What is in this article?:
- Tired of Playing Rent Roulette | Flexible Leases Take Some Guesswork Out Of Setting Cash Rent
- Setting up a flex cash-rent lease
- Farmer and landowner share risks
Setting up a flex cash-rent lease
Here are some suggestions on how to set up a flexible cash-rent lease.
* Negotiate the base rent. If this is the minimum rental payment, it should be 10-15% lower than typical cash rent for comparable land, so the owner shares some downside risk, ISU’s Jensen says.
Just as in a fixed cash-rent contract, Jensen adds, the base rent on a flex contract will be affected by land quality, Corn Suitability Rating, yield history, drainage, location and fertility levels. You could consider setting the base rent at the amount that was paid for the land a few years ago, he says.
The lower the base rent, Jensen notes, the sooner the bonus should kick in. Likewise, the closer the base rent is to the market rate, the more crop revenue is needed to trigger a bonus payment, he says.
Along with a minimum rent, consider setting a maximum rent, too, suggests Minnesota farmer Arvid Schwartz. That protects both parties from excessive risk, helps the farmer with budgeting and crop-insurance decisions, and creates a strong incentive for the farmer “to do a really first-class job of management to get those extra bushels.”
Corn & Soybean Digest columnist and farm management analyst Kent Thiesse notes that maximum rental rates are typically $50-100 above the base rent.
The lease should specify payment dates for base rent and any bonus due.
* Set the base revenue.The basis for revenue sharing is each tenant’s actual cost of production, says Hertz Farm Management’s Loyd Brown. That includes inputs, crop insurance and base rent, as well as returns to labor, machinery and risk. How revenue above the base amount gets divided up “is something we negotiate with each operator, based on all the other lease factors.” The formula is based on corn, although operators are free to plant soybeans, Brown adds.
You can also use your state’s estimated cost of crop production to set the revenue base, Jensen says. The landowner would typically receive about 30% of earnings above the base revenue as a bonus rent payment for corn, and about 40% for soybeans.
* Establish the crop price. Some ofHertz Farm Management’s flexible leases call for averaging cash bids for December delivery at a nearby elevator on the first trading days of March, June, August and October. Others use the average closing price on the first trading day of the month from January through October for December corn and November soybean contracts on the CBOT futures market.
You could also average your local FSA posted county prices for several set dates, Jensen says. Average new-crop cash bids for at least three or four periods, he advises. Avoid calculating crop value using only the price at harvesttime, he says, because “then the tenant can’t sell crop ahead with confidence.”
* Determine actual yields. Jensen suggests using federal crop-insurance yields, which the tenant turns in for the year of the lease.Other acceptable ways to determine actual yield include GPS yield maps, weigh wagons, elevator scale tickets or bin measurements, Brown says. Yield numbers should be adjusted to a specified moisture level.
* Run some scenarios. It’s very important to test your flexible-lease formula by plugging in different prices and yields to get a sense of the range of possible rents, Dobbins says. “You need to spend some time with a spreadsheet, asking a lot of ‘what ifs.’” Include an example of the formula in your written lease, too, he adds.
Iowa State University has an interactive online tool to help you analyze flexible leases: www.extension.iastate.edu/agdm/wholefarm/xls/c2-21flexiblerentanalysis.xls
* Make it clear. Sample flexible-lease agreements are available from most state Extension offices.Also, keep in mind that flexible leases “require increased communication with landowners about what’s going on,” Dobbins says. He advises informing landowners about crop progress and price trends during the season.