Your guide to fixed vs. flexible cash leases for farmland
Farmland lease agreements vary widely. To cover every single type and dive into all the details would take a good chunk of time. So, for this blog post, we will cover cash leases, both the fixed cash lease and the flexible cash lease.
Both of these lease types are very common, especially here in Iowa. They share some similarities, too, but, as we will get into, have some important differences that need to be understood.
Once you understand those differences, you will hopefully have a better grasp on what type of lease is right for you, your farmland and your tenant.
Farm lease basics
Before we get into the lease types that we’re focusing on here, let’s go over some of the basics regarding farmland leases.
It’s no secret that in agriculture, leases for both land and equipment are very common. Absentee ownership of farmland is increasing all across the United States, so owners seeking farmer tenants are likely to become even more common as the years go on.
What’s a lease, though, in legal terms? According to the National Agricultural Law Center, it’s “a contract implied through the parties’ actions, expressed through a written document or created through oral communications.”
For a lease to be considered valid, both the tenant and the landowner must include in an agreement the extent and boundary of the leased property, a term stating the length of the lease and a determined rental rate.
Some leases may be between a farmland owner and a government entity, an oil company, a mining operation or other businesses. However, for this article, we’ll focus on landowner and tenant farmer leases.
Written or oral lease
Though written leases may be recommended in some circles, not all leases are placed on paper. Oral leases can be valid, as long as they meet some requirements.
In many states, oral leases with a length of less than one year are allowed. If a lease lasts a year or longer, then it must be in the form of a written agreement signed by both parties.
The fixed cash lease
With a fixed cash lease agreement in place, a tenant agrees to pay a given amount of cash rent per acre per year so they can use the farm resources.
The landlord has the ability to restrict what types of crops can be grown. Landlords can also control what forms of tillage, conservation and pest control practices can be used on their land.
However, that’s about it when it comes to what the landlord controls under these types of leases. From there, the tenant can plan crop and livestock production.
Tenants also will receive all crop insurance programs and USDA commodity program payments.
Advantages and disadvantages of a fixed cash lease
There are several notable advantages to a fixed cash lease. As stated above, one of the highlights is that a tenant has a lot of freedom in crop production, marketing and can decide which government programs they would like to participate in.
The landowner and tenant may also find their relationship less stressed in a fixed cash lease, as the landowner does not have as much managerial input as they do in other agreement forms. On top of that, there is not as much concern over making sure crop division, expenses and marketing are accurately handled.
Finally, cash rents lower the likelihood that a landowner will be labeled a participating landlord when social security payments are calculated.
On the other end, there are disadvantages to consider with fixed cash leases. Those include the difficulty in determining a set rent rate, the fact that those rates may be too low in times of high yields or high prices, and too high in times of low yields or low prices. Cash rents are also fixed costs for the tenant.
The flexible cash lease
Flexible cash leases are an offshoot of the fixed cash lease, as they have some similarities. With this farmland lease type, though, the actual rent that a tenant pays depends on the actual yields produced, or the selling price that was available at the time of the lease period, or a combination of both.
A flexible cash lease helps make sure that the rent amount that the tenant pays is more reflective of the crops that are grown that year. These leases can also include provisions that state government payments and crop insurance benefits are included when calculating the farm’s gross revenue.
Landlords should note that they will share some of the risk with this lease type. That’s because a farm could produce low yields in a given year or suffer from declining prices available for crops. This works the other way, too. A landlord could benefit from a great crop yield or favorable prices that exceed expectations and provide more revenue.
There are some flexible leases that take crop input costs into account when calculating the final rent due or bonus.
Advantages and disadvantages of a flexible cash lease
Like fixed leases, flexible cash leases carry their own advantages and disadvantages.
Perhaps the most widely touted advantages is that, under a flexible lease, a tenant does not have to commit to a fixed rent amount when so much, such as production and market variables, are unknown. Operators are protected from some risk if costs rise or farm revenue comes in lower than expected.
For landowners, flex leases provide an opportunity for them to reap the benefits of high-yield years or good commodity prices.
There are disadvantages to be aware of, too.
For operators, that higher revenue or good prices means there is more revenue to be shared with a landowner. Landowners expose themselves to more risk, though, if revenue plummets.
In general, flex leases are a bit more complicated to come to agreement on, too. That should not be overlooked.
How to choose the right lease type
For many farm landowners, especially those who are not involved in farming themselves, the best way to go about choosing the proper lease type is to seek out a trusted farm management firm.
At Cotton Grave, we can help you navigate cash rent management, as well as crop share management, on top of all our other farm management services.
Request a complimentary consultation to see how Cotton Grave can help your farm operation achieve greater success.
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