Lease Negotiations Annie’s Project Coweta Oklahoma February 20, 2007.
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Transcript of Lease Negotiations Annie’s Project Coweta Oklahoma February 20, 2007.
Lease Negotiations
Annie’s Project
Coweta Oklahoma
February 20, 2007
Cash and share lease agreements
What portion of the income do I receive? What portion of the costs do I contribute? What portion of the risk do I bear? What crop and land management practices will be
followed? What will be the condition of the land and
improvements at the end of the lease?
Cash lease agreements
Tenant pays landlord a fixed amount per acre per year.
May be single or multi-year. Government payments go to tenant. Can add flexible component.
Cash lease advantages
Landlord More stable income Payment can be scheduled for
any time of year Eliminates or greatly reduces
cash expenditures Reduced management
responsibility Shifts risk Fewer potential conflicts about
sharing and marketing crops
Tenant Total managerial freedom Fewer chances of conflict
over decisions Receive all benefits of a
“good year” and superior management
Eliminates time and effort associated with dividing crops and input purchases as well as the related record keeping
Cash lease disadvantages
Landlord Can become inequitable due
to changes in prices, costs and technology
Fewer opportunities for income tax management
Will not realize benefits of good price and/or yield years if the agreement is not flexible
Greater chance of soil depletion, neglected improvements
Tenant Must shoulder all the price
and yield risk if the agreement lacks flexibility
Large capital requirements for inputs
May be required to pay part of the rent early in the year before the crop is planted
Landowners may attribute above average yields to soil rather than management
Adding flexibility to the cash agreement Can reduce need for frequent adjustments Distributes more of risk
Price risk adjustment Multiply base rate by actual price/estimated price
Yield risk adjustment Multiply base rate by actual yield/estimated yield
Share lease agreements
Landlord and tenant share proportionally in costs and risks of production, then share benefits accordingly
May be single or multi-year Government payments shared in same
proportion as crop
Share lease advantages
Landlord Receives benefits of good price
and/or yield years Land and improvements are
more likely to be maintained Relieved of some operational
decisions Easier to establish “material
participation”
Tenant Less capital may be required Less experienced tenants can
benefit from the landowner’s managerial input
Share price and yield risk with landowner
Share lease disadvantages
Tenant Need to discuss
management practices with landlord on a continuing basis
Joint decisions result in more opportunities for conflicts
Must share benefits of a “good year” and superior management
Must maintain records of shared expenses and divide crops
Landlord More variable income and
increased risk Need to discuss management
practices with tenant on a continuing basis
Increased capital requirements associated with share of cash expenses
Must maintain records of shared expenses
Increased responsibilities More possibilities for conflicts
with tenant
Put the agreement in writing!
Encourages understanding by both parties Serves as a reminder of terms agreed upon Legal resource and guide for heirs
Consult with a lawyer.
Terms that should be specified in all agreements
Parties to lease and description Date the lease is entered into Names and addresses of the landlord and tenant Legal description of the leased property Binding to heirs Signatures of the landlord and tenant
Terms that should be specified in all agreements
General terms Beginning and ending dates of the lease Rental amount, respective shares When and how rent will be paid and penalties for late
payment Who will carry insurance on the property and crop Statement that no partnership is intended Conditions under which the tenant may or may not
sublease the property Records to be kept
Terms that should be specified in all agreements
Termination When and how the lease may be terminated Requirements for notice of termination Acts of the tenant that would constitute default of the lease Reimbursement provisions for crop nutrients, lime and/or
completed fieldwork upon termination of the lease Tenant’s rights if the property is transferred or condemned
during the lease period. Reimbursement provisions for a crop in the ground when
the lease is terminated.
Terms that should be specified in all agreements
Operation and maintenance Desired or prohibited farming practices, including types of
chemicals that may not be used on the property Process of measuring and maintaining soil fertility and pH
levels Which party is responsible for controlling noxious weeds Which party is responsible for maintaining fences Whether the tenant has the right to make improvements
and be compensated for improvements, terms for reimbursing tenant
Terms that should be specified in all agreements
Operation and maintenance (continued) Stocking rate Whether the tenant has the right to utilize improvements
made by the landlord. Provisions for soil-conservation practices. Statement regarding the existing environmental status of
the property and responsibility to minimize activities that may cause contamination.
Use of non-cropland, garden plots, trees, buildings, grain bins, pasture or other areas not rented for cropland.
Terms that should be specified in all agreements
Landlord rights and government payments Landlord's right to enter the property for specific purposes
(entry, hunting and fishing, harvesting pecans) Landlord's right to a security interest in the crops or other
provisions for ensuring payment. Statement of which party will participate in federal farm
programs, including responsibility for eligibility and receipt of payments.
Nature of landlord participation in management (may impact income and self-employment, taxes, social security payments, and estate planning)
Terms that should be specified in all agreements Arbitration of differences
Provision that any amendments must be in writing and signed by both parties.
Procedure for resolving disputes, including the applicable state statutes.
