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Renting facilities? Consider these factors first

Laura Holtzinger for Progressive Dairy Published on 31 December 2019

When contemplating renting a facility for animals, it can be difficult to know how to calculate the value. There are standardized formats for renting other properties and assets but no simple formula for computing livestock facilities’ worth.

Ultimately, when considering a rental agreement, the owner (landlord) and the person interested in renting the space (tenant) must assess their budgets and decide if it is cost-effective to enter into a rental agreement.

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If the landlord has advertised or previously rented his or her facility, there may be a benchmark for rent cost. If so, the parties can adjust the agreement to suit the situation’s specifics. If the landlord has not rented the space before, both parties should evaluate their needs and variables for the space and communicate about how these align.

The landlord should consider his or her costs associated with the building.

Rory Lewandowski, Ohio State University’s Wayne County extension educator, provides insight into livestock building rentals and defines fixed and variable costs in the article “Livestock Building Rental Considerations.”

“There are two basic categories of building ownership costs: variable and fixed,” he wrote. “Variable costs are dependent upon building use and the level of intensity of building use, and include utilities, use-related repairs and maintenance, and possible costs of wear-and-tear beyond depreciation.” Water, electricity, fuel and equipment usage are other examples of variable overheads.

Fixed costs remain, even if the building sits empty, and include interest, insurance, depreciation, mortgage, general repairs and taxes.

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While variable costs will fluctuate, the landlord can analyze the fixed costs and the value of the building and use this information to help navigate a rental negotiation. If the building sat empty and wasn’t generating income, the landlord should consider the loss of potential revenue by leaving it vacant.

The tenant should examine his or her income, expenses and potential profit margin to determine what he or she can reasonably afford to pay for rent.

Important factors for deciding if a facility is a suitable fit include:

Intentions for the space and animals

What does the tenant want the space for? What kinds of animals and how many? Are the animals for market and will be sold in the fall, or are these breeding animals that require the space year-round? Is the tenant planning to care for the animals, or is the tenant hoping to pay the landlord to raise the animals?

Size of the space

Is the space large enough to comfortably accommodate the number of animals? The time, labour, maintenance, wear-and-tear, and equipment use to bed and clean the space should be considered, especially for more or larger animals.

Supplies and storage

What will be used for bedding, and who will provide it? At what cost? Does the tenant already own bedding, feed and hay, or will the tenant be buying it from the landlord? Is there storage space available for bedding, feed, hay and miscellaneous supplies and tack? Is this an additional cost? Waste management should be discussed as well.

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Location

How in demand is the facility? If the building is in a popular area, there could be competition for it, which may increase the price.

Character

Do the landlord and tenant know each other and one another’s character and tendencies? It is wise to account for whether both parties feel there would be an amiable and healthy business relationship. Communicating by establishing expectations and guidelines ahead of time can save time and upset in the long run.

Expectations

If something breaks, who fixes it, and who pays? What are the landlord’s rules and standards for equipment use, cleanliness, maintenance and what areas may and may not be used?

Schedule

What is the approximate timeline for chores? And how will the tenant’s actions – and milk trucks, delivery trucks, A.I. technicians and other relevant necessities for the tenant’s business – affect the schedule, safety and lifestyle of the landlord and their family? Even the traffic of whoever is doing chores driving in and out of the driveway two or three times a day should be a thought.

Documentation/liability

The landlord would normally carry fire and building liability insurance. It is intelligent – and often required – for the tenant to carry renters insurance, which provides protection and helps to transfer risk. Business interruption insurance is an additional cost but a wise investment in case of a disaster or structure loss, as it compensates for the profit that would have been earned. The landlord may require a copy of proof of renters insurance or a declarations page of the insurance policy. Insurance providers can easily generate copies of these documents.

These are significant, common considerations for drafting a rental agreement, though each situation is unique. Surveying and requesting insight from industry peers and professionals with experience establishing livestock facility rental agreements is an excellent strategy as well.

The landlord and tenant may use such data in their rental negotiations to help tabulate a fair rent projection.

If both parties agree that their needs, expectations and figures align, a written lease must be drafted and signed. The written lease is crucial for acknowledging binding matters and protecting both parties’ interests in the arrangement. Handshake agreements are common among farmers, but having everything in writing helps prevent misunderstandings or upset, including when the business is between family or friends.

The lease must include the following: the names and roles of all parties involved, the beginning date (and end date if applicable) of the lease, terms of the rental agreement, how the lease is renewed or terminated, and the rent amount (including security deposit) and due date. There should also be details about what happens if the rent is late – is there a grace period? Penalties?

When considering a livestock facility rental agreement, the landlord and tenant should assess their needs, finances and intentions. This will prepare them to communicate and negotiate efficiently. A written lease with clear terms is essential, as it provides clarity and protects both parties’ interests.  end mark

Laura Holtzinger is a freelance writer in northeast New York.

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