Tenants need to be prudent about farm improvements

Does the farmland you rent need tiling, limestone, conservation structures or other long-term improvements? When landlords are reluctant to pay for an improvement, some tenants will pay for it themselves. A tenant who chooses to make a long-term improvement should be very cautious, warns a University of Missouri Extension agriculture business specialist.

“Since the improvement will stay with the farm if the lease is terminated, the tenant should protect himself by having a written lease that clearly explains how he will be reimbursed for any remaining value of the improvement,” said Whitney Wiegel.

For example, if a tenant pays for an application of limestone, which will provide benefits to the property for multiple years, the tenant should get the landlord to agree to pay for the unused benefits of the application.

“This written agreement should state that if the leasing arrangement is terminated before the end of the limestone’s useful life, the tenant, who paid for the improvement, would receive a payment from the landlord that is equal to remaining value of the limestone,” Wiegel said.

In general, there are three guidelines to follow if a tenant is going to pay for part or all of a long-term improvement.

1. The tenant and landlord should agree to the specific improvements to be made. “Specify what each person will furnish and the value of the tenant’s contribution,” Wiegel said.

2. Both parties should agree to the depreciation rate for the tenant’s contribution, and the lease year when depreciation begins. The depreciation or amortization rate can be different from the farm income tax depreciation schedules, which may allow assets to depreciate faster than their value decreases. Other methods, such as appraisal, may be specified to determine the asset’s value at the end of the lease period.

3. The tenant and landlord should agree on how any remaining value will be reimbursed if the tenant leaves the farm before the costs are fully recovered.

“Both tenants and landlords should want to make long-term improvements to rented property,” Wiegel said. “However, before making any improvements, there needs to be communication and consensus between the tenant and landlord to ensure that the improvement results in long-term profitability for both parties.”

The MU Extension publication “Farm Lease Agreement” (G426) is available for free download at http://extension.missouri.edu/publications/displaypub.aspx?p=g426.