Negotiating a Farmland Lease
17 August 2017
Leasing some farmland soon? The farm and ranch management team from The University of Nebraska provides some great information on tips for negotiating a farmland lease through a series of webinars. These webinars look at current lease values, leasing alternatives and give suggestions on how to communicate to hold leasing costs down.
There are three considerations for cash leasing farmland: cash leases, crop shared leases, and flexible cash leases.
· Cash leases are the most popular but it hasn’t really worked well since 2007. This is mainly because when commodity prices go down cash leases can’t adjust fast enough. The same thing goes for when commodity prices go up cash leases can’t meet up to the commodity price therefore the tenant bears all of the risk.
· Another type is crop shared leases. Those are still in use. They are very fair but not popular among landlords because they pay for the all of the expenses. The risk is shared between the tenant and the landlord.
· The third type is flexible cash leases. Again the risk is shared. It’s more of a crop share than a cash lease. Landlords typically do not pay production costs.
It’s important to know that the tenant and the landlord must have good communication to have a good lease. It’s the tenant’s responsibility to share information like production, yield information, challenges, growing seasons, etc. with the landlord and it’s the landlord’s responsibility to share expectations for managing his or her asset with the tenant. This is to avoid any future conflict.
That is why the farm and ranch management team from The University of Nebraska suggests that an attorney get involved when negotiating or even re-negotiating a lease. It’s best to get everything in writing.
So when is the right time to give up on a lease? Whether it’s a long term or a short term lease there are three types of expenses.
· Direct is the first one, the tenant goes away with fewer acres.
· The second is overhead where expenses stay the same regardless of acres.
· The last one is non-farm expenses such as farm living and income taxes.
Gross income could be larger than all three types of expenses and that’s normally produced in a long term lease.
The webinar states that when leasing farmland the tenant should also look at flexible cash rent provisions and make sure to modify the current cash lease to changes in farm performance. Evaluate the prices, yields, and revenue. Flexible cash rent doesn’t act as bonus schedule and it’s not a profit machine. Flex leases will increase or decrease rent but will not save the farm if base rents are too high or too low or if management is poor. It’s important to become knowledgeable on how flex leases work. Start using them in your operation and investment. Also get help before you need it whether its’ from a university or even legal help and industry experts.
To find out more information on negotiating a farmland lease and listen to the full webinar click here.