HOW DO YOU NEGOTIATE AN
EQUITABLE CROP-SHARE LEASE?
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Why have a share lease farm rental agreement, since most farm leases are cash-rent arrangements? What are the features of share lease?
With a cash lease, the landowner provides the land, but with a share-lease both the landowner and tenant provide inputs needed to produce a crop. Then they each get a share of the crop when it's harvested.
The tenant has less risk with crop share as compared to cash rent. In "bad years" the tenant will usually share better with a crop-share lease.
Since the landlord also shares in the risk with the crop share, he/she makes more money in the long run if the tenant is a good manager. In "good years" the landowner will generally fare better with a crop-share lease.
Over the long run, profits average out reasonably well for both the landlord and the tenant. If it's profitable for one party, it's profitable for the other. Plus, no one is usually wiped out in a bad year.
Finally, a share rental is required if the landlord is to receive any government farm program payment.
This takes patience! An equitable crop-share lease is one that the landowner and tenant share the crop in the same proportion as they contribute to the total production cost.
1. Begin by determining the resources (inputs) each party has in place.
For the landlord this would include the land and quota, or base rental value. Then add any resources attached to this land such as Irrigation Facilities, Buildings, Storage Facilities, etc. Any machinery (depreciation/ interest, and operating costs if applicable) either operated by the landowner or the tenant should be listed. And if any labor is provided, place a value on this contribution.
For the tenant, labor is the first input valued. Tenants usually provide most of the machinery, so place a value on this (depreciation/interest, fuel and repairs). Also. Include any buildings and storage facilities.
2. Now, consider other inputs that
each party is willing to provide, unshared.
For example, the landowner may pay for the lime because it has a long-term effect on the land. Further, the landowner may be willing to pay for items such as maintenance of fence rows and grass waterways. As a trade-off, the tenant may offer to pay for some other items.
3. Then allocate all other
input costs to get the desired share ratio.
For example, if a 5O:50 share arrangement is desired, sharing most of the production inputs would probably benefit both parties. Sufficient amounts of fertilizer, or adequate insect and disease control are more like to be carried out if the costs are shared, rather than if one party is expected to incur all the expenses.
An estimate of the costs of each input can be obtained from printed budgets and computerized versions available in local County Extension Offices. These can be used as guidelines -- especially for machinery expenses. It is suggested both parties keep records so a final accounting of costs be done after the crop is harvested to insure both have contributed their allocated amounts.
This worksheet for cotton provides an illustration. In this example the landowner will provide the land, lime and boll weevil eradication. The tenant will provide all labor, machinery and equipment, and management.
The landowner's unshared contributions are $64. The tenant's unshared inputs amount to $180. This is a 74:26, tenant:landowner, share ratio. As the parties agree to share all income in this ratio, all other inputs marked with an asterisk will be shared in a similar manner.
Total up the expenses to be incurred by both parties, and calculate the expenses as a percent of total costs. It is equitable if both parties incur costs in the same percentage as the income they receive.
If the agreement does not result in the desired percentages of costs incurred, then negotiations and a recalculation is needed until both costs and returns are shared in the same percentage..
While fertilizer costs may be shared, the application costs may vary. The landlord may share the cost if it's custom applied. But if the tenant applies it, the landlord usually pays none of the application costs. Be certain this is spelled out in the lease agreement.
Carryover value of fertilizer is considered in some leases. This is especially true if a tenant comes to a farm in low fertility and builds it up.
But if there is a good ongoing fertility when the tenant begins, he could reap benefits from it. Therefore he is leaving the land as fertile as when he began and shouldn't expect any reimbursement for the carryover fertilizer.
Lime has a longer carryover life. A tenant who shares in the liming expense may have a right to expect reimbursement if he leaves the farm a year or two after lime application. Suppose a tenant pays $3,000 for lime on 120 acres. If the lime has a three year life, and he leaves the farm after two years, it would be fair for the landlord to pay him for the "unused" portion of the lime. In this case it would one-third the cost, or $1,000. This should be spelled out in the lease.
This problem can be prevented if the landlord incurs the expense for lime.
