Investing below the surface: financial viability and unrecovered investment frameworks for tenant-installed subsurface drainage on rented farmland

Abstract

Subsurface drainage installation represents one of the most significant capital investments available to tenant operators on rented farmland, yet no established framework exists to quantify and protect unrecovered investment in the event a lease relationship ends before the investment has fully paid out. This thesis evaluates the economic viability of subsurface drainage investment from the tenant’s perspective and develops a model-based compensation framework to address early lease termination risk. Using net present value and payback analysis on a representative 155-acre Upper Midwest field with a corn-soybean rotation, the study evaluates 20 sensitivity scenarios across installation cost, yield improvement, field productivity, crop prices, and discount rate variables. All analysis is conducted over the 15-year asset life established by the Internal Revenue Service Modified Accelerated Cost Recovery System (MACRS). Under base case assumptions with an investment cost of $1,050 per acre, 15 percent corn and 6 percent soybean yield improvement, $4.65 per bushel corn and $11.50 per bushel soybean prices, a 6 percent discount rate, and a 22 percent federal income tax rate applied to a Section 179 first-year deduction, the investment achieves a marginally positive net present value of $1,514 at Year 15. The undiscounted cash-flow recovered occurs at Year 10, but discounted economic break-even does not occur until Year 15, creating a five-year zone of unrecovered capital that is not visible from cash-flow analysis alone. Across all scenarios, 13 of 20 produce a positive NPV at Year 15 with the two most sensitive variables being installation cost and yield response producing the widest outcome ranges at $110,623 and $107,882 respectively. Building on the results, the thesis develops an applied lease exhibit framework that translates model-derived unrecovered investment values into a year-specific, pre-agreed compensation schedule for use in a tenant-landlord lease negotiations including a template in Appendix A that tenant operators can populate with their own investment values. The framework developed represents an original contribution to the applied agribusiness literature on tenant-financed drainage investment on rented farmland.