News
Analyst says flex lease agreements fair and simple way to figure rental rates
A farm management analyst says flexible lease agreements can be a fair and simple way to figure out farmland rental rates.
Kent Thiesse at MinnStar Bank in Lake Crystal, Minnesota says there has been more interest in flexible leases the last two years.
“What we see is more of a base rent with a bonus kind of approach where you try and set a base rent that’s maybe close to the breakeven level. If there’s added profit, either through a year like this one with added yield, or yield and/or price; some of that gain is then split on a percentage basis.”
He says that provides a breakeven for the farm operator and an incentive for the landlord.
“If there are extra profits in some of those good years, it allows the landlord in that final rental payment to get a little bonus.”
And regardless of the lease arrangement, Thiesse says to look at next year’s projections when negotiating rental rates.
“We can’t use this year’s yields. I encourage people to use APH yields, such as crop insurance and the 10 year average. Look at those yields (and) look at what the local price projections are.”
Thiesse says too often leases are being based off the current year or earlier instead of the year rents will be paid in.
Thiesse made his comments Friday during the KNUJ Farm Forum.
Why should the base rent be set at a break-even level? Why add additional land to your operation if you are only locking in a break-even return. The base rent should be set at a level at which the operator will generate at least a small profit in most years.