Consider herbicide costs, which may be shared. But should the farm be weedy when the tenant begins the lease, the landlord may agree to pay a larger share of the herbicide costs until the weed problem is under control.
Insecticide costs for some crops are highly variable from year to year. This is a good reason for a 50:50 division for a given crop. But also have an agreement how this cost is divided for the entire farm.
The rental agreement should specify a delivery point and perhaps a marketing plan for the crop. If it becomes necessary to alter the delivery and the tenant incurs extra expense, the landlord should share the expense..
Crop insurance can be carried by one or both parties on their share of the crop. Each person should be responsible for their share of the insurance.
For lower producing land, the tenant generally needs a relatively large share to realize a profit. With the tenant's usual investment in machinery and labor, a small share of low productivity is not profitable.
Finally, HAVE A SIGNED LEASE AGREEMENT after a thorough discussion of arrangements so no one forgets any details. This will avoid any problems in case of a death, as the survivors need to be aware of any agreements.
Material Participation by Landlord
Landlord participation can affect the landowner more than just receiving the income.
If one doesn't materially participate in the farming operation, the rent received is considered to be investment income. Social security tax is not paid on the rental income, and the income doesn't reduce social security benefits if you are retired.
Any material participation should be specified, which may be either in production (labor or costs) or management of the production. While one should check with a social security office or attorney regarding participation, the following are tests to help determine material participation.
TEST ONE: Material participation is assumed if the landlord does any three of the following:
There is not a precise definition of a significant amount of contribution. One-half would probably be considered significant, but less than one-half will depend on the individual situation. And periodic inspection would count if it is done to see if the farm work is being done properly and on time.
TEST TWO: Significant participation is assumed if the landlord regularly and frequently makes decisions affecting the success of the enterprise. What, when or where to plant, cultivate or spray or when to harvest the crop would be considered participation.
TEST THREE: Significant participation is assumed if the landlord works at least 100 hours over 5 weeks on activities associated with crop production. Working less than 100 hours may still be participating if the work adds up to a significant contribution.
However, if the landlord works as an employee of the tenant and is paid separately, that work does not count toward material participation.
TEST FOUR: The landlord's total activities may be considered as material participation even if the earlier tests are not met. There may be different types of situations or combinations of factors that, based on the total , indicate material participation.
Keeping a daily diary of your activities is recommended. Record the day and hours you worked and the type work performed. Terms of the lease should specify if you do or do not want to materially participate. If the landlord is retired, they may want to avoid material participation.
OUESTION.- A rainy spring leaves fields too wet for machinery to operate, and weeds and insects become bad. The tenant has agreed to take care of insecticide and herbicide applications, but can't justify aerial applications because he will get only one half the benefit, due to the 50:50 share. How should this be handled?
ANSWER: If chemicals aren't applied, both the tenant and landlord will lose. In this case, maybe the landlord would be best served to agree to pay one-half the application costs.
QUESTION.- How do the tenant and landlord share the return from renting stalk fields to a neighbor?
ANSWER: The tenant may reason that if he had livestock of his own to graze the stalks, he wouldn't pay any additional rent. But the landlord reasons that if the tenant rents the stalk field to someone else, he (the landlord) should get all the rent.
Another advantage to the tenant in grazing cornstalks is to reduce volunteer corn the next year. Both parties face the loss of additional nutrients if the stalks are grazed too closely.
Probably the best answer is for the rent paid by a third party to be divided between the landlord and tenant in the same ratio as the crop is shared.
OUESTION.- A landlord reports his tenant's corn yields were 10% lower than when he farmed it himself due to the tenant consistently working this farm last of the three farms he operated. How can this be avoided. Ten percent of a normal 150 bushel irrigated yield resulted in 7.5 bushels loss for each party. At $3.00 per bushel, this amounts to $22.50 per acre loss.
ANSWER: No landowner should expect his farm to be the first worked, or last. But he/she and the tenant should discuss the amount of land the tenant is farming, the adequacy of equipment, and if the tenant has enough labor to get the jobs done on time.
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