A guide to leasing farmland and lease agreement types
Leasing farmland can be an attractive option for many landowners. Whether they are investors, active farmers or members of a family who have inherited land, leasing can be a great option for those who want to keep the land producing income and to keep the land in the family.
But there is a lot more to leasing farmland than leasing, say, an apartment or house. For one, there are several different types of leases that are specific to agricultural purposes that have many differences when compared to residential property and even most commercial property lease agreements.
There is certainly value in knowing more about the ins and outs of leasing farmland, as well as the different types of lease agreements that are most common. So, if you have been looking for a solid source of information on leasing farmland, then here is the guide for you.
Who leases farmland in the United States?
Leasing farmland to tenant farmers is common in the United States. According to the latest data from 2016 from the USDA, about 39% of the 911 million acres of farmland in the lower 48 states is leased. It’s an even more common practice for cropland, which is about 50% leased vs. farmed by the landowner. For comparison, about 25% of pastureland is leased by the owner.
That same data shows that most rented farmland is owned by landlords who are not actively farming. It’s estimated that 80% of land that is leased is owned by non-active landlords. This is a broad category that could include anyone from retired farmers, family members who inherited the land and investors.
It is estimated that the other 20% of rented farmland is leased out by farmers who are actively farming.
The basics of leasing farmland
Leasing farmland is a business arrangement between the landowner and an operator of the land called a tenant farmer. The actual lease itself is what defines the details of the agreement between the two parties.
The lease is the legal document that lays out how the landlord’s resources will combine with the tenant’s to meet production and sustainability goals. The lease obviously addresses land, but other resources such as capital and labor are also considered and often addressed in the agreement.
These lease agreements come in various forms for several reasons, primary among them is the fact that land quality and production capacity often differs, so leases need to reflect this reality. Other reasons a lease agreement may differ from one to another include different goals of the landowner and of the tenant, conservation and sustainability priorities and how much in the way of resources each party will be expected to contribute.
Why would a tenant lease land rather than buy?
Many might wonder why a tenant farmer would decide to enter into a lease agreement with a landlord rather than buy the property.
There are several reasons for this. First, land is an expensive resource. Should a farmer wish to purchase an entire operation, we are talking about a multi-million dollar transaction.
That’s why many farmers, especially younger ones, enter into lease agreements and then work to build enough equity for potential future land purchases. It is also common for farmers to own and operate some land, while also lease and operate additional land.
Second, land is scarce. For many, it is seen as an investment that can provide income while, ideally, it also increases in value. Many landowners may also have a sentimental connection to the land that also makes them want to retain ownership of the land, such as having been in their family for a long time or the fact that they themselves farmed the land before entering into retirement.
The different types of lease agreements
The leases that tenants and landowners enter can vary quite a bit. In this article, we will cover three of the most common types of lease structures.
Cash rent lease
A common lease structure is the cash rent lease, also known as a fixed cash lease.
Under this type of structure, the farmer takes on the risk of operating the land, but also reaps all of the reward. This can be especially lucrative in good years when markets are performing well, while also being harder to manage in bad years where challenges are hard to overcome.
For the landowner, a cash rent lease provides a consistent and predictable amount of income that won’t change due to those factors that may impact production and revenue.
A flex lease, or flexible cash lease, is a possible alternative to the cash rent lease for tenants who would rather not take on so much risk.
With this type of agreement, the amount of rent that ends up being paid often depends on yields. The benefit for a tenant is that a bad year won’t be as painful because the landlord also assumes some risk by lowering rent in those years. On the other hand, the landlord will benefit more when yields are good through higher rent payments.
Crop share lease
Perhaps a lesser common arrangement in many cases, a crop share lease does require some agricultural knowledge for the agreement to be successful, though. So, unless you have farming experience yourself, or have a farm management services provider handling many of those aspects, then it may not be the best decision for you to enter this type of lease agreement.
Under a crop share lease, the owner gets a share of the crop and USDA in return for them allowing the tenant to operate the land and use its resources. Typically, the land owner also provides land and buildings, too. Generally, the owner must also cover a certain share of costs of crop inputs, including seeds, fertilizer and pesticides.
Professional farm management to guide decisions
Midwest Land Management can assist landlords in determining what type of farmland lease agreement may prove most beneficial and lead toward better results. In addition to complete farm planning, which includes tenant selection, among many other services, our team also negotiates contracts and leases to ensure our clients’ goals are met.
Contact Midwest Land Management today to learn how we can help you achieve your financial and farm operation goals.