Farm (revenue Leasing) - Valuation of A Farm

Valuation of A Farm

The tenant of a farm can only make a profit if he makes a careful assessment of its value. Although modern financial management theory has reduced such calculations to scientific formulae, the mind of the astute financier of past ages would have well understood the calculations involved, whether they were performed mentally or by making marks with a stick in the sand. An estimate is made of the long-term average yearly gross value of the revenue stream in question, which can be derived from examination of past records & accounts, adjusted for any new circumstances affecting the future. Then a discount for a risk element is deducted with a further discount deducted for the time value of money. The risk in question relates to the possibility of some of the debts forming the revenue stream being defaulted on or paid late. This causes variability in the revenue stream. These concepts must always have been second-nature to the successful merchant throughout the ages. The resultant figure forms the maximum rent the tenant is willing to pay to the lessee of the farm. His profit becomes the excess of whatever revenues he can extract from the farm less the rents payable, less his administration, levying and collection expenses. The skill of the tenant of a farm is therefore firstly in negotiating a favourable rent which he does by overstating the riskiness (variability) of the cash flow stream in question and secondly in his management of the debts thus assigned to him, that is to say his skills as a debt-collector and manager in general. He must also be satisfied that he has the ability to enforce payment of the debts, ultimately by use of a court of law, in which he must pay the standard fee for bringing a suit, under the legal system generally instituted by the government authority which is the lessor of the farm. He does not act as the lessor's agent but as a principal.