farmgate: Farm Leasing #1: Know Everything You Need To Know.
Harvest is winding down across most of the Cornbelt, although some areas still have a lot of standing corn. But where fieldwork is diminishing, bookwork is increasing, and that includes working on crop budgets for 2009, taxes for 2008, and making leasing arrangements for the coming crop year. Marketing plans may not be able to support breakeven prices from crop budgets, unless cash rents can soften. Our focus for the week is going to be on farm leasing: what is a fair lease, flexible leases, owner-operator relations, and setting cash rents.
What should you pay for cash rent? Whatever the owner wants is a starting point and it goes down from there. In rent auctions, someone may be willing to pay more than you, but land should never be rented if it is going to be a losing proposition. If your sharp pencil says you cannot make any money above a certain level, that higher bidder may not be able to make any money either. Renting a farm can frequently be an emotional decision, and emotions can get you into financial trouble.
Enter the leasing decision with a solid checklist of factors that may allow your bid to go up, or keep it below a certain level. Purdue economist Craig Dobbins offers 16 factors that should be checked in setting cash rent. Among them is current fertility levels, which may have been mined by the prior tenant, and puts you behind the 8-ball to start. Another issue Dobbins wants you to assess is the status of tiles and drainage. This past year would be a good litmus test for serious problems if there were any. An additional issue involves those “non-itemized” services expected by the owner, such as plowing out his snow-clogged driveway or repairing the facilities you are renting. While there is nothing wrong with the latter issues, it may be appropriate for you to add fees, or receive a rental rebate.
Farm leasing documents can come from a variety of sources. Every county Extension office can supply a lease form or direct you to a website to download and print your own. Others can be obtained from attorneys in rural communities. Many landowners will supply a lease their attorney wrote, but you must always remember, whoever wrote the lease made it fair for himself. And just like a cash rent offer, that is the starting point. A simple lease may be a page long. But the shorter the lease the more questions that are left unanswered and the more contentious a solution could become. Ohio State economist Donald Breece offers a lengthy checklist of issues that should be covered in a lease to reduce the amount of assumptions that need to be made and only serve to get someone in trouble.
One of the issues that Breece suggests, which may not be at the top of your agenda, includes a statement that your rental of someone’s farm is not the development of a partnership, which could create unforeseen liability issues. Another addresses the issue of what happens to a growing or unharvested crop should the lease be terminated, and what are the exact factors that would cause termination of the lease.
If a sample lease would help get the process started for you, the Land Grant Universities offer a lease form that can be use for both crop share or cash rental arrangements. While the document is 10 years old, it is quite usable in its basic form and covers most of the issues that would be applicable for a Cornbelt farm lease. One of those is the use of arbitration to settle any differences, which goes a long way to keeping problems out of the court, where expenses can mount up quickly.
Summary:
With high production costs, and relatively low market prices that will challenge profitability, the prudent farm operator should eliminate all potential risk in the leasing of acreage. That is accomplished with the help of a thorough lease document that itemized all possible issues that might arise, and gives a solution process for unsettled issues. However, prior to signing a lease, a prudent farm operator will have checklist of issues that will either be addressed in the lease or that can be checked for correct information prior to signing the legal document. No one should sign on the dotted line, and then ask, “Oh, what about….” You won’t be happy with the answer.
Posted by Stu Ellis on November 17, 2008 12:35 AM to farmgate