Land Debt per Acre
How is it calculated?
Land Debt per Acre = Total Land Debt / Total Acres pledged as Collateral to Loan
Goal of the Ratio
The goal of this ratio is twofold. The first goal is to provide a quick snap shot of where you stand from a collateral perspective. If you have lived in an ag area, many farmers talk about how much land sells for in how much $X/Acre. By viewing the amount of Debt/Acre, you can quickly recognize the collateral position that you are in.
The second is that it will show you how much debt each acre of production land needs to be able to support. For a farmer, annual profitability fluctuates from year to year, but this Debt load per acre changes very slowly (since land loans are amortized over a long period of time).
When is it used?
This calculation is common for borrowers in a row crop farming business.
Rules of Thumb
Lower is Better (but too low and you don’t have a loan earning interest :)
Please note all ratios should be viewed in relation to industry norms to determine overall adequacy.
What changes in the ratio could mean:
Some example reasons why the Debt/Acre Ratio can change:
- Purchase additional land
- Sell existing land
- Repay loan that finances the land
Other Relevant Terms
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