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University of Maryland Extension

Farmland Leasing Arrangements Jenny Rhodes – Queen Anne Shannon Dill, - Talbot John Hall - Kent. University of Maryland Extension. Farm Lease Agreement Written agreement Components. University of Maryland Extension. Lease Components: Names of Parties and description of property

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University of Maryland Extension

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  1. Farmland Leasing Arrangements Jenny Rhodes – Queen Anne Shannon Dill, - Talbot John Hall - Kent University of Maryland Extension

  2. Farm Lease Agreement Written agreement Components University of Maryland Extension

  3. Lease Components: • Names of Parties and description of property • Term of Lease • Rental Rates and arrangements • a. Crop-share * • b. Cash Lease * • c. Flexible cash lease * • d. livestock share lease • e. Farm Machinery, equipment and building leases University of Maryland Extension

  4. Lease Components Cont.: • 4. Farm operating expenses • 5. Conservation and Improved Practices • 6. Improvements and repairs • 7. Records • No Partnerships statement • Right of Entry • Arbitration ( settlement) • Additional agreements and modifications • Signatures University of Maryland Extension

  5. You need to have a written agreement The purpose of this presentation is to provide tenants and landowners basic information needed to write rental agreements. Changes in the structure of production agriculture have increased the need for persons entering a contractual rental arrangement to have a written agreement. Additionally, rental agreements should be updated regularly to incorporate changes in government programs, environmental regulations, costs of production and revenue received University of Maryland Extension

  6. Value of a written lease The value of a written contract is in helping the prospective landowner and tenant think about and agree upon the essential considerations of leasing and operating the farm. To arrive at an equitable lease, the interested parties should talk over the basic considerations involved in the leasing arrangement and in managing the farm. They should then make a contract, preferably written, based on these considerations. University of Maryland Extension

  7. 1 – Names of parties and description of property • Every lease should identify the parties entering into • the lease contract and give the legal description of the • property or properties involved. In addition to the legal • description, information such as the distance and direction from town, road name, mailing address and popular name of the farm might be given. University of Maryland Extension

  8. 2 – Term of lease The term, or length of time the lease is to be in effect, should always be agreed on and should be stated in the contract. The term of the lease is important. A long-term lease is often necessary to develop a profitable business over time because of the need for permanent capital investments. The tenant will not want to share investment in permanent facilities on a short-term lease. Usually, landowners favor a short-term lease on the basis that a longer-term lease lowers the market value of the farm because it cannot readily be sold. This problem can be solved by including a termination clause that would apply in case the farm was sold. University of Maryland Extension

  9. The lease agreement can be for either a one-year lease or a longer lease, as desired. Most agreements include an automatic renewal clause and allow some flexibility in the terms of the lease if the parties under contract give adequate notice. Renewal: a multi year lease is automatically renewed unless a termination notice has been submitted. Lease dates: Typically a lease runs for a calendar year. However, this may vary University of Maryland Extension

  10. Termination of lease • It is recommended that a termination notice be given by July 1 of the growing season. • If termination is given, the operator has the right to harvest all crops currently growing on the given land. • If there are crop input costs for crops currently growing, these input costs should be addressed at the time of termination. University of Maryland Extension

  11. In some communities, it is customary to give notice that the lease is to be terminated before wheat sowing time in the fall or by March 1 in the spring. But failure of either party to give this notice does not necessarily indicate a desire that the lease be continued. Consequently, it is desirable to state in the contract the procedures to be followed for terminating or continuing the lease contract. University of Maryland Extension

  12. 3 – Rental rates and arrangements • Rental rates and arrangements for payment or disposition of the rent are a significant part of any lease, whether written or oral. • Basically, there are five methods of paying rent: • crop-share rent – “share crop” • livestock-share rent • cash rent • Flexible cash rent • farm machinery, equipment and buildings rent – “custom farming” University of Maryland Extension

  13. a. Crop-share rent – Characteristics of a crop-share lease are that each party receives a share of the crop as earnings for their contribution in land, labor and capital. Normally, crop-sharing involves grain crops such as small grains, corn, and soybeans and land used to participate in government programs. Remaining areas used in producing forages (hay and pasture) are normally cash rented. The landowner’s share of the crop depends on the contribution made toward production of the crop. When crops are divided 50-50, the landowner normally pays 50 percent of the cost of fertilizer, seed and chemicals in addition to providing the land. In other instances, the landowner may or may not share in cash production costs and receives a 1⁄4 to 1⁄3 share of the crop as a return to land. University of Maryland Extension

  14. . b. Livestock-share lease – Livestock-share leases vary considerably because of differences in contributions made to the business by each party. The owner normally furnishes land and buildings, while the tenant furnishes major portions of the crop machinery. Livestock is owned jointly. Production costs such as feed, veterinary and medicine, other livestock expenses, fertilizer, seed and chemicals are shared equally. Livestock machinery and equipment may be jointly owned. Labor costs are shared according to the agreement, as are repairs and upkeep on permanent buildings. The landowner usually pays for construction of permanent buildings, or arrangements are made to reimburse the tenant in case the lease is terminated. Livestock and crop sales are divided according to the terms of the agreement University of Maryland Extension

