Developing an irrigation water supply is a permanent improvement on real estate, which is why landowners usually own irrigation systems. However, ownership of irrigation equipment can vary. The landowner can own the equipment; the tenant can lease or own the equipment; or the equipment can be jointly owned by landowner and tenant.
Rental agreements for irrigated farmland should be designed to consider the ownership of the equipment.
A fair lease requires that the contributions of each party be identified and assigned a dollar value. These contributions include land, labor, capital, management and variable costs.
Land is the major contribution of the landowner. A lease for irrigated land needs to consider the value of the land and the water supply (well or irrigation lake) separately from the value of the irrigation system. Consult property tax records and depreciation schedules to separate the values. Land sales usually list the value of the bare land and the equipment attached to the land.
Count it once. Don’t count the value of the irrigation equipment twice by including it in the market value of the land and then again as an equipment investment. If the land is valued as irrigated land, the well, reservoir and other permanent facilities should not be counted again as a capital contribution. If the land is valued as dry land (or land with irrigation potential), the value of the irrigation facilities and equipment must be assigned to the contributing parties.
Irrigation investments can complicate a lease arrangement. Crop-share rental agreements often share variable costs, such as seed, fertilizer, pesticides and harvest drying. If the landowner does not own all of the equipment, tenants may be hesitant to purchase equipment. Writing a longer-term lease, specifying the parties responsible for repair costs, etc., may help to alleviate concerns.