Terms that should be specified in all agreements Crop-share provisions
Sharing of crops and tenant's contribution of machinery and labor.
Sharing of operating expenses. Storage and/or delivery of landlord’s share of crops. Compensation upon termination of the lease. What records are to be kept by whom and how will this
information be shared.
Terms that should be specified in all agreements Miscellaneous
Willingness to sign security agreement Plan to pay property taxes, repairs, insurance on
improvements Compliance with FSA, NRCS, other agency
requirements Mineral rights Other environmental clauses
What is fair? What is not fair?
Fair does not equal legal. Legal does not equal fair.
Everything is negotiable up front.
Determining a Fair Cash Rent
Market approach Landlord’s ownership costs plus return to
equity Residual income method
Northwest
Southwest
East
Northcentral
Oklahoma Farmland Leasing Regions
Average Annual Dryland Cash Rental Rates ($/acre)
NW SW NC E State
Wheat 27.63
10-46
29.93
15-47
34.80
8-50
31.43
10-45
30.21
8-50
Alfalfa 39.62
25-90
Grain Sorghum
25.60
18-45
Native Pasture
7.06
2-15
10.13
5-30
12.15
2-30
10.12
2-30
9.66
2-30
Bermuda 12.55
7-20
13.60
2-30
13.09
2-30
Other Pasture
18.20
10-40
15.87
6-40
Source: OSU CR-216 and CR-230, 2005
Dryland Wheat Cash Rental Rates
2
31
37
20
2
9
05
10152025303540
< $10 $10-19.99 $20-29.99 $30-39.99 $40-49.99 >$50
Rental Rate ($/acre/year)
% o
f R
es
po
ns
es
Source: OSU CR-230, 2005
Determining a Fair Cash Rent
Landlord’s ownership costs plus return to equity Property taxes on land $2 Improvements
Repairs and maintenance Property taxes Insurance Depreciation
Desired return on equity $800 @ 4%
Determining a Fair Cash Rent Residual income method
Returns Grain, government payments, other
Variable costs Seed, fertilizer, chemicals, fuel, harvest costs, labor, etc.
Fixed costs Machinery and equipment depreciation, interest on
investment, taxes, insurance Management fee (e.g., 5-8% of gross receipts)
Review wheat budget
Establish expected returns to overhead, land, risk, management
Determine what each party is contributing.
Overhead LandRisk Management
Determining a fair share rent
Determine the percent contribution of total value of fixed items contributed by each party
Share variable expenses in the same percentage as crop is shared
Adjust share arrangements to reflect the impact of new technologies, improvements, land quality
Share total returns in the same proportion as total expenses are contributed
Compensate tenant at the end of the lease for the unused portion of investments
Valuing fixed contributions
Land “Safe” rate Divide annual cash rent by per acre land value Divide per acre net income by per acre land value
Machinery and equipment Management
Percent of average capital invested Percent of gross farm receipts
Labor
Typical Oklahoma cropland share lease agreements
Source: OSU CR-230, 2005
Income items shared Landlord’s share
Crop 1/3
Gov’t. payments, other income 1/3
Expense items shared
Seed None
Fertilizer 1/3
Pesticide 1/3 (or none)
Chemical applications 1/3 (or none)
Harvesting None
Lime application 1/3
Irrigation None (or 1/3)
Tenant’s Share of Herbicides
0 0
12
41
1
45
05
1015202530354045
0 1-35 36-63 64-71 72-99 100
Percent of Responses
Source: OSU CR-230, 2005
10
0
17
33
30
37
0
5
10
15
20
25
30
35
40
% o
f R
esp
onse
s
0 1 - 35 36 -63
64 -71
72 -80
81 -99
100
Landlord's Share
N=34
Source: OSU CR-230, 2005
Tenant’s Share of Lime Application Costs
Effect of land quality and farm cost on crop-share rental arrangements
Annual yield per acre
Annual operating cost per acre ($)Costs
Least productive land
Most productive land
2/3 tenant½ tenant
Coming to agreement....
Both tenants and landlords should estimate their contributions to production
Use of area standards or traditions may not be in the best interest of either party
Worksheets and spreadsheets are available to summarize contributions and analyze alternatives
Equitable agreements are negotiated
References
http://osuextra.okstate.edu/, choose Department, Agricultural Economics
Oklahoma Pasture Rental Rates, OSU CR-216 Oklahoma Cropland Rental Rates, OSU CR-230 Developing Cash Lease Agreements, OSU F-214 Developing Share Lease Agreements, OSU F-215 Tax Aspects of Leasing, OSU WF-940 Tax Consequences: Cash vs. Crop Share Leases, OSU WF-941 Breeding Livestock Lease Agreements, OSU WF-571 Stocker Lease Agreements, OSU WF-572
Also, MidWest Plan Service website located at http://www.mwpshq.org/
To do
Develop written agreements Review agreements annually in advance of
the renewal date Update, modify agreements when the
operating environment changes significantly