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Dr. Tiffany Lashmet discusses the pros and cons of a cash lease, crop share lease and a flex/hybrid lease.

Tiffany Dowell Lashmet, Assistant Professor and Extension Specialist in Agricultural Law

March 25, 2019

5 Min Read
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For agricultural lease agreements, there are normally three types of arrangements utilized: cash leases, crop share leases, and flex/hybrid leases. There is no right or wrong option to select so long as the parties can agree on the structure and the details that go along with that selection and understand the potential implications. It is advisable to visit with an accountant and an attorney before making this type of decision as it can impact a landowner with regard to who will receive government program payments, what self-employment taxes may be owed, and what income may be reported for social security purposes.

CASH LEASES

The most common and straightforward lease structure is a cash arrangement. A tenant and a landowner agree on a set price for the lease. Cash lease rates are generally listed as per acre or per head, although a flat fee could be utilized as well. For example, a landowner leasing a 100-acre pasture to graze cattle could structure payments as $10 per acre, $5 per head, or $1,000 per year.  Most hunting leases are cash agreements and are often structured as per acre, per gun, or with a flat fee.

For the landowner, the benefit of a cash lease is certainty of payment. The downside is the inability to share in good years when yield and/or price are higher than normal. The benefit of a cash lease to a tenant is certainty of cost, while the downside is that the cost must be paid, regardless of how the crop or the markets fare.

One important issue for a landowner to understand is that under a cash lease, the tenant will receive 100 percent of the government program payments such as ARC or PLC payments under Title I of the farm bill.  The parties could agree to a different division of this payment but aside from an agreement, the tenant will be entitled to all payments.

For more information about publications offering average cash lease rates in Texas, click here

CROP SHARE LEASES

Another common fee arrangement in agricultural leases is a crop share lease. This type of agreement is seen more commonly in row crop-type farm leases but could be utilized in grazing leases also.  As the name suggests, in this lease a landowner and a tenant share in certain costs and share in the revenue made from selling the crop in an agreed-upon percentage. The common percentages vary based on both the geographic location and on the type of crop being grown.  For example, in the Northern Texas Panhandle, it is common to see a cotton lease done on the thirds—meaning that a landowner receives 1/3 of the income and the tenant receives 2/3. Compare that to a lease in the Midwest where corn is grown, where share lease rates would be much closer to 50-50.

One key consideration when structuring a crop share lease is to be clear about in which specific costs the landowner will share. For example, typically, in the northern Texas Panhandle, landowners share in fertilizer, chemicals, and irrigation.  Again, this varies by geographic area and crop, and ultimately landowners and tenants can include whatever costs they agree upon to share. The key is for both parties to understand what costs will be split and any requirements such as providing receipts or documentation for expenses.

For the landowner, the benefit of a crop share lease is the opportunity to share in the upside risk if it's a good year, and, of course, the downside is the risk of receiving far less payment in a bad year than a cash lease might have generated. For the tenant, a crop share lease allows payment to be based upon the revenue generated and offers some assistance in paying for certain inputs, but it also may require additional record-keeping, billing, and in a good year, could result in a greater lease payment than would have been owed under a cash agreement.

As for government payments, under a crop share lease, government payments will be paid in the same share as any other income shared between the parties. Again, this can be modified by agreement between the two parties.

FLEX/HYBRID LEASES

A new leasing structure is a flex or hybrid lease which combines attributes of both the cash and crop share lease.  Although these could be drafted any number of ways, generally a flex/hybrid lease will set a base price that the tenant will pay, and then flex up or down based upon an external factor, usually either yield or price.

For example, a flex lease could require a tenant to pay $25 per acre to grow dryland corn, but if the price of corn rises above or falls below $4.00/bu, the lease rate will flex 24 cents for every 10 cents over or under $4.00.

With this type of lease, the devil is certainly in the details. Ensuring specifics are included in the lease such as the specific market that will be used to determine prices and at what time of year the determination is made are critical to ensuring both parties are on the same page about how the final price is calculated.

Landowners may benefit from a flex/hybrid lease because it allows them the assurance of at least the set amount, but also allows them to share in the potential upside of a good price or yield.  The downside for a landowner is the potential downside risk that could lower the total lease payment received. For the tenant, the flip side is true. The flex/hybrid lease is attractive as it does provide some certainty with regard to the amount he or she will owe, but does allow a potential decrease in a year with low market prices or yields, depending on how the lease is structured. Of course, the opposite is also true for a tenant on the downside, with the potential for increased rental payment owed if the flex is triggered.

For flex or hybrid leases, exact wording and structure of the lease will determine how government payments will be made.

Source: is Texas Agricultural Ag Law Blog, which is solely responsible for the information provided and is wholly owned by the source. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset.

About the Author(s)

Tiffany Dowell Lashmet

Assistant Professor and Extension Specialist in Agricultural Law, Texas A&M AgriLife Extension

Tiffany Dowell Lashmet is Assistant Professor and Extension Specialist in Agricultural Law, Texas A&M Department of Agricultural Economics.

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