CHAPTER 10 LEASE AND LAND PURCHASE ANALYSIS The purposes of this exercise are to (1) compare the cost of cash and there leaving (2) estimate the maximum cash rent that you can afford to pay (3) estimate the economic value of fm. and based on its projected future camings A Crep Share versus Cash Rent Lease Analysis Use information from 3 years of crop production records to compare how much it cost of would have cost) to rent and under a stor share lente compared to share The indirect cost of a crop share lease can be computed by estimating (1) the value of the land.onet's share (50%) of the gross income, minus (2) the value of the land owner's share (50%) of the input costs (seed, fertiler, pesticides and drying) Round values to the nearest whole Year Year 2 Ye Com $4.95 Soybeans 11.75 Soybeans 58.60 Com 56.10 Soybeans $11.00 $3.40 180 166 48 60 150 1. Average selling price, S/hu. 2 Average yield, bula Gross income, S/acre (price x yield) 4 Average gross for com and soybeans 5 Landowner share of gross income hain 6 Value of input costs. S'acre 7 Average input cost for com and soybeans 8 Landowner share of input costs (hal 9 Netcost of crop share rent (5 minus 8) 10. Casb rest is same year 11. Which type of rent was cheaper? 5296 $136 $296 5136 5296 $136 $210 $210 $210 12. In what type of year would you expect a trop share base to be share than a cashlee More expensive? 11. Which type of lease arrangement would you consider to be the client for the tenant and why? Focus SES B Maximum Cash Rent Analysis Estimate your added income and added costs from cash renting more land, Identical to the land you already own. Round values to the nearest 1 Average gross income per acre (line A 4. average of years 1-3) 2 Average input costs per acre (line 1.7. average of years 1-3) $150 4 Machinery costs per acre, variable plus fixed Laber cost per acre 3 hours per acre 510 per hour Total added casts (2+ 3+ 4) $ 6 Added net income per acre from land rental (line 1 minus fine 5). This is the most you could pay for cash rent and just break even. Of course, if you must invest in Targer machinery, you will have additional fixed machinery costs, as well. 1 c Value of Land (income capitalization approach) The net income that could be earned from renting land would also be available if you purchased the land. You would not have to pay cash rest, but you would have to pay property taxes 1. Net income per acre from additional land (line B6) 2. Minus property taxes per acre 520 3. Equals added set income per acre from a land purchase Since the expected useful life of land is unlimited, the present value of the land can be found by simply dividing the annual added set income by the real discount rate. Part of the cost of investments in fixed assets like from land is offset by appreciation in value over time. To take this into account we can subtract the expected rate of inflation from the discount (or interest) rate to get a "real" discount rate. 4 Long-term interest rate 7.00% Expected rate of inflation in land values 2.00% Real discount rate 500% 7.055 per acre, estimated land value 5. Added net income (C3) off-farm income CHAPTER 10 LEASE AND LAND PURCHASE ANALYSIS The purposes of this exercise are to (1) compare the cost of cash and there leaving (2) estimate the maximum cash rent that you can afford to pay (3) estimate the economic value of fm. and based on its projected future camings A Crep Share versus Cash Rent Lease Analysis Use information from 3 years of crop production records to compare how much it cost of would have cost) to rent and under a stor share lente compared to share The indirect cost of a crop share lease can be computed by estimating (1) the value of the land.onet's share (50%) of the gross income, minus (2) the value of the land owner's share (50%) of the input costs (seed, fertiler, pesticides and drying) Round values to the nearest whole Year Year 2 Ye Com $4.95 Soybeans 11.75 Soybeans 58.60 Com 56.10 Soybeans $11.00 $3.40 180 166 48 60 150 1. Average selling price, S/hu. 2 Average yield, bula Gross income, S/acre (price x yield) 4 Average gross for com and soybeans 5 Landowner share of gross income hain 6 Value of input costs. S'acre 7 Average input cost for com and soybeans 8 Landowner share of input costs (hal 9 Netcost of crop share rent (5 minus 8) 10. Casb rest is same year 11. Which type of rent was cheaper? 5296 $136 $296 5136 5296 $136 $210 $210 $210 12. In what type of year would you expect a trop share base to be share than a cashlee More expensive? 11. Which type of lease arrangement would you consider to be the client for the tenant and why? Focus SES B Maximum Cash Rent Analysis Estimate your added income and added costs from cash renting more land, Identical to the land you already own. Round values to the nearest 1 Average gross income per acre (line A 4. average of years 1-3) 2 Average input costs per acre (line 1.7. average of years 1-3) $150 4 Machinery costs per acre, variable plus fixed Laber cost per acre 3 hours per acre 510 per hour Total added casts (2+ 3+ 4) $ 6 Added net income per acre from land rental (line 1 minus fine 5). This is the most you could pay for cash rent and just break even. Of course, if you must invest in Targer machinery, you will have additional fixed machinery costs, as well. 1 c Value of Land (income capitalization approach) The net income that could be earned from renting land would also be available if you purchased the land. You would not have to pay cash rest, but you would have to pay property taxes 1. Net income per acre from additional land (line B6) 2. Minus property taxes per acre 520 3. Equals added set income per acre from a land purchase Since the expected useful life of land is unlimited, the present value of the land can be found by simply dividing the annual added set income by the real discount rate. Part of the cost of investments in fixed assets like from land is offset by appreciation in value over time. To take this into account we can subtract the expected rate of inflation from the discount (or interest) rate to get a "real" discount rate. 4 Long-term interest rate 7.00% Expected rate of inflation in land values 2.00% Real discount rate 500% 7.055 per acre, estimated land value 5. Added net income (C3) off-farm income