Cash Rent Agreements
Starting in 2009, the FSA adapted the interpretation of flexible or variable cash lease agreements, so that most of these leases are now considered cash leases. Where a lease agreement provides for the guaranteed amount or share of harvest or harvest yields, the lease is considered a cash lease, where the lease agreement provides for both: if this method is applied, an average net harvest share should be used over a one-year period to allow both good and bad yields. Landowners who have leased on a share basis in previous years will likely know the percentage of the harvest share received. Each lease must contain certain elements. These include the names of the parties involved, a precise description of the property for rent, the start and end date of the contract, the amount of rent to be paid, an indication of how and when the rent should be paid and the signatures of the parties involved. The reasonable percentage of gross income to be used for determining cash rent may be a typical portion of the crop that the landowner receives under a crop share lease in which the operator bears all production costs. This proportion varies from region to region. Spreadsheet 5 shows an example of this approach when setting cash rent. If the decision to rent in cash is made, how is a fair rent rate set for the operation or field in question? There are several methods that can be used to determine a fixed cash rent for a particular operation or field: 1) the cash market approach, 2) Landowner ownership costs, 3) the adjusted net share rental approach, 4) the operator`s net return or the “amount an operator can afford,” 5) the amount of land value , 6) gross revenue, 6) gross revenue, 7) dollar per production wood, and 8) fixed rent. Land ownership can be considered another type of asset in a portfolio of investment alternatives.
Owners would likely look for a return that matches other types of investments, adjusted for risk differences. Similar investments would involve investments in a similar holding period. For land, longer-term investments should be used as comparisons. In this scenario, the landowner and the operator are exposed to different risks. The main risk to the landowner is the potential for a decline in land values. The main risk to the operator is the variability of yields, market prices and input costs. Spreadsheet 4 provides an example. With all this uncertainty in the market, farm owners and operators may want to move from a more traditional cash rent to a flexible lease or hybrid of these two, the “basic rent – bonus” in cash.