Agricultural LeasesAgricultural Leases

• Landlord –Tennant Contracts• Landlord –Tennant Contracts

Farm Lease AgreementsFarm Lease Agreements

Should be equitable for each partySpecific language and clear provisions in the lease are essentialLeases can be bought or made by the individualsLeases should be made for a specific contract between parties and only cover the needed provisions of the leaseCooperation is the most important part

Should be equitable for each partySpecific language and clear provisions in the lease are essentialLeases can be bought or made by the individualsLeases should be made for a specific contract between parties and only cover the needed provisions of the leaseCooperation is the most important part

Types of agricultural leasesTypes of agricultural leases

Crop share lease agreements

Fixed-Cash lease agreements

Flexible-Cash lease agreements

Crop share lease agreements

Fixed-Cash lease agreements

Flexible-Cash lease agreements

Crop Share LeasesCrop Share Leases

• A lease is basically an agreement which gives the use of an asset to a lessee for a specific period of time at a specified rate.

• A lease does not transfer title of ownership nor an equity interest in the asset.

• A Crop share lease agreement provides for a specified percentage of the crop to go to the landlord and tenant. The basic premise is that each party receive income from the crop in proportion to what each party contributes to production.

• In a typical crop share lease agreement, the landowner contributes land and improvements, associated property expenses, and a specified amount of the variable expenses.

• A tenant usually contributes labor and machinery, associated equipment expenses, and a specified amount of the variable expenses.

• A lease is basically an agreement which gives the use of an asset to a lessee for a specific period of time at a specified rate.

• A lease does not transfer title of ownership nor an equity interest in the asset.

• A Crop share lease agreement provides for a specified percentage of the crop to go to the landlord and tenant. The basic premise is that each party receive income from the crop in proportion to what each party contributes to production.

• In a typical crop share lease agreement, the landowner contributes land and improvements, associated property expenses, and a specified amount of the variable expenses.

• A tenant usually contributes labor and machinery, associated equipment expenses, and a specified amount of the variable expenses.

Advantages of Crop Share LeasesAdvantages of Crop Share Leases• Less operating money may be tied up by the tenant due to

landowner sharing of the variable expenses.• Management may be shared between and experiences

landowner and tenant resulting in more financially rewarding and effective decisions.

• Crop sales and input purchases may be timed for improved tax management.

• Risk of low yield and prices are shared between two parties. Profits and higher yields are also shared.

• Landowner material participation may be more easily proved for use of government programs, estate planning, building social security bases, and income tax purposes.

• Less operating money may be tied up by the tenant due to landowner sharing of the variable expenses.

• Management may be shared between and experiences landowner and tenant resulting in more financially rewarding and effective decisions.

• Crop sales and input purchases may be timed for improved tax management.

• Risk of low yield and prices are shared between two parties. Profits and higher yields are also shared.

• Landowner material participation may be more easily proved for use of government programs, estate planning, building social security bases, and income tax purposes.

Disadvantages of Crop Share LeasesDisadvantages of Crop Share Leases

• Landowner income will be variable because of yield and price variations as well as changes in costs of shared inputs to production

• Accounting for shared expenses must be maintained• The landowner must make marketing decisions• Landowner and tenant must discuss the cropping practices

and other management decisions• As prices change, the lease should be reviewed for

fairness. Sharing agreements may also need changed.

• Landowner income will be variable because of yield and price variations as well as changes in costs of shared inputs to production

• Accounting for shared expenses must be maintained• The landowner must make marketing decisions• Landowner and tenant must discuss the cropping practices

and other management decisions• As prices change, the lease should be reviewed for

fairness. Sharing agreements may also need changed.

Fixed Cash LeaseFixed Cash Lease

• A fixed cash lease is rental agreement in which the landowner receives a predetermined cash fee from the tenant irrespective of crop yields or the product prices. The tenant produces crop on the land and makes management decisions as if the tenant owned the land.

• A fixed cash lease is rental agreement in which the landowner receives a predetermined cash fee from the tenant irrespective of crop yields or the product prices. The tenant produces crop on the land and makes management decisions as if the tenant owned the land.

Calculating a Fixed Cash LeaseCalculating a Fixed Cash Lease•

Cash rent market approach—you must know the cash rents being paid in an area and adjust according to the productivity of the land, use of the improvements, and other factors about the land

• Landowner’s Cost or Desired return approach—This method requires calculating the landowner’s ownership costs( depreciation, interest, repair, taxes, and insurance) or establish the desired return the landowner wishes to receive on investment.

