Finance first: Be fair to your landlord

Finance first: Be fair to your landlord

How to compensate owners if profits rise.

My landlord adjusted my cash rent down this year because of the current financial situation in ag. I’m trying to think of how to compensate him fairly if this year turns out a lot better for my operation than I had thought. What are some ways I could do that? — T.K., Iowa

To fairly treat your landlord, you could let him know you’ll be adding some sort of compensation if the year turns out better than you had thought. If you do so, make sure to clearly define what a better-than-expected scenario looks like.

Does it mean better-than-expected yields? Better-than-expected prices? A combination of the two? Make sure it’s all laid out clearly for your landlord, or you risk losing trust.

What's the best way to compensate landlord if year turns out better than expected? (Photo: Zoonar O. Kovach/Thinkstock)

Our ag financial advisers often help farmers set up specific “flex,” or bonus-based, rents — which provide a well-defined framework around what the landlord can expect.

Another route to consider is letting your landlord know that if things turn around for your farm next year, you’d be willing to go back up to the previous rent. That way, he isn’t expecting an increase in 2016 but is aware you’re trying to keep the relationship as fair as possible.

Consider what you want for your long-term relationship with your landlord — qualities like mutual fairness, respect, trust and stability.

Ask yourself: What has my relationship with this landlord been like in the past? What’s important to my landlord? Have I already set any expectations with my landlord around how I think this year may turn out?

By asking how to compensate your landlord fairly in a better-than-expected situation, it’s clear you don’t want to take advantage of your landlord’s willingness to lower the rent.

Focusing on the type of long-term relationship you want with your landlord will help you ensure things stay fair — and help preserve a high level of trust.

Costly ideas

My son has more ideas than our farm can afford. He wants to take over someday. How can I make sure he doesn’t break the farm in the meantime — or in the future — with all these ideas he wants to try? — L.D., Nebraska

It’s true some people are more interested in pursuing new ideas. But sometimes those people can have a poor understanding of an idea’s practical application or cost.

For your son, what is he learning and doing right now to prepare to lead the farm in the future? Is there a plan in place for how he’ll build and demonstrate his leadership and decision-making skills? This needs to be part of your farm’s transition plan.

You might carve out a “sandbox,” an area you put him in charge of and hold him accountable for. He can gain experience as he makes his own decisions, without the risk of a large-scale poor decision.

When your son comes up with a new idea, he must first demonstrate that implementing the idea will create a payoff. What will be the positive impact on the farm? What problem is the idea solving? How will the idea make the farm more efficient or help to generate more revenue?

The key is building his understanding that ideas in and of themselves don’t create success for the farm — it’s all about ideas that add value to the farm. He needs to be held accountable in some way for “return on idea.”

Most farms are surrounded by new ideas — there’s no shortage of them! The tougher part is deciding which ideas will move the farm closer to its goals. Learning how to ask and think through the right questions before making decisions is a key piece of training for your son before he moves into a leadership role.

This training for your successor needs to be part of your farm’s overall transition plan.

Frye is president and CEO of Water Street Solutions. [email protected]

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