Flex Leases: 2 real world examples

Feb 18, 2024 | Uncategorized

Flexible cash farm leases are a twist on both traditional cash rent leases and traditional crop-share leases. In a flex lease, the landowner receives a pre-determined cash fee, adjusted for changes in yield and/or price.

Advantages:

  • Landowner shares in the good years
  • Tenant has less risk

Disadvantages:

  • Less benefit to excellent farm managers
  • More challenging to forecast breakevens

The parties could set the lease up to flex for 1) price changes, 2) yield changes, or 3) both price & yield changes.

Some formulas can get very detailed and location specific, which we won’t get into here.

The following are two very simple variations:

Example #1: Base Rent plus Bonus

Base Rent is calculated at 2% of the value of the land. (i.e. $6,000/acre land = $120/acre)

Bonus Rent is determined as follows:

→ Average Corn Yield X 30% X Average Corn Price = Total Rent Per Crop Acre

→ Average Soybean Yield X 40% X Average Soybean Price = Total Rent Per Crop Acre

The actual corn and soybean yield comes from the combine monitor, weigh tickets, or federal crop insurance report.

The average corn and soybean price is determined by recording the

  • March 15th
  • June 15th, and
  • September 15th 

December corn & November soybean prices from the local co-op.

A simple average is calculated.

–> If the Bonus Rent exceeds the Base Rent, the difference is due December 1st.

For example:

Corn yield – 160 bu/acre

Corn prices = March 15: $4.25
June 15: $4.50
September 15: $4.75

Simple average = $4.50

Bonus Rent is (160 x 30% x $4.5) = $216/acre

So, since Bonus Rent ($216) exceeds Base Rent ($120) the difference ($92) is due Dec 1.

Example #2: Share of Gross Revenue

There is no Base Rent (floor) in this scenario.

→ The landowner receives cash rent equal to a specified percentage (~25-40%) of the gross crop revenue.

*Likely a higher % than Example #1 since there’s no price floor.

Rent = 32% of gross crop revenue

  • Actual yield: 160 bu
  • Actual price: $4.50
  • Gross value: (160 x $4.50) = $720
  • Other crop income: $5/acre

→ Total rent payment: ($725 x 32%) = $232

Notes:

  • These differ from traditional crop-share leases because landowner does not pay for any inputs
  • Farmer makes all production & marketing decisions
  • Base Rent % and Price/Yield % are negotiated between tenant & landlord
  • Please document your deal w/ the landlord in a written, signed flex lease agreement

So, maybe consider a flex rent agreement next time you’re negotiating with either your tenant or your landlord.

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