Flexible rental contracts help landowners and operators

By: Agriculture.com Staff 02/12/2007 @ 8:58am

High corn prices and increasing real estate taxes have prompted many landowners to increase cash rents by double digit figures.

As a result, some owners and operators have gone to flexible lease arrangements. Under this type of arrangement, the final cash rent is based upon actual price and/or actual yield.

Flexible leases have several advantages over simple cash rent. Profit opportunities are shared between landowner and operator as are the risks. The actual rental payment is adjusted automatically based upon the commodity price and yield. This eliminates negotiations between parties, and the landowner is paid a cash rent and not bothered with marketing the crop.

Both a maximum and minimum rental rate should be included in the agreement. This will keep the rent paid in a desirable range. The landowner can share in a portion of the profit without the operator giving up all the upside benefit, for example, if the operator is a good marketer and can capture higher prices.

Once landowner and operator have decided on a flexible contract, they should test it by using several different price and yield numbers in the calculation. Determine if the ranges in price and yield result in reasonable cash rent values.

As always, the rental contract should be put in writing. That way there is no opportunity for misunderstanding about the formula used or the values in the formula.

High corn prices and increasing real estate taxes have prompted many landowners to increase cash rents by double digit figures.