Farm land is an investment, but it’s also a business. For many landowners, the view of land as an investment is a long term perspective, while in the short term, the land needs to produce income to be worthwhile.
If the landowner does not intend on farming the land themselves to produce that income, then they will need to consider how to lease the land to the right tenant farmer who will manage the production and revenue generating part of the operation.
However, there are several different types of lease agreement for farmland. Many of them are common, but each agreement type has both advantages and disadvantages. The key is determining what type of lease agreement is the best fit for your farmland, your goals and your tenant farmer’s goals.
What is a Farm Land Lease?
A farm land lease, according to University of Wisconsin-Madison Extension, is a contract that is legally enforceable that lets the land owner (or personal property owner) give another individual or a business the right to use the property for a set period of time in exchange for a payment of some type.
It is always advisable to have the lease in writing and signed by both parties, the landlord and the tenant. Having the lease in the form of a written document provides a resource for referencing details about the lease, which can sometimes include easy to forget, complicated information. It also provides a reference that could be needed if any legal action has to be taken by either party that has signed the lease.
However, it’s not uncommon for leases to be oral and unwritten agreements. In many cases, these are seen as year-to-year agreements that are established annually. At the end of the day, it is up to the landowner – and to some extent the tenant, too – to decide whether a lease agreement should be written or if an unwritten agreement might suffice.
Common Types of Leasing Agreements
There are several types of leasing agreements that you will no doubt hear about most often. Which one works best for you often boils down to your specific goals – and the goals of your tenant farmer.
Here, we will provide a brief overview of these common agreement types and the pros and cons of each.
Cash Rent Leases: Fixed and Flexible
Cash rent leases are a very common type of agreement between landlords and tenants when it comes to farm land. There are two different subtypes of cash rents, fixed rate leases and flexible rent leases.
Fixed rate leases allow for a stable and predictable income, something that can come in handy when forecasting, budgeting finances and tracking goals. The rate is agreed upon and then does not change until the agreed upon time period in the lease concludes.
A flexible rent lease, on the other hand, is what it sounds like. It is adjustable rather than set. It can fluctuate one way or the other based on farm yields and prices each year. There is not as much predictability with a flexible rent lease, but there is the potential for more income for both the tenant and the landowner.
With cash rent leases, owners pay only real estate taxes, farm liability and property insurance, land and building improvements, as well as repairs.
Perhaps the most important piece of advice for a landowner entering into a cash rent agreement is that they need to find a responsible tenant who can keep the farm productive while also protecting its yield potential in future years with proper land stewardship practices.
Crop Share or Custom Share Leases
For parties wishing to enter what operates more like a true partnership, crop share lease agreements are an excellent option. The landlord often plays more of a role with production, purchasing and marketing decisions under these agreements and there can often be higher revenue.
One example of a crop share lease is one in which the owner of the land gets about 75% to 80% of the crop yield, depending on the yield potential itself. The owner will also, under this agreement, pay all of the crop expenses aside from machinery hire.
For their part, the tenant farmer will get 20% to 25% of the crop to reimburse them for the equipment and for the labor.
A Custom Farming Agreement
One agreement that many Stalcup AgService clients opt to enter is a customer farming agreement. This can often provide higher and better returns on investments and gives even more control over the use of the land and decisions for production.
With custom farming agreements, the landowner will pay for all crop input and custom-hired machinery costs. The owner will also receive the entire crop.
With a custom farming arrangement, there is a farm manager who makes all the grain and marketing decisions for the owner. The farm manager will manage the farm on-site, making sure it is as profitable and sustainable as possible, for a fee for services.
How to Determine the Best Farm Land Lease Agreement Type
Sometimes, it’s best to bring in a professional. This is especially true with a topic of importance like leasing farm land. Not only is the decision a weighty one in the near term, as the landowner certainly wants to generate enough income while setting up the tenant farmer for success, but it is also a decision that will no doubt set both parties up for success – or not so much if the wrong decision is made.
When trying to pick a type of lease agreement, consider consulting a professional, such as Stalcup AgService, to help walk you through the pros and cons of any lease agreement you might be considering entering that involves your farmland.
The staff at Stalcup AgService has extensive experience providing these types of services to our clients. Stalcup’s professionals strive to establish and accomplish goals that keep their clients moving forward in their operation.
Give Stalcup AgServices a call today at (712) 732-4811 or contact us online to speak with someone at our office in Storm Lake, Iowa.
