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JenREES 12-15-19

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.

  1. 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.
  2. 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.
  3. 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
  4. 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.

Updated Cash Lease Considerations

Landlord/tenant workshops have occurred throughout the State and I hope you had the opportunity to attend one of them. Survey numbers fromAl Vyhnalek, UNL Extension Educator teaching at the Landlord-tenant lease workshops UNL and USDA (click on 2012 County Level Cash Rents) are available for starting points even though basing lease arrangements off the productivity of the land may be fairer. A 50/50 share lease is still the fairest lease arrangement yet I realize for a number of reasons many landlords are switching to cash rent. I also realize we continue to see situations of very high cash rent numbers. These numbers aren’t the norm and they don’t pencil out when cost of production is factored in.

In this post I wrote about considering cash rent based on the productivity of the land and provided a formula for it. Essentially take a 5 year Olympic average yield for the field.  Multiply by an agreed price such as fall harvest price or whatever both parties agree upon.  Then multiply by 1/3 and it gives you an idea of where to start. The price can be adjusted from there depending on if the tenant provides additional services, etc. Granted this formula isn’t perfect because a high average yield with a very high price can result in the high cash rents we’re hearing.  It’s another formula to consider.

A flexible cash lease is another way to arrive at a cash rent price. These leases can be as simple or complicated as you would like to make them. Flexes can be made for yield alone but we wouldn’t recommend flexing on price alone.  If you consider flexing on price, you should consider a combination with price and yield.

Communication is Key!

For both landlords and tenants: communication is key. I’m always amazed how many landlords tell me they don’t know the yields their tenants are receiving. If you don’t think your tenant will provide that every year by just asking for it, then build it into the written lease.  Landlords, if there are things you want tenants to do like keeping the sprayer boom away from your plum bushes that you like to pick for jam or mow your ditches a certain way, you need to communicate those things to your tenant and/or build those things into the lease as well. Building all these unmentioned things into a written lease also greatly helps family members understand why things are done a certain way when the family member who is the landlord is no longer able to take care of these things.

Landlords: while you hear high crop prices, many of your tenants did not sell $8 corn; most sold at some price along the way.

Tenants: it is important to be fair with your landlords. In good years consider giving them a share of the profit-that’s another reason to consider flexible cash leases because these things can be built in to be fair to the landlord in good years and to the tenant in bad years.

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