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Home > Protecting Our Lands & Waters > Conservation > Post-CRP Management Options & Issues > Selecting a Lease Type

Selecting A Lease Type


Debra Elias, Minnesota Institute for Sustainable Agriculture

The information presented in this fact sheet is not intended to take the place of professional legal advice. In developing any written lease agreement, it is highly recommended that all parties seek professional legal advice.

Summary

  • There are many different lease types. These include fixed cash, flexible cash, crop share, percentage share, share of the gain, and livestock share.
  • Landowners should ask themselves several questions when selecting a lease type. These are related to management, marketing, labor, income, accounting, equitability, degree of interaction with tenant, conservation goals, Social Security benefits, and farm program participation.

Personal and Practical Considerations

Many different kinds of agreements can be used to lease post-CRP lands for agricultural production. Landowners should ask themselves several questions before deciding upon a lease type. Some of these include:

  • How involved do I want to be in management decisions?
  • Am I willing to market crops or livestock myself?
  • Am I willing to contribute labor?
  • How much variability can I tolerate in the rental income?
  • How much record-keeping and accounting am I willing or able to provide to fulfill the lease agreement?
  • Is the agreement equitable for the tenant and myself?
  • How much do I want to interact with the tenant?
  • How can I ensure that my conservation goals are met?
  • How will the agreement affect my current or future Social Security benefits?
  • How will the agreement affect my participation in federal farm programs?

A comparison of lease types according to these considerations is provided in Table 1. For information on meeting conservation goals on leased land, see Maintaining Conservation Benefits on Leased Land in this series. For information about special considerations related to leasing post-CRP lands, see Basic Considerations for Leasing Post-CRP Land in this series.

Table 1. Lease Types and Personal Considerations

Considerations

Lease Types

Fixed Cash

Flexible Cash

Crop Share

Percentage Share

Share of the Gain

Livestock Share

Land Use

Crops, Hay, Pasture

Crops, Hay

Crops, Hay

Crops, Hay

Pasture

Pasture

Management

Tenant

Tenant

Tenant and Landowner

Tenant (Landowner Optional)

Tenant (Landowner Optional)

Tenant and Landowner

Marketing

Tenant

Tenant

Tenant and Landowner

Tenant (Landowner Optional)

Tenant (Landowner Optional)

Tenant and Landowner

Labor

Tenant

Tenant

Tenant (Landowner Optional)

Tenant

Tenant

Tenant (Landowner Optional)

Income Risk for Landowner

None

Some

Some

Some

Some

Some

Accounting

Very Little

Some

Significant

Significant

Significant

Significant

Interaction

Very Little

Some

Significant

Some

Some

Significant

Material Participation

Unlikely

Unlikely

Possible

Possible

Possible

Possible

Types of Leases

Six common lease types are briefly described on the next page. Other Resources lists examples of each lease type and publications that provide detailed descriptions.

Fixed Cash Lease (Crops, Hay, Pasture)
In Minnesota, the most common type of lease for any agricultural land use is a fixed cash lease. This is an agreement where the tenant pays a given amount of cash rent per acre or a lump sum per season for the use of land. For livestock, the cash rent can be set on a per acre or per head per month basis. Under a fixed cash lease, the tenant pays all production costs. He or she keeps all the crops or livestock and gains from the sales. The tenant also makes all decisions concerning federal farm program participation. Under a fixed cash lease, it is unlikely that the landowner will be considered a material participant for Social Security purposes.

Flexible Cash Lease (Crops, Hay)
A flexible cash lease is similar to a fixed cash lease, except that the final rent is adjusted based on the actual yield and/or price at the end of the growing season. There are many different ways to adjust the final rental amount. Before deciding on an adjustment formula, landowners should calculate the amount of rent they would receive under several different price and yield scenarios. An acceptable range of rents can then be set by including a minimum and a maximum rent amount in the lease. The adjustment formula should be included in the lease with a written example.

The landowner and tenant will need to agree upon a base cash rent, a base yield, and a base price to be used in the adjustment formula. They also will need to decide when, where, and how actual yields and prices will be determined for the final rent calculation. This should be clearly described in the agreement.

Crop Share Lease (Crops, Hay)
Under a crop share lease, the landowner supplies a portion of the production inputs (such as seed, fertilizer, and chemicals) and receives a share of the final crop as rent payment (usually between one-third and one-half). The share amount depends on the landowner’s contributions to production inputs, equipment, or labor.

Percentage Share Lease (Crops, Hay)
The percentage share lease is a flexible arrangement similar to the crop share. However, under this agreement, the landowner does not pay any of the production costs. As in the crop share lease, the landowner receives a share of the crop as rent. The agreement also can be set up so that the landowner receives a cash payment equal to the value of the percentage share. The
figure is calculated by multiplying the landowner’s share of the yield (in bushels) by a price determined at an agreed upon location and time. The lease should explain clearly when, where, and how the price will be determined.

