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FAIR FORMULA: To determine a fair land rental payment, consider setting the amount based on a percentage of the average rental rates for the county where the property is, or at a percentage of the property’s property tax value.

Figuring payment terms for land lease agreements

Farm & Family: Consider a formula to help determine fair cash-rent payments.

As I discussed in a previous column, it is important to provide lease options in a farm succession plan. Lease options provide stability for the ongoing farm operation.

A key term the succession plan should address is how to determine the rental rate. Will the lease be a cash rent, a share crop or a flex lease? This is an important question for the succession plan to answer.

Many succession plans offer a family member who is actively farming the option to rent land on a cash-rent lease. However, these plans often do not address how to determine the cash rent amount. This leaves the cash rent amount open to negotiation among the family members. Often the family member who is renting the land will expect a below-market rent amount, while the nonfarming land owners will expect a market rental rate. The negotiation of the lease amount in this circumstance is likely cause disharmony among the family members.

To alleviate this risk, we recommended that the succession plan provide a formula for determining the cash rent amount. Generally, the rent is not based on a set dollar figure. Rather, many of our clients prefer that the rent amount be set each year at a percentage of the average rental rates for the county where the property is located, or at a percentage of the property’s property tax value. Clients use many variations of these options in creating a formula that works best for their circumstances.

In the alternative to cash rent, some clients choose to use a share-crop lease. With share-crop leases, the landowner receives a percentage of the crop harvested. The landowner then markets his or her share of the harvest. Clients who choose this option like it because both the farmer and the landowner share the risks of the farming operation.

When drafting a share-crop lease, it is important to say how the crop and expenses will be split between the farmer and the landowner. Also, it is important to decide whether the parties owning the land will have the ability to market their share of the crop and to monitor the farming operation. If the landowner does not have adequate experience to market the crop and monitor the farm operation, it is advisable to work with a qualified farm manager to help with these items.

In my next column, I’ll discuss the advantages and disadvantages of a cash lease and a crop share lease, and how a combination of these are used in a flex lease.

Balzarini is an attorney at law with Miller Legal Strategic Planning Centers P.A., a legal firm based in Tyler, Minn. Questions or comments? Email them to Miller Legal at [email protected].

 

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