Develop a succession plan with your landowners.
Think about your farm. What would happen to profitability potential if the acres you rent were suddenly sold to someone else? How easy would it be to replace those acres in your portfolio?
Just as it is important for farmers to develop and maintain their own estate and succession plans, it is equally important to visit with those on whom your business depends. For many farmers, landlords are a key segment of that group.
"Land is a huge part of a person’s estate and livelihood, so it makes sense to plan for transition," says Bob Hodges, an attorney with BrownWinick in Des Moines, Iowa.
Address the Subject. It might be daunting to ask your landlord about future plans. But remember, you have a business relationship, says Johnne Syverson, a family business consultant with Transition Point Business Advisors in West Des Moines, Iowa.
Think about farmers you know who have been hit hard by losing ground after a landlord passes away. "Share that story with your landlord," Syverson says. "There are plenty of those stories around." This will help you ease into the topic.
Lead by example. If you’ve been doing this type of business planning, communicate that with your landlords, Syverson suggests.
"That will build trust," he says. "Tell your landlords about your farm’s succession plan and that they can be assured you or your successor will be glad to rent from them, as long as they want."
Ask for It in Writing. The first step to firm up your landlord relationship is a written lease. "It sounds elementary, but not having a written lease is a big risk," Hodges says.
If a landowner and tenant have a good working relationship, they can agree on a long-term lease, which might span several years.
When working with long-term leases, Hodges advises building in price adjusters. "I like reducing rent levels to a math problem, based on a current rent survey," he says. "That way, both parties know the farm is being rented at market value."
Many farmers and landowners have their business in some form of an operating entity, such as a corporation or limited liability company. If that’s the case, Hodges says, the lease agreement should be between the entities, as opposed to the individuals. Then, if either entity is transferred to new owners, the lease can continue without change.
In some cases, landowners don’t have successors in place to operate or own their land after their death.
If they want to give their tenants an opportunity to buy their land, Hodges recommends that they draft a right of first refusal within the landowner’s estate plan.
This should allow the tenant to purchase the land before anyone else. "My clients like this option because they want to give their farmers the chance to buy the acres at a reasonable price," he explains. "Plus, you still have some protection in that you aren’t locked into one bidder."
- March 2014