Leibold takes a closer look at costs associated with tiling
Jean Caspers-Simmet
Date Modified: 12/01/2009 11:36 AM
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Agri News staff writer
NASHUA, Iowa -- There are different ways to look at tile cost and net returns, said Kelvin Leibold, farm and ag business management field specialist.
An owner-operator's full cost and benefit comes from the partial budget showing the change in revenues from added income, added expenses and the cost of drainage. Landlords would need to recover the cost of the tile through additional cash rent or crop share lease. They may benefit from tax advantages. Tenants are putting money into something that they do not own and would need a long-term land and rental rate commitment.
Landlords who can pay for tile improvements out of cash on hand need a rate of return comparable to other investment options, Leibold said. They also may want to compare it to purchasing more land. If they borrow money for the improvement, they would need a return on borrowing cost and improvement maintenance.
In most cases the cash rent must carry the added cost, Leibold said. Equity financing for a $600 investment in tile for land renting at $200 would require an increase in rent of $18 per acre. Debt financing would require an increase of $42 per acre.
For an owner-operator, tiling is considered Section 179 property and would all be deductible in the year of installation, Leibold said. Landlords who aren't actively involved in the farming operation would have to depreciate the tile over 15 years.
A tenant with a long-term lease could depreciate the tile. It is Section 1245 property and would be eligible to be expensed under Section 179 by a farmer conducting an active farming business.
In situations where the landlord isn't in a position to pay for tile, options exist for the tenant to pay for it, Leibold said. To pay for tile, the tenant would need a long-term lease of seven to 10 years with cash rent fixed for the term of the lease or indexed. The cash rent would reflect the untiled land.
When the lease expires, the rental rate would be adjusted to the market. The tenant could depreciate the tile, and the landlord would own the tile at the end of the lease. Leases of five-year duration or longer must be recorded at the county courthouse.
In a situation where the landlord isn't interested in a long-term lease, the tenant could consider a five-year flat pro-rated lease. If the lease is not renewed, the landlord pays back the remaining prorated cost of the tile.
"There are some options out there," Leibold said.
Leibold suggests that farmers look at these questions when considering adding tile:
• How many acres will benefit?
• What will be the added profit per acre?
• Is there enough increased profit per acre compared to the present situation to cover the additional cost? Use after-tax figures.
• Can a portion of the investment be offset by increase in Land value?
To obtain Leibold's tile drainage worksheet contact him at kleibold@iastate.edu.