Leasing Basics for Landowners
Aside from the day-to-day duties of owning and managing land, one of the more difficult aspects of land ownership deals with leasing farm land. Many landowners have difficulties coming to mutually acceptable agreements, getting those agreements on paper, determining fair rental rates, and determining what type of lease agreement best suits their needs. What are the leasing basics of which landowners should have a firm grasp?
The first is to know and understand how rental rates are set. The end goal is to come to an agreement that is mutually beneficial to both the landowner and tenant. As such, setting a fair rate is important. There are several factors landowners can take into account when determining this rate, among them are the rental rates of the local area, percentage return on investment, survey data showing rental rates, percent of gross income, and many others. Most land managers recommend that landowners estimate the rental rate based on three or four of these factors and then make a decision. Determining a local rental rate is fairly straightforward; ag loan officers from the local bank, ag real estate professionals, and professional land managers are able to supply the going rates for current lease agreements.
Additionally, the National Ag Statistics Service (NASS) releases land value surveys annually for consultation. This, along with determining your desired ROI and percent of gross income, are excellent ways to come to a fair rental price agreement with your renter.
With over half of the agriculture land in Nebraska rented, it’s important for landowners and farmers who lease land to recognize the importance of a well-written lease agreement. Where a handshake was enough in many cases in the past, the nature of farming today is a bit more complicated, and the necessity of having a well-designed legal agreement is paramount. Land managers are well-versed in helping you get that lease down on paper, as well as helping you sort through the necessary particulars prior to it.
Land managers are also able to help you determine if a flexible lease agreement may be the right choice for you and your tenant. The factors that have the greatest effect on rental price are land values and crop yields. As these vary year to year, it can be tricky for owners and the farmers who rent the farmland to agree on a fair rental price. To address this complex problem, area farm management experts increasingly promote flexible land lease agreements in order to reduce risk and optimize profit potential for both parties. A flexible land lease agreement is an agreement in which the rent is not paid until the after the crop is harvested. The final rate is then based upon the actual prices and yields attained in a year, rather than a set rate.
After determining the type of rental agreement come the particulars, such as who pays for grain bin storage and power, how irrigation costs are to be handled, and the like. These vary from farming “neighborhood” to neighborhood. The important thing is that both parties come to an agreement so there is no confusion if/when an issue arises.
There is no definitive right or wrong land rental rate, but taking the above factors into account will accomplish the most important leasing goal: A mutually beneficial and satisfactory agreement for both parties.
Source consulted: Vyhnalek, Allan. “Frequently Asked Questions—Farmland Leases.” University of Nebraska-Lincoln Agricultural Economics. University of Nebraska-Lincoln. Web. 17 Mar. 2015.
