Agricultural Leases

1
Agricultural Leases

• Landlord Tennant Contracts

2
Farm Lease Agreements

• Should be equitable for each party
• Specific language and clear provisions in the
  lease are essential
• Leases can be bought or made by the individuals
• Leases should be made for a specific contract
  between parties and only cover the needed
  provisions of the lease
• Cooperation is the most important part

3
Types of agricultural leases

• Crop share lease agreements
• Fixed-Cash lease agreements
• Flexible-Cash lease agreements

4
Crop 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.

5
Advantages 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.

6
Disadvantages 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.

7
Fixed 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.

8
Calculating a Fixed Cash Lease

• Cash rent market approachyou 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
• Landowners Cost or Desired return
  approachThis method requires calculating the
  landowners ownership costs( depreciation,
  interest, repair, taxes, and insurance) or
  establish the desired return the landowner wishes
  to receive on investment.
• Landowners Adjusted Net Share Rent
  ApproachThis 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.
• Tennants Ability to Pay ApproachThis
  approach determines fixed cash rents on the
  tenants 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.

9
Advantages 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.

10
Disadvantages 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

11
Flexible 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.

12
Advantages 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

13
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 tenants 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

14
Other leases

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