  15. c. Cash lease – The cash lease is normally uniform and • relatively simple. The tenant pays the landowner a cash • sum per acre or a lump sum for his or her investment • in farm resources. Provisions in the lease generally state • the terms of agreement. For example, the landowner • may place restrictions on the use of land or fields for certain • crops. Also, the agreement might state the degree • of productivity to be maintained. Provisions should also • state the amount and method of paying rent. • degree of productivity: The definition may need to be defined as part of the agreement. It is assumed that this definition reflects the soil nutrient values. Soil tilth, erosion and other soil parameters may also be addressed University of Maryland Extension

  16. d. Flexible cash lease – The flexible cash lease is a hybrid of the cash lease. The flexible cash lease agreement states that the tenant will pay in proportion to either or both the price and the yield level. There are many methods for flexing the rental agreement. The most common method is flexing gross (or net) revenue so that the tenant and landowner share the risks associated with cash renting. If revenue is greater than the established base level, the tenant and landowner share the excess revenue. If revenue is less than the established level, the tenant and landowner share the lost revenue. However, often there is a cash lease price floor that the landowner is guaranteed. Other types of flexible cash rental arrangements include flexing only price or yield or flexing both University of Maryland Extension

  17. e. Farm machinery, equipment and buildings leases – Renters have found that leasing unused resources can be cheaper than making new capital investments. Also, producers have found in certain situations leasing machinery and equipment from dealers can be cheaper than purchasing. Additionally, machinery and equipment leasing arrangements can be between renters and owners to allow the renter to avoid paying full value and the owner to generate revenue to cover the ownership costs. Renters need to compare the size, condition, obsolescence, use, location and lease cost of the capital good versus the cost of purchasing the capital good outright. Owners are primarily interested in recovering ownership costs. The lease price should equal the amount needed to cover ownership costs and variable costs, such as upkeep costs incurred from renting the capital good. Both renters and owners should consider current value, depreciation, interest, insurance and taxes, inflation, repairs and maintenance when agreeing on a lease value. University of Maryland Extension

  18. The cash lease is the most common. The second • most often used is the crop-share lease. Flexible rental • agreements are increasing in use as tenants seek • to share downside revenue risk with landowners and • landowners seek to capture upside revenue potential. • The rental arrangement for each specific farm should be • developed to fit the farm and the planned operating procedures. • These conditions are known best by the landowner and prospective tenant, so they should work out the most satisfactory arrangement between them. No standard lease form can be used to develop an equitable rental agreement. The function of the form is to record operating procedures agreed upon by the parties entering the contract. University of Maryland Extension

  19. 4 – Farm operating expenses Reaching agreement on farm operating expenses provides an opportunity for the tenant and landowner to discuss and designate the share of cash production costs that are to be paid by each party. We have shared Custom rates and budgets with you Soil Ph / Lime may fall into this area and needs to be addressed University of Maryland Extension

  20. 5 – Conservation and improved practices • To improve or maintain the productivity of the • farm, conservation and improved production practices • are usually warranted. Normally, conservation and • other improved farming practices require additional • labor and expenditures. Give important consideration • to questions such as who contributes the labor and cost • of implementing the practice and how these contributions affect income for both tenant and landowner. • CRP – cutting waterways – spraying noxious weeds University of Maryland Extension

  21. 6 – Hunting • Waterfowl and deer hunting provide a significant value to many farms on Delmarva. • Careful consideration must be given to liability issues as well as methods of hunting, frequency of hunting, trash from hunters, pit, stand and roadway maintenance and location. • The land owner must understand liability issues of the property owner • See additional issues and contract University of Maryland Extension

  22. 7 – Improvements and repairs • Misunderstanding is prevented by agreeing ahead • of time what repairs will be done, how much will be • done and what each party will furnish toward them. • In many instances, tenants provide equipment that • legally becomes permanent fixtures on the farm. • Disagreements can be avoided and the farm’s resources more fully used if both landowner and tenant agree on needed improvements. • Roadways, fencing, and machinery storage fit this need. • Goose pit construction may also fit this area University of Maryland Extension

  23. 8 – Records Farm records are a necessary part of farming. The records need not be elaborate or formal accounts but at least should cover all the expenses affecting both parties. The tenant is the logical person to keep the records because he or she is usually in closer touch with the day to- day operations. If the records are kept as part of a complete farm account record, they will have greater value to the total business. Nutrient management plans maybe part of the records shared. They include: 1. soil tests 2. nutrient inputs 3. Yield records *Owners can get copies if requested Pesticide records may also be part of the records shared University of Maryland Extension

