintenance requirements, particularly soil fertility, weeds, fencing, buildings, and machinery etc. should be clearly stated in the lease agreement and monitored regularly by a third party.

• Financial

  The lease price should be set at a level that allows both parties to succeed. It is useful to compare the annual rental to industry average debt-servicing figures.

• Entry and exit

  Length of terms are open to negotiations. Terms of three to five years with first right of renewal are typical, but any review period can be negotiated. Rent review dates and methods (CPI, market, agreed percentage) are typically included in the lease.

  From the lessee perspective, given the investment in cows, plant and equipment, and staffing, there is a requirement for a reasonable period of tenure.

  Clear and robust lease agreements are available from a number of sources within the industry.

• Next steps

  Use a current lease agreement alongside your farm advisor. For more DairyNZ information on support and advisors click here. If you are a Federated Farmers member you can access legal advice and purchase land lease agreements.

Lease with variable lease rate

This is a land lease agreement with a lease price that varies based on the milk price. If the final milk price is higher than the one used in the base calculation, top up payments will be paid to the farm owner.

• How it works

  Base rental

  Typically, a base rental is calculated on the productive potential of the property from a pasture-based system and paid monthly. Farms with a significant amount of infrastructure such as animal barns should have these assets valued separately with a rental calculated for these that recognises the interest costs and depreciation on these assets.

  For example: base rental = Production x base milk price x rental rate

  It may be agreed between the parties that this base rate sets the minimum payment that will be made to the farm owner.

  Top-up payments

  End of year – the simplest option to manage top-up payments is to maintain the base rate until the final milk price is known and a single top-up payment or adjustment is made when final milk price is announced.

  Throughout the year – top-up payments are made as the milk price changes throughout the season.

• Advantages

  For the lessee

  • The lessee has a predetermined method to calculate lease costs at a range of milk prices at the start of the season.
  • Lessees have full management control assuming they are meeting their obligations.

  For the farm owner/Lessor

  • Allows for people to exit from the day-to-day running of the property, retain land ownership and receive a secure income
  • Ability to receive a greater return on the land as the milk price increases.
  • Ensures the viability of the lessee, who will then be in a stronger position to maintain the property.
  • A floor milk price is often used to calculate the base rate. This means a minimum income is guaranteed. Some lessors will move with milk price and not have a base rate in place.

• Considerations

  For the lessee

  • Must budget for top-up payments in a high milk price year.
  • If the lessee is making top-up payments throughout the year, this is not immediately covered by an increase in the milk price due to phasing of the advance rate.
  • A floor milk price is typically used to calculate the base rate. This means the lessee carries risk if the milk price falls below that.
  • Needs a clear understanding of environmental obligations.

  For the farm owner/lessor

  • Have less input into farming policy.
  • Depending on the agreement and method of top-up payments, will not have the use (receive) of the top-up payment until it has been announced, so should budget accordingly.
  • Farm owners need to ensure that environmental and safety obligations are being met.
  • Retiring farm owners leasing their properties for the first time, may have a temptation to influence the lessee's farm management decisions. Farm owners should be aware that the lessee has full management control, assuming they are meeting their obligations set out in the agreement.
  • Where dairy company shares are involved, one option is to transfer shares to the lessee (held in trust) for the length of the lease. Another method is where the farm owner retains the ownership and financial benefit from these. Seek advice on the best option and legal requirements.
  • Houses on the property can be priced into the lease or excluded from the lease and rented separately or excluded.

• Keys to success

  • Determine a realistic rental. Parties should appreciate they may be leasing two classes of assets – one is the farm, and in addition, there may be assets such as feed pads, feed bunkers or in-shed feeders that allow for increased profitability.
  • A reasonably modest base milk price is generally used to determine the base rental. It is agreed that this will set the minimum payment made to the farm owner.
  • Clear expectations around improvements and maintenance requirements, particularly soil fertility, weeds, fencing, buildings, and machinery etc. should be clearly stated in the lease agreement and monitored regularly by a third party.

• Financial

  The lease price needs to be set at a level that allows both parties to succeed. It is useful to compare the annual rental to industry average debt servicing figures.

• Entry and exit

  Length of terms are open to negotiations. Terms of three to five years with first right of renewal are typical, but any review period can be negotiated.

  From the lessee perspective, given the investment in cows, plant and equipment, and staffing, there is a requirement for a reasonable period of tenure.

• Next steps

  Use a current lease agreement alongside your farm advisor. For more DairyNZ information on support and advisors click here. If you are a Federated Farmers member you can access legal advice and purchase land lease agreements.