The purpose of a lease is to define the split of income, expenses, and responsibilities of farm owner and farm operator.
There are several types of leasing arrangements that can be negotiated. The exact terms of the lease will vary depending upon market conditions and individual situations. The return and risk of each type of lease should also be considered.
Another factor to consider is whether you, or your tenant, would like to update the terms of your lease for the upcoming growing season. If so, you will want to send a formal lease termination notice. This does not mean you are terminating the relationship, only that you would like the option to consider updating the terms of your current lease. Each state handles this process a little differently. See below for the termination dates by state.
Lease Termination Deadlines
Iowa – September 1st
Illinois – November 1st
Indiana – Oral lease: 3 months prior to end of lease
– Written lease: 3 months prior to end of lease or as specified in the lease
Minnesota – Same as Indiana
Missouri – 60 days prior to end of lease
Nebraska – Oral lease: September 1st
– Written lease: September 1st or as specified in the lease
Wisconsin – October 1st
50-50 Crop Share Lease
Historically, it was assumed that the land resource, provided by the landowner, was equal to the operator's contribution of labor and machinery. Over the years, this was the most common type of lease. The crop income and crop expenses are divided equally between the land owner and farm operator. With higher crop yields and less tillage, the trend has been away from 50-50 crop share leases.
50-50 Crop and Livestock Lease
In addition to sharing the crop income and expenses noted above, the landowner participates in the livestock production with the farm operator. The specific lease terms depend on the type of livestock and the livestock facilities.
Modified Crop Share Lease
In addition to the land, the landowner provides all of the seed, chemicals, and fertilizer. The operator provides the machinery, fuel, and labor. Each party is responsible for drying and storing his respective share of the crop. The owner receives from 65 to 80 percent of the crop depending on the quality of the land. This arrangement will normally provide a higher return to the landowner as compared to the 50/50 crop-share lease.
- The owner receives the entire crop and government payments.
- The owner pays for all the cropping expenses.
- A farmer in the local community is paid to till, plant, and harvest the crops.
Most progressive and timely operators have more than an adequate line of equipment to farm their current operation and are interested in custom farming to have a guaranteed cash flow. As they already have their equipment and labor, their only cost is fuel and repairs. The custom operation will generate a higher net income on above-average land, particularly with favorable yields and commodity prices.
A percentage lease is similar to a cash rent lease. However, the owner receives a specified percentage of corn or soybeans delivered to an agreed grain terminal or location and a percentage of the government payment. The operator pays all expenses. This gives the owner some inflation protection and the ability to increase his return through effective grain marketing. Once again, it is important to evaluate the credit worthiness of the proposed operator and to evaluate the herbicide, fertilizer, and method of farming to protect your land investment. Improper application rates and farming methods can reduce the production potential of the farm. Generally, the owner's percentage varies from 30% to 40% depending on the quality of the land.
An operator pays a set amount of cash and the landowner does not participate in the crop production. Many leases function with one-half of the rent paid on March 1 and the balance paid after the harvest is completed, while some leases are paid entirely on March 1. Current interest rates may influence the payment date arrangement. It is important to evaluate the credit worthiness of the proposed operator and to evaluate the herbicides, fertilizer, and method of farming to protect your land investment. Improper application rates and farming methods can reduce the production potential of the farm. It is equally important to execute a UCC-1 financing statement to ensure collection of the rent.
Variable Cash Rent
Works the same as cash rent with an added variable component. This allows the landowner to share in some of the risk, and reward, without actively participating. The landowner can be guaranteed a base rent, plus a potential variable, or flex, payment. The variable component can be based on several factors that the landowner and operator agree on. Examples include: crop yield, commodity prices, gross income (yield and price) and net income (yield and price minus inputs), among others.
Please contact us to discuss leasing alternatives and an estimate of net income for your farm.