In periods of changing technology and costs of crop production, it is advisable to reappraise the leasing agreement periodically. If the terms of a rental agreement place more risk on one of the parties, it should also give a higher long-term potential return to the party with the increased risk. Unless the lease reflects differences in both yield and prices it may not decrease risk as compared to fixed cash leases. The parties must arrive at a base rental value in some cases. If price differences are to be reflected in cash rent agreements, the lease should state how prices should be determined.
Many different formulas determine costs in a flexible cash lease arrangement. The most important consideration is to consider all parties involved and place a premium on good long-term arrangements that are beneficial to both parties. Take into consideration efforts for conservation, soil tilth improvement, increased microbacterial activity and organic matter increase. Providing incentives for these considerations maintain the value of land while increasing yield potential and crop quality.
The first example of a flexible lease formula is the Percentage of Gross Crop Income formula. In this example, the yield is multiplied by the loan rate, or other agreed upon price, the government payment is added on and then a percentage of this gross income, usually 33%- 38% for corn, is calculated for rental rate. This system shares the risk of price and yield while allowing both parties to participate in government payments.
A second example of a flexible tax lease formula is the Price Less Yield Share formula. In this example a base rent price is established and multiplied by the actual yield to base yield ratio. This product is then multiplied by the actual price to base price ratio to achieve a rental rate. This formula provides flexibility for base rent, base yield and base price while taking into consideration the actual yield and price. By involving, all of these factors one provides for a guarantee while allowing sharing the risk.
One could formulate a hybrid of these two formulas by adding a percentage of the government payments to the product of the second example. Both formulas are being used successfully at this time. Consider these formulas in this year’s negotiations, they could create a long-term arrangement that will increase value for all parties. If you have questions on leases, or other land financial questions, call us at the Buchanan County Extension Office at 319-334-7161.
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8/28/2008