Source: Texas Ag Law Blog | March 25, 2019
by Tiffany Dowell Lashmet, assistant professor and Extension specialist in agricultural Law with Texas A&M AgriLife Extension
For agricultural lease agreements, there are normally three types of arrangements utilized: cash leases, crop share leases, and flex/hybrid leases. There is no right or wrong option to select here so long as the parties can agree on the structure and the details that go along with that selection and understand the potential implications. It is advisable to visit with an accountant and an attorney before making this type of decision as it can impact a landowner with regard to who will receive government program payments, what self employment taxes may be owed, and as far as income may be reported for social security purposes.
Cash leases
The most common and most straightforward lease structure is a cash arrangement. A tenant and a landowner agree on a set price for the lease. Cash lease rates are generally listed as per acre or per head, although a flat fee could be utilized as well. For example, a landowner leasing 100 acre pasture to graze cattle could structure payment as $10 per acre, as $5 per head, or $1,000 per year. Nearly all hunting leases are cash agreements, and are often structured as per acre, per gun, or with a flat fee.
The benefit of a cash lease to a landowner is certainty of payment, and the downside is inability to share in good years where yield, price, or both are higher than normal. The benefit of a cash lease to a tenant, too, is certainty of cost, while the downside is that the cost must be paid, regardless of how the crop or the markets fare.
One important issue for a landowner to understand is that under a cash lease, the tenant will receive 100 percent of the government program payments such as ARC or PLC payments under Title I of the farm bill. The parties could agree to a different division of this payment, but absent some agreement otherwise, the tenant will be entitled to all payments.
Keep in mind that we have a fact sheet that offers information on several different publications that offer average cash lease rates for Texas.
Crop share leases
Another common fee arrangement in agricultural leases is a crop share lease. This type of agreement is seen more commonly in row crop-type farm leases, but could be utilized in grazing leases as well. As the name suggests, in this situation a landowner and a tenant share in certain costs and share in the revenue made from selling the crop in an agreed upon percentage. The common percentages varies based on both the geographic location and on the type of crop being grown. For example, in the northern Texas Panhandle, it is common to see a cotton lease done on the thirds—meaning that a landowner receives 1/3 of the income and the tenant receives 2/3. Compare that to a lease in the Midwest where corn is grown, where share lease rates would be much closer to 50/50.
One key consideration in structuring a crop share lease is to be clear about which specific costs the landowner will share in. For example, typically, in the northern Texas Panhandle, landowners share in fertilizer, chemicals, and irrigation. Again, this varies by geographic area and crop, and ultimately landowners and tenants can include whatever costs they can agree on in the list of those to be shared. The key is that both parties understand what costs will be split and any requirements regarding providing receipts or documentation for such costs to be paid.
The benefit of a crop share lease for a landowner is the opportunity to share in the upside risk if it is a good year, and, of course, the downside is the risk of receiving far less payment in a bad year than a cash lease might have generated. For the tenant, a crop share lease allows payment to be based upon the revenue generated and offers some assistance in paying for certain inputs which are positive, but also may require additional record-keeping, billing, and in a good year, could result in greater lease payment than would have been owed under a cash agreement.
On the government payment issue for crop share leases, government payments will be paid in the same share as any other income is shared between the parties. Again, that can be modified by agreement.
Flex/hybrid leases
Finally, a flex or hybrid lease is a newer leasing structure that essentially combines attributes of both the cash and crop share lease. Although these could be drafted any number of ways, generally a flex/hybrid lease will set a base price that the tenant will pay, and then flex up or down from that base price based upon an external factor, usually either yield or price.
For example, a flex lease could provide that a tenant will pay $25/acre to grow dryland corn, but if the price of corn rises above or falls below $4.00/bu, the lease rate will flex $.25 for every $.10 over or under $4.00.
With this type of lease, the devil is certainly in the details. Ensuring specifics are included in the lease such as the specific market that will be used to determine prices and at what time of year the determination is made, for example, are critical to ensure both parties are on the same page about how the final price will be calculated.
Landowners may benefit from a flex/hybrid lease from the standpoint that it allows them the assurance of at least the set amount, but also allows them to share in the potential upside of a good price or yield. The downside for a landowner is, of course, the potential downside risk that could lower the total lease payment received. For the tenant, the flip side is true. The flex/hybrid lease is attractive as it does provide some certainty with regard to the amount he or she will owe, but does allow a potential decrease in a year with low market prices or yields, depending on how the lease is structured. Of course, the opposite is also true, in the the downside of a flex lease for a tenant is the potential increased rental payment owed if the flex is triggered.
For flex or hybrid leases, it will likely depend on the exact wording and structure of the lease to determine how government payments will be made.
For more information, visit the Texas Ag Law Blog at agrilife.org/texasaglaw. The blog is an outreach project of the Texas Agrilife Extension Service with the goal of keeping producers and landowners up to date on various legal issues impacting Texas agriculture. Topics include water law, oil and gas law, leasing, property rights, right to farm statutes, and dealing with animal rights activists.