4/30/2012
Farmland Leasing
What You Need to Know
by Marcia Passos Duffy
Land: They're not making any more of it,
that's for sure.
Land is one of the biggest obstacles to farming, particularly for new farmers. Owning farmland is prohibitively expensive in many areas of the country, and in more populated urban areas finding agricultural land for sale can be difficult if not impossible.
Leasing land can be a pragmatic strategy for many growers; in fact, according to the U.S. census, nearly half of all U.S. farmers lease some or all of the land they work on.
Farmers sometimes view leasing as a second-rate option to owning land. However, experts advise focusing on "control" of the land rather than ownership. When viewed this way, leasing is often a business-savvy option for many farmers that provides them affordable, flexible and secure access to land, buildings and even equipment.
How can you enter into a farm lease that will enable you to maintain control of your farm and benefit your business in the long run? Here are some pointers:
Understand the types of leases
A lease is a legal agreement between the property owner and the renter of the land. While farm lease agreements-particularly short-term leases-can sometimes be sealed with a simple handshake, this is not advisable, says Bob Bernstein, co-director of Land for Good, a nonprofit New England-based organization that offers education and assistance to owners and managers of working lands, new farmers, and other land use decision makers in the six New England states.
"A lease should be in writing, for clarity's sake," says Bernstein. "Get clear, and on paper, what is necessary, desirable and optional."
Most farmland leases fall into three basic categories:
- Short-term (annual to three to five years)
- Long-term (five to 99 years)
- Ground lease (a long-term lease where the tenant rents the ground, or land, and owns the improvements to the land, such as the barn, house, etc.)
There are variations of these three types of leases. For example, if a farm is already in existence, farmers can rent the whole farm (barns and other buildings) or just the land with a short or long-term lease. There are also leases that include machinery, equipment and even livestock. A farm lease can be a straightforward cash lease or a crop share lease (where the landlord and farmer-tenant each receive a percentage of the crop and may share management responsibilities in the farm business).
Which type of lease is best?
It depends on your farm's business plan or objectives, says Bernstein.
A short-term lease gives the farmer the advantage of being able to "test drive" a farm's products in a certain location and market. The downsides to a short-term lease include the inability to build equity on the land. This can directly affect the farmer's ability to get loans, since lenders often do not want to finance equipment or livestock if the farmer doesn't have a lease that covers the loan period.
"The key is to match the length of the lease with the proposed agricultural activity . the length of the term of the lease should fit in with the operation. An orchard with a five-year lease, for example, is not the best strategy," says Bernstein.
Long-term leases have the advantage of more business security with more time to build the business, the soil, and establish markets and community relationships, says Land for Good's co-director Kathy Ruhf. It also allows the farmer to borrow against the long-term lease and participate in USDA conservation programs.
An even better long-term scenario for a farmer, points out Ruhf, is a ground lease.
"There are more and more young people who want to enter farming, and holding land, for them, is not a priority to start with . or ever," she says.
Long-term secure ground leases are becoming an increasingly attractive option to owning land. Ground leases give the farmer the opportunity to build equity in a house or farm structures that the farmer purchases outright. While the structures are purchased, the land the buildings sit on is rented. The farmer can also own other land improvements. For example, in an orchard the fruit trees can be owned by the farmer and sold when the time comes.
"Ground leases are a little more cutting edge," says Ruhf, adding that these types of leases are not yet popular in the private sector. Ground leases are typically an arrangement made on conservation land that has been earmarked for agriculture. Bernstein adds: "Increasingly, landowners and farmers are talking more about including equity-building provisions in the lease."
Finding land to lease
About 90 percent of farm landlords are not farmers, according to Land for Good. However, individuals, organizations and public entities with arable land have a variety of reasons why they want to make their land available for farming.
"Farmers are turning to the world of nonfarming landowners such as religious organizations, municipalities, conservation groups, education and family realty trusts," notes Bernstein.
Bernstein has seen an increasing number of individuals who want to hold onto the land they own or inherited, but don't want to farm themselves.
"Baby boomers are inheriting land . they don't need much money out of it but want to keep it," says Bernstein. "Leasing the property to a farmer is a good option, and a good long-term opportunity for many young farmers."
According to the FarmLASTS Project of the University of Vermont, there are many types of landlords of potential farmland, including:
- Heirs of farm operations
- Second home and estate owners
- Land trusts (and other conservation organizations)
- Churches and religious orders
- Municipalities with conservation land and/or open space
- States with institutional and other properties with an agricultural history or capability (e.g., state mental hospital and corrections facilities)
- State-owned conservation and open space land and state-owned parkland
- Federal lands such as parkland, rangeland, forestland and tribal lands
- Schools, colleges and universities
Ruhf says that conservation property has not typically been thought of as land for agriculture until recently.
"The general trend we're seeing in the conservation community is that agriculture is not necessarily the enemy, says Ruhf. "We're also seeing more municipalities making land available for farming."
Bernstein warns that just because land is available doesn't mean it is right for the farming enterprise: "The farmer needs to evaluate the water, soils, topography, exposure and more," he notes.
Finding the right land is often the most challenging part of the equation, notes Bernstein. "You need to evaluate your business plan about what is desirable and optional against a particular property. We encourage people to take a good, hard look at that," says Bernstein. "You need to look at what you can be flexible on and what you can't."
The best way to start a search for farmland to lease is through the farmer's personal and professional network. There are also a variety of land-linking websites catering to different regions of the country.
Understand how a lease-and a
landlord/tenant relationship-works
Stephen Hatz, senior vice president and regional manager of Bank of the West's agribusiness division, a large commercial bank lender to production agriculture, notes that today is a seller's market in farm leasing, with the owner of the farmland having the advantage.
"The current market terms are very aggressive . cash up front, multiple-year lease contracts, bidding on dollar per acre with aggressive terms," says Hatz.
Still, many land leases are based on relationships and confidence that the landowner has a tenant who is a good farmer and a good caretaker of the land, says Hatz. "The market is very aggressive for cash rent farm ground, and those with solid relationship leases need to develop and take care of those as well."
Bernstein agrees: "You need a written lease, but ultimately you will have a relationship with the landowner . this is the opportunity and challenge, that it is hard to share ownership and control."
At the very least, a basic written lease should include the following:
- The parties (tenant and landlord)
- Start and end dates
- Rental rate
- Signatures of the parties
More detailed leases could address topics such as repairs and maintenance, prohibited uses of the land, capital improvements, termination, landlord's right to enter and procedure to resolve dispute, among other terms.
An important part of the tenant agreement, Bernstein advises, is to keep the farm business separate from the real estate: the landlord should not be involved in a farmer's business unless the agreement specifies this.
The New England Farm Institute further recommends in its lease checklist that the lease agreement should include a complete description of the property (land, boundaries, farm structure, equipment, residence, livestock); who is responsible for capital improvements (and if the tenant is responsible, how will the tenant be compensated); and who is responsible for getting and maintaining insurance (including liability, casualty and other insurance, such as crop insurance).
For More Information About Farm Leases
The author is a freelance writer from Keene, N.H.
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