Tired of Playing Rent Roulette | Flexible Leases Take Some Guesswork Out Of Setting Cash Rent

Farmer and landowner share risks

For nearly 20 years, south-central Minnesota farmer Arvid Schwartz rented a farm on a flexible-lease basis. Schwartz farms about 2,200 acres near Green Isle with two younger partners.

His flexible lease called for a base rent, which was lower than the market rate. If yields exceeded a specified level, the landowner received a bonus payment, which was a percentage of the base rent. For example, if yields were 25% above the threshold, the bonus would equal 25% of the base rent. The rent was capped to keep it within a desirable range, Schwartz adds.

In years with very good yields, “the landowner came out better than the highest rents in the neighborhood,” Schwartz says. “But in a short crop year, like 1993, all we paid was the base rent,” while growers with fixed leases “had to pay quite a bit more.” As with a fixed cash-rent lease, though, Schwartz bore all the price risk. “We still had to be smart with our marketing.”

Two-thirds of the base rent was due in the spring and one-third in the fall, with the final settlement after harvest. Schwartz always provided the landowner with a detailed spreadsheet and copies of the elevator scale tickets, so “he knew exactly what we were doing.”

Owner and tenant negotiated the base rent and cap each year. “He’d come with an idea, and we’d come with a proposal, and we were usually reasonably close.”

The flexible lease kept the landowner involved in production agriculture – something he greatly enjoyed. This year, because of his advancing age, they switched to a fixed cash lease. “But the greatest testimony to the success of our flexible lease is that we farmed that way for nearly 20 years,” Schwartz says.