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Agricultural Leases

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Should be equitable for each party. Specific language and clear provisions ... the land or not replace nutrients, therefore reducing the productivity over time. ... – PowerPoint PPT presentation

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Title: Agricultural Leases


1
Agricultural Leases
  • Landlord Tennant Contracts

2
Farm Lease Agreements
  • Should be equitable for each party
  • Specific language and clear provisions in the
    lease are essential
  • Leases can be bought or made by the individuals
  • Leases should be made for a specific contract
    between parties and only cover the needed
    provisions of the lease
  • Cooperation is the most important part

3
Types of agricultural leases
  • Crop share lease agreements
  • Fixed-Cash lease agreements
  • Flexible-Cash lease agreements

4
Crop Share Leases
  • A lease is basically an agreement which gives the
    use of an asset to a lessee for a specific period
    of time at a specified rate.
  • A lease does not transfer title of ownership nor
    an equity interest in the asset.
  • A Crop share lease agreement provides for a
    specified percentage of the crop to go to the
    landlord and tenant. The basic premise is that
    each party receive income from the crop in
    proportion to what each party contributes to
    production.
  • In a typical crop share lease agreement, the
    landowner contributes land and improvements,
    associated property expenses, and a specified
    amount of the variable expenses.
  • A tenant usually contributes labor and machinery,
    associated equipment expenses, and a specified
    amount of the variable expenses.

5
Advantages of Crop Share Leases
  • Less operating money may be tied up by the
    tenant due to landowner sharing of the variable
    expenses.
  • Management may be shared between and
    experiences landowner and tenant resulting in
    more financially rewarding and effective
    decisions.
  • Crop sales and input purchases may be timed
    for improved tax management.
  • Risk of low yield and prices are shared
    between two parties. Profits and higher yields
    are also shared.
  • Landowner material participation may be more
    easily proved for use of government programs,
    estate planning, building social security bases,
    and income tax purposes.

6
Disadvantages of Crop Share Leases
  • Landowner income will be variable because of
    yield and price variations as well as changes in
    costs of shared inputs to production
  • Accounting for shared expenses must be
    maintained
  • The landowner must make marketing decisions
  • Landowner and tenant must discuss the
    cropping practices and other management decisions
  • As prices change, the lease should be
    reviewed for fairness. Sharing agreements may
    also need changed.

7
Fixed Cash Lease
  • A fixed cash lease is rental agreement in which
    the landowner receives a predetermined cash fee
    from the tenant irrespective of crop yields or
    the product prices. The tenant produces crop on
    the land and makes management decisions as if the
    tenant owned the land.

8
Calculating a Fixed Cash Lease
  • Cash rent market approachyou must know the cash
    rents being paid in an area and adjust according
    to the productivity of the land, use of the
    improvements, and other factors about the land
  • Landowners Cost or Desired return
    approachThis method requires calculating the
    landowners ownership costs( depreciation,
    interest, repair, taxes, and insurance) or
    establish the desired return the landowner wishes
    to receive on investment.
  • Landowners Adjusted Net Share Rent
    ApproachThis approach presumes the cash lease
    should be related to share rents. Normally fixed
    cash rents would be lower than share leases
    because the landowner shifts the risk of price
    and weather over to the tenant.
  • Tennants Ability to Pay ApproachThis
    approach determines fixed cash rents on the
    tenants projected return over the cost of
    production, using anticipated yields and prices.
    Subtracting out all costs and figuring in a
    return for labor and management from gross income
    leaves an approximate maximum return the tenant
    could afford to pay.

9
Advantages of Fixed Cash Leases
  • The landowner has less managerial input than
    with other lease agreements reducing the
    possibility of friction between landowner and
    tenant
  • There is little conflict over the division
    of crop, expenses, and marketing
  • The tenant has great freedom in crop
    production, marketing, and participation in
    government programs
  • Cash rents will less likely to be considered
    a participating landlord when calculating
    social security payments.

10
Disadvantages of Fixed Cash Leases
  • It may be difficult to determine a cash rent
    acceptable to both the landowner and the tenant
  • Cash rents are likely to be too low in times
    of high yields and prices, and too low I times of
    low yields and prices.
  • The tenant may tend to mine the land or
    not replace nutrients, therefore reducing the
    productivity over time.
  • Cash rents become fixed costs for the tenant

11
Flexible Cash Lease
  • A flexible cash lease agreement is a rental
    arrangement in which the landowner receives a
    predetermined cash fee from the tenant that is
    adjusted for the change in yield and price. The
    tenant produces crops on the land and makes
    management decisions as if the land were owned by
    the tenant.

12
Advantages to Flexible Cash Leases
  • The landlord has opportunities to share in
    unexpected increases of crop yield or increase in
    price
  • The tenant has less risk because of lower than
    expected yields or prices

13
Disadvantages to Flexible Cash Leases
  • Flexible cash leases increase risk for both
    landlord and tenant
  • The tenant may give up some benefits of
    higher yields due to the tenants management
    input, thus reducing the incentive for the tenant
    to do the best possible job
  • Flexible cash leases are much harder to
    calculate that fixed rate leases
  • Flexible cash lease Base rent x current
    years price

  • Base price

14
Other leases
  • What other leases have you either heard about or
    have experience with in our area?
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