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Cash Rent with Bonus Leasing Arrangement

October 7, 2011

By Debra Levey Larson, University of Illinois

 
When signing a cash rent lease, landlords who are willing to accept more risk may be rewarded when resulting crop revenues are higher than expected, according to a new cash rent with bonus arrangement. 
 
University of Illinois agricultural economist Gary Schnitkey explained that it is a type of variable cash rent in which a minimum base cash rent is established. There can be a bonus or a higher rent if revenue exceeds a predetermined target.
 
"What this lease is designed to do is to provide some flexibility in these uncertain economic times," Schnitkey said. "If revenue turns out to be good in the fall, or after the lease is signed, there will be a bonus. If the lease and economic times turn out to be not so good, there won't be a bonus."
 
Schnitkey said the cash rent with bonus lease is regarded by Farm Service Agency (FSA) as a cash lease if the minimum cash rent is a meaningful one.
 
"Under a cash lease, all of the farm programs, the direct payments, and any counter-cyclical or ACRE payments flow to the farmer, which is what most people want so that the landlord doesn't have to deal with that," he said.
 
Details including examples and spreadsheets are available online at farmdoc.illinois.edu.
 
In an example on the website, the base is $200 cash rent. A bonus can be added based on the crop revenue above a target. Visitors to the website can set a minimum cash rent as well as a maximum cash rent.
 
"You have to set different trigger revenues for different crops because corn typically has more revenue than soybeans," Schnitkey said. "So let's say we're going to share revenue above $720 per acre. You have to determine how much of that the landlord gets. If revenue turns out to be $1,020 per acre with a $300 overage, we have to decide whether 30 percent or 40 percent of that overage goes to the landlord."
 
The difficult part of the equation is deciding what percentage will go to the landlord.
 
"What we would suggest is that the lower the base cash rent is, the higher the percentage because in that case the landlord is taking more of the risk," Schnitkey said. "We typically see percent shares in the 35 to 40 percent range for corn."
 
Schnitkey said the base cash rent is usually calculated below the going cash rent in the area, with the share of the bonus above that.

 

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RELATED TOPICS: Farm Business, Crops, Land

 
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COMMENTS (9 Comments)

Jasper Essentials - Charlotte Amalie, St. Thomas, VI
I think, be fair and everybody wins. Landlords and Farmers are taking risk all the way around. The thing is once a fair deal is agreed on. The landlord can cash in for allowing the Farmers to make the money. Once the Farmers riskly pulling the revenