We discussed the last few months how lease options are important in a farm succession plan. It is important to determine whether cash-rent, crop-share or flex lease will work best for the succession of your farm.
Most lease agreements are on cash rent. Cash rent is preferred by many because it is easy to administer, and the landowner is able to easily budget for the rent amount. The disadvantage is the risk that the lease amount is too high or too low, depending on the crop yield and the prices. Because of the ease of administration, we find many succession plans use a cash-rent lease when giving rental rights to farming heirs.
Another option less often used in succession plans is a crop-share lease. In this lease, an agreed-upon percentage of the crop harvest is delivered to the landowner. The landowner then has the opportunity to market the crop. The farmer and the landowner share the risks and rewards of crop prices and yields proportionally. The disadvantages are that the landowner cannot easily budget for the rent income, and the landowner must have a sophisticated knowledge level of farming and marketing.
This type of lease is not often used in a farm succession plan, because it is difficult for nonfarming heirs who do not have the knowledge to market grain or monitor the farming operation.
A third option that is popular among many farmers and landowners is a flexible rental agreement. There are many variations of this type of lease. Some of the options for rent payment include:
• base cash rent amount, with bonus cash amounts paid if the yield exceeds the base amount
• base cash rent, with remaining rent paid on a share of the revenue as determined after the harvest
• base rent based on the value of a set number of bushels, with bonus amounts paid if yield exceeds the base amount
• rent based on the average value of a set number of bushels, with the average price taken over a number of months
Some like this type of lease because:
• The rent amount is determined after harvest to reflect the yield and price.
• The farmer and the landowner share in the risks and rewards.
• The landowner is paid in cash and thus does not need to market grain.
A flex lease is used to allow the farming and nonfarming heirs to share in the risks and rewards.
Balzarini in an attorney at law with Miller Legal Strategic Planning Centers P.A., Tyler, Minn. Contact him at Miller Legal at email@example.com.