An equitable percentage share should be determined for the agreement. This will vary according to the type of crop, land productivity, crop storage, input costs, expected crop price, and sharing of farm program payments. Two ways to determine the percentage share are to compare the agreement to a fixed cash rent amount or to a 50-50 crop share amount. The percentage share should be set accordingly to yield a similar rent amount.

Share of the Gain Lease (Pasture)
A share of the gain lease requires that the total income be divided between the landowner and the tenant according to their contributions to the operation. Usually, the tenant owns the livestock and pays input costs (such as supplemental feed and veterinary services). The landowner provides land and fencing. Total income is determined by the value of the weight the livestock gained while on pasture. This means the livestock must be weighed before being put on pasture at the beginning of the season and again at the end of the season. The weight gain is then multiplied by a price to determine the value. The livestock weighing locations and the market where prices will be obtained should be agreed upon and specified in the lease. The lease usually stipulates the minimum number of animals on which rent will be paid, regardless of the number actually pastured.

Livestock Share Lease (Pasture)
A livestock share lease is based on the same idea as a crop share lease. The landowner supplies land and buildings, while the tenant supplies labor and equipment. Operating costs such as feed and veterinary bills are shared by both. The livestock are purchased and owned jointly by the tenant and the landowner. Income from livestock sales is divided according to the percentage share established in the lease.

The percentage share is determined by listing the contributions of each party including land, improvements, machinery, labor, capital, management, and livestock. Dollar values must then be assigned to each party’s contribution, and each party’s share of the total costs must be calculated. An equitable lease will establish each party’s share of the income to be equal to the share of the costs he or she contributes.

Livestock share leases usually last for more than a year, since livestock operations take time to build. An automatic renewal clause can be put in the lease, based on a performance goal or on satisfactory review by the two parties. It should include a
provision for reimbursing the tenant after the lease period for the unexhausted value of improvements he or she made.

Some important points need to be clarified before entering the agreement. Both parties should discuss whether the livestock operation is large enough to provide satisfactory income. The landowner and the tenant also should establish who will make management decisions (input and livestock purchases) and who will make marketing decisions (how, when, and where to sell the livestock).

Social Security Benefits
A landowner’s Social Security benefits will be affected by his or her level of “material participation” in the farming operation, which varies with the type of lease arrangement (see Table 1). If the landowner is considered a material participant and currently receives Social Security payments, the payments may be lowered. However, for those who are not yet receiving Social Security payments, material participation will help build a base for future Social Security payments. Therefore, material participation may be a disadvantage for retired landowners, but an advantage for pre-retirement landowners.

Federal Farm Programs
Landowners should consider how the agreement will affect participation in federal farm programs. Who will make the decision whether or not to participate and how—the landowner or the tenant? Is compliance with a conservation plan required? If so, how can compliance be ensured? Should government payments be shared by the landowner and tenant, and if so, how? Contact your local Farm Service Agency office to get the most accurate answers (see Other Resources #4).

Other Resources

  1. The following are available from the Minnesota Department of Agriculture, Sustainable Agriculture Program at 651-201-6673.
    • Land Rental Arrangements for Minnesota, University of Minnesota and Goodhue County Extension (1995).
    • Percentage Share Lease, Iowa State University Extension Service (1992).
    • The following North Central Regional Extension publications and lease forms are available from Kansas State University, Extension Publications, 24 Umberger Hall, Manhattan, KS 66506. 785-532-5830.
      • Cash Farm Lease (with Flexible Provisions) (1993). Item #NCR-76.
      • Crop Share or Crop Share/Cash Farm Lease (1994). Item #NCR-77.
      • Livestock Share Farm Lease (1990). Item #NCR-108.
      • Pasture Lease (1990). Item #NCR-109.
      • Crop Share or Crop Share/Cash Rental Arrangements For Your Farm (1992). Item #NCR-105.
      • Fixed and Flexible Cash Rental Arrangements For Your Farm (1983). Item #NCR-75.
      • Livestock-Share Rental Arrangements For Your Farm (1992). Item #NCR-107.
      • Pasture Rental Arrangements For Your Farm (1992). Item #NCR-149.
      • The following are available from South Dakota State University Extension, Economics Department, Box 504-A, Scobey Hall, Brookings, SD 57007. 605-688-4142.
        • Pasture Lease 1: Cash Rent Per Head Per Month (1995). Item #ExEx 5026
        • Pasture Lease 2: Cash Rent Based on Acres (1995). Item #ExEx 5027
        • Pasture Lease 3: Rent to Be Paid by Share of Gain (1995). Item #ExEx 5028
        • Assistance in determining how a lease agreement might affect participation in federal farm programs: U.S. Department of Agriculture, Farm Service Agency (FSA) (formerly ASCS). FSA has an office in most Minnesota counties (see the U.S. government pages of your phone book) and a state office at 375 Jackson Street, St. Paul, MN 55101. 651-290-3651.
        MDA Contact

        Barbara Weisman, Conservation Program Specialist
        barbara.weisman@state.mn.us
        651-201-6631 or 1-800-967-2474
        Ag Marketing & Development Division