One of the most important aspects of owning farm land is establishing a proper lease agreement with the operator in charge of farming the land. There are two general types of lease agreements that one must choose from: cash rent and crop-share.
Glaub Farm Management recommends a crop-share arrangement as the best long-term option because it contains many benefits to both the landowner and the operator. When compared to cash rents, a crop-share arrangement allows the operator to have less capital in play due to the landowner sharing some of the costs. Additionally, both parties share risks from potential low yields or profits from high yields. A crop-share arrangement also motivates landowners to be as involved as possible with the land as well as establish a good relationship and communication with the operator.
When establishing a crop-share arrangement, it is important to develop an equitable lease for both parties based on resource and input contributions. One way to do this is to make sure shareable expenses are divided into the same percentages as the income that is shared. Remember that yield-increasing input expenses should be shared in the same percentage as the crop. The operator and the landowner must share total returns in the same manner that they contribute inputs and resources to produce the crop. The sharing of input expenses encourages both parties to maximize production and yield the highest profits possible.
If the landowner and operator each contribute 50% of all resources and inputs, then it is only fair that both parties share 50% of any income derived from these expenses. The same applies for a 67-33% agreement, a 75-25% agreement or any other percentages that have been established by the lease. The shareable income includes crop sales, government payments or other type of income generated from the land to which both parties have contributed. Mineral rights are typically not shared since the operator generally has not contributed to this income in any way. Income from rights such as hunting, solar/wind, etc. may have shared contributions which could be factored into a crop share percentage or other arrangements.
Oftentimes leases are set because “that’s how we always have done it.” However, technology and capital contributions change, so a lease should be reviewed over time. There are two different approaches to a crop-share arrangement—the contribution approach and the desired-share approach. Under the contribution approach, the percentage of contribution from each party (except for yield-increasing inputs) is determined. Both parties then share crop-related income and yield-increasing inputs using the same percentage. Under the desired-share approach, both parties determine a percentage share basis and adjust their contributions to fit this percentage. While both approaches have their advantages and disadvantages, determining the best solution for a specific situation is ultimately up the landowner and operator.
Once an agreement has been made, the determined arrangement must be put in writing. Our in-house joke is that “a verbal lease is as good as the paper it is written on.” A written lease provides both parties a physical statement of all details for a better understanding of the entire agreement. In the case of the death of the landowner or operator, having a physical copy of the agreement provides any heirs with a guide for moving forward with the operation.
One resource for lease publications is ncfmc.org/publications.aspx from the North Central Farm Management Extension Committee. Leasing information is also available through Glaub Farm Management, the extension offices and the National Ag Risk Education Library.