The past few weeks I’ve had several questions regarding cash rents/leases. My colleague Allan Vyhnalek wrote an article addressing several of these questions, so sharing some of his thoughts. You can read his full article here: https://go.unl.edu/qxt7.
“What should I rent my ground for? (How do I calculate a fair rental rate?): Land rent can be based on several things. Rental rates of the local area, percentage return on investment, survey data showing rental rates, percent of gross income, and many others. The recommendation is to calculate the estimated rental rate based on three or four of these calculations and then decide.
- The local rental rate might be obtained from an ag loan officer at your local bank, by ag real estate professionals, or from professional farm managers.
- To calculate a percent return on investment, multiply the value of the land by the percent return that you’d like to receive. Be sure to factor in expenses such as land taxes when making this calculation.
- Land Value Surveys:
UNL land value survey: https://agecon.unl.edu/realestate/2019-farm-real-estate-report
Nebraska Ag Statistics Service (NASS) survey: https://www.nass.usda.gov/Statistics_by_State/Nebraska/Publications/County_Estimates/19NEcashrents.pdf
- The percent of gross income is calculated by taking the average yield of the commodity grown multiplied by the expected price for that commodity which equals the gross income per acre. The landlord would typically receive about 30% of the gross income calculation; however, the number will change based on yield and price. The percentage should represent an average across 5 or more years.
The bottom line on rental rate is that it will be what the renter agrees to pay and the landlord agrees to accept. Pricing will also be based on supply and demand of farmland rental ground in the area. There is no right or wrong definitive rental price. The final rent is simply an agreement between parties involved. Typically this constitutes a fair and equitable trade price for the use of the ground.
Is a Crop Share Lease still a valid lease? Yes, it is still a fair lease. It is probably the fairest lease that you can have. In periods of commodity price stability, the cash lease gained popularity because the landlords didn’t like to pay for their part of the expenses and most didn’t care to have to market their share of the crop. A crop share lease indicates your willingness to share the risk of farming. Crop Share leases share the risk between landlord and tenant. Cash leases put all risk of production on the tenant solely.
What is the Most Common Share Lease Used? There is no share lease that is more or less correct or appropriate for one situation or another. The distribution of the share (50/50, 60/40. Etc.) depends largely on the agreement between the land owner and the tenant. In some cases, the agreed to distribution in the lease, is 60% tenant and 40% landowner; in other cases the distribution depends on the final inputs, for example, the tenant would pay all seed and chemical, and landowner paying all land and drying. Your final distribution will depend on your expectations and the agreement with the tenant.”
Farm Real Estate Resources: https://cropwatch.unl.edu/economics/realestate
Fillable Lease Templates: https://aglease101.org/DocLib/default.aspx
Flexible Cash Lease Calculator: https://farm.unl.edu/cash-rent-flex-calc
Landlord/Tenant Cash Rent Workshops: These three-hour workshops will cover: agricultural finance and the real estate market; current trends in ag finance across Nebraska; negotiation skills for effectively managing land leases; current considerations on lease provisions; and strategic farmland succession and communications. There is no charge and please RSVP to the Extension Office in the county you wish to participate. Closest locations to this area will be: Jan. 7, 1:30 p.m., Extension Office in Seward; Jan. 8, 9 a.m., 4-H Building in York; and Jan. 15, 1 p.m., Fairgrounds in Clay Center.
Posted on December 15, 2019, in Cash Rent/Lease, JenREES Columns and tagged cash lease, cash rent. Bookmark the permalink. Leave a comment.
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