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Leases for Farm Owners—Pros & Cons

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Don’t Just Wait for More Acreage to Fall into Your Lap! Find the Lease that Works Best for You!

Farms, like any business, naturally want to grow. It’s obvious why any good producer would want to gain more acreage. It allows for bigger and better yields. So with this in mind, it is a wonder why many farms don’t actively work toward gaining more acres.

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Choosing To Wait For Opportunities

barn.jpgMany farm families instead choose to wait for acres to come to them. They think it is enough to simply hope that they will hear about opportunities as other farmers retire.

Some farm families only have one particular lease arrangement with all landowners while others have multiple versions of every lease type. Farm families need to make a fundamental decision if their lease type is a deal breaker, and their landowners will need to do the same.

Asking their landowners of their preferred lease type is an obvious and effective way to taking another step closer to finding the right lease for your family farm. Perhaps an even better question is to ask them WHY they prefer that type or what led them to selecting that lease arrangement in the past.

There are three different types of leases, and each has its advantages and disadvantages. Here are the advantages and disadvantages for each lease in the perspectives of the landowner, tenant, and both!

Crop Share Lease

Advantages – Both landowner and tenant can enjoy more of a true partnership and better communication when they use this type of lease. There is a higher potential for revenue, and the landowner is more involved with the decisions regarding production, purchasing, and marketing. Tenants can enjoy a fair “rent paid” since this lease is production-based, and the costs are typically split. The landowner will also share the risk with the tenant, but they may also expect you to farm their land first.

Disadvantages – This sort of lease is kind of difficult to navigate as both landowner and tenant will need to track the costs, FSA paperwork, and more. Landowner and tenant alike will have to work together to make certain decisions together and agree on crop share splits, which may be tough if they have different ideas and philosophies, and determining the costs for drying, transporting, and storing crops can be problematic. Landowners may also be unsure of the amount of money they will receive each year as they are sharing in the risk, and there is always a potential to make less if there are poor yields or a downturn in market prices (or both). Tenants could end up paying more here than in the other lease types, and the FSA payment is shared with landowner.

Straight Cash Lease:

Advantages – This sort of lease is the simplest of all and allows for the easiest budgeting. Landowners have virtually no risk (unless if their tenant doesn’t pay); they have the highest GUARANTEED income, and they are relieved of virtually all decisions except for terms of the lease and capital improvements. Tenants can enjoy the freedom to make any and all cropping and production decisions and not so much record-keeping. They also will receive all of the FSA direct payments.

Disadvantages – A fair lease is hard to determine with volatility in grain markets and input prices and perhaps should be determined annually. Cash rents are likely to be too low in times of rising prices and increasing yields, and too high in times of decreasing/low prices or yields. Landowners also have the least amount of control and involvement in this type of lease. Their soil conservation efforts cannot be expenses, and they must be capitalized into the value of the land. Tenants have a decent likelihood of overpaying or underpaying for the land and assume virtually all risk. They also usually require more working capital if the rents are due at the beginning of the cropping season.

Flex Lease

Advantages – The rent that is paid and received is in direct proportion to the yields received or the market prices available or both. This lease is also simpler than the crop share lease and provides the opportunity for longer term leases as the need to renegotiate the rent as frequently to make sure it is fair is eliminated. Landowners have a guaranteed income component and even the potential for an increased income. While they share in some of the risk, the risk is usually fairly limited. Tenants have the freedom to make all the cropping and production decisions and don’t bear all of the risks alone. This lease also improves working capital positions since the flex portion of the rent paycheck isn’t paid until harvest.

Disadvantages – Landowners and tenants must agree on the base amount and method to determine the “flex amount” or bonus, and verifying the accuracy of the yields can prove to be difficult. Landowners may not know how much they’ll receive each year, and the guaranteed revenue is not as high for landowners. There is also a certain amount of tracking that may be necessary for the landowner to do. For tenants, there is a possible risk of base rent being over the amount determined by yields or market prices, and flex leases based only on yields or only on market prices can actually INCREASE the tenant’s risk.

If your preference and your landowner’s preference don’t align, then this list of pros and cons of each lease type may be of assistance in guiding them and you toward the type that’s best for you!

And as always, if you need any further assistance or have more questions, feel free to call us here at FamilyFarms at 1-877-221-FARM.

 

Flex leasing eBook

 

Written By

Jill Miller

Jill Miller

Marketing Manager

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