  24. 9 – No partnership • A lease does not create a partnership. A statement • of this nature is advisable in any lease form. • Rental arrangements involving livestock-share • leases are more apt to be considered partnerships than • the crop-share arrangements, but such arrangements are more likely to be considered modifications of the • landowner-tenant relationship as traditionally established under the crop-share lease. University of Maryland Extension

  25. 10 – Right of entry Every farm lease agreement should include a statement giving the landowner the legal right to enter the property. Without such a statement, a tenant has the right to treat any entrant on the property as a trespasser, including the landowner University of Maryland Extension

  26. 11 – Arbitration (settlement) Differences of opinion can arise rather unexpectedly. For this reason, leases should be in writing. Time tends to make oral agreements hazy while a written agreement is always available for reference and recall. Also, a written lease forces both parties to “argue out” their differences in most areas where differences of opinion may occur. This section is included to encourage the use of disinterested persons for settling differences promptly and in a friendly manner rather than by litigation. The county agent, MDA personnel, banker, etc may assist in arbitration University of Maryland Extension

  27. 12 – Additional agreements and modifications • It is often necessary to change or add to contractual • arrangements, and one of the tests of a good lease is its flexibility for changing the operating plan. Any changes made after the initiation of the original contract should be made a part of the written contract. • All agreements which encumber the land should be addressed. • CSP/ CRP are examples University of Maryland Extension

  28. 12 – Signatures • Signatures by each party are one of the five essential • parts of the lease contract. The agreement becomes a • contract when it is signed. All co-owners of the property, • including husband and wife, should sign the lease • agreement when property is held in joint tenancy or tenancy by entireties. • Signatures should be by individuals rather than family members, partners, share holders, etc. so it is clear who is involved. University of Maryland Extension

  29. Our goal is to suggest lease agreements that will: Reduce Risk University of Maryland Extension

  30. Risk considerations • Crop Input costs • Machinery costs • Fuel costs • Land costs • Volatile commodity markets • A very troubled monetary system University of Maryland Extension

  31. Famer controlled costs • Crop Input costs • Machinery costs • Fuel costs University of Maryland Extension

  32. What can you do to control Crop Input costs? • Seed • Fertilizer • Herbicides • Insecticides • Tillage methods University of Maryland Extension

  33. What can you do to control Machinerycosts? University of Maryland Extension

  34. DIRTI – Method to determine cost of ownership D- Depreciation I – Interest R – Repairs T – Taxes I - Insurance University of Maryland Extension

  35. Depreciation Definition a. tax purposes b. real value purposes (amortize) University of Maryland Extension

  36. Depreciation - Real b. real value purposes $200,000 combine 8 years Residual value $50,000 What are annual costs? 150,000/8 $18,750.00 per year University of Maryland Extension

  37. DIRTI $200,000 combine • Ownership costs • Amortization $18,750.00 • Interest 50% at 9% $9,000.00 • Repairs 1% $2,000.00 • Taxes • Insurance 1% $2,000.00 • Annual ownership costs $31,750.00 University of Maryland Extension

  38. Machinerycosts What are real combine costs at $31,750.00 per year per acre? a. 500 acres $63.50 b. 1000 acres $31.75 c. 1500 acres $21.17 d. 2000 acres $15.87 University of Maryland Extension

  39. Fuel costs 1. Assume 12 gallons per hour 2. $4.00 per gallon 3. 3 acres per hour 12 * $4.00 = $48.00 / 3 = $16.00 per acre University of Maryland Extension

  40. What about Labor? Assume $15.00 per hour- salary plus any benefits Remember Health care - $5,000 + $5.00 per acre University of Maryland Extension

  41. Total Costs for combining 500 acres1000 acres 1. Ownership$63.50 $31.75 2. Fuel 16.00 16.00 3. Labor 5.00 5.00 Real costs $84.50 $52.75 Per acre University of Maryland Extension

  42. Total Costs for combining 1500 acres2000 acres 1. DIRTI $21.17 $15.87 2. Fuel 16.00 16.00 3. Labor 5.00 5.00 Real costs $42.17 $36.87 Per acre University of Maryland Extension

  43. Ownership costs University of Maryland Extension

  44. Suggestion: Custom rates should be a. ownership costs Plus b. Fuel c. labor University of Maryland Extension

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  46. Example Break University of Maryland Extension

  47. Land Costs University of Maryland Extension

  48. Rental rates and arrangements • Cash Rental Rates Determine a fair rate • Crop-Share Leases • Calculating a Cash Rent Lease • Flexible Cash Leases University of Maryland Extension

  49. Background • • Land values have been steadily increasing along with land taxes. Land owners are looking for ways to off set this increased costs • Land rents have escalated dramatically in some areas • Rents in Iowa have topped $300 per acre when corn was $6.00 • Some local rents have approached $175. University of Maryland Extension

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