• Landowner’s Adjusted Net Share Rent Approach—This approach presumes the cash lease should be related to share rents. Normally fixed cash rents would be lower than share leases because the landowner shifts the risk of price and weather over to the tenant.

• Tennant’s Ability to Pay Approach—This approach determines fixed cash rents on the tenant’s projected return over the cost of production, using anticipated yields and prices. Subtracting out all costs and figuring in a return for labor and management from gross income leaves an approximate maximum return the tenant could afford to pay.

• Cash rent market approach—you must know the cash rents being paid in an area and adjust according to the productivity of the land, use of the improvements, and other factors about the land

• Landowner’s Cost or Desired return approach—This method requires calculating the landowner’s ownership costs( depreciation, interest, repair, taxes, and insurance) or establish the desired return the landowner wishes to receive on investment.

• Landowner’s Adjusted Net Share Rent Approach—This approach presumes the cash lease should be related to share rents. Normally fixed cash rents would be lower than share leases because the landowner shifts the risk of price and weather over to the tenant.

• Tennant’s Ability to Pay Approach—This approach determines fixed cash rents on the tenant’s projected return over the cost of production, using anticipated yields and prices. Subtracting out all costs and figuring in a return for labor and management from gross income leaves an approximate maximum return the tenant could afford to pay.

Advantages of Fixed Cash LeasesAdvantages of Fixed Cash Leases

• The landowner has less managerial input than with other lease agreements reducing the possibility of friction between landowner and tenant

• There is little conflict over the division of crop, expenses, and marketing

• The tenant has great freedom in crop production, marketing, and participation in government programs

• Cash rents will less likely to be considered a “participating landlord” when calculating social security payments.

• The landowner has less managerial input than with other lease agreements reducing the possibility of friction between landowner and tenant

• There is little conflict over the division of crop, expenses, and marketing

• The tenant has great freedom in crop production, marketing, and participation in government programs

• Cash rents will less likely to be considered a “participating landlord” when calculating social security payments.

Disadvantages of Fixed Cash LeasesDisadvantages of Fixed Cash Leases

• It may be difficult to determine a cash rent acceptable to both the landowner and the tenant

• Cash rents are likely to be too low in times of high yields and prices, and too low I times of low yields and prices.

• The tenant may tend to “mine” the land or not replace nutrients, therefore reducing the productivity over time.

• Cash rents become fixed costs for the tenant

• It may be difficult to determine a cash rent acceptable to both the landowner and the tenant

• Cash rents are likely to be too low in times of high yields and prices, and too low I times of low yields and prices.

• The tenant may tend to “mine” the land or not replace nutrients, therefore reducing the productivity over time.

• Cash rents become fixed costs for the tenant

Flexible Cash LeaseFlexible Cash Lease

• A flexible cash lease agreement is a rental arrangement in which the landowner receives a predetermined cash fee from the tenant that is adjusted for the change in yield and price. The tenant produces crops on the land and makes management decisions as if the land were owned by the tenant.

• A flexible cash lease agreement is a rental arrangement in which the landowner receives a predetermined cash fee from the tenant that is adjusted for the change in yield and price. The tenant produces crops on the land and makes management decisions as if the land were owned by the tenant.

Advantages to Flexible Cash LeasesAdvantages to Flexible Cash Leases

• The landlord has opportunities to share in unexpected increases of crop yield or increase in price

• The tenant has less risk because of lower than expected yields or prices

• The landlord has opportunities to share in unexpected increases of crop yield or increase in price

• The tenant has less risk because of lower than expected yields or prices

Disadvantages to Flexible Cash Leases

Disadvantages to Flexible Cash Leases

• Flexible cash leases increase risk for both landlord and tenant

• The tenant may give up some benefits of higher yields due to the tenant’s management input, thus reducing the incentive for the tenant to do the best possible job

• Flexible cash leases are much harder to calculate that fixed rate leases

• Flexible cash lease = Base rent x current years price • Base price

• Flexible cash leases increase risk for both landlord and tenant

• The tenant may give up some benefits of higher yields due to the tenant’s management input, thus reducing the incentive for the tenant to do the best possible job

• Flexible cash leases are much harder to calculate that fixed rate leases

• Flexible cash lease = Base rent x current years price • Base price

Other leasesOther leases

• What other leases have you either heard about or have experience with in our area?

• What other leases have you either heard about or have experience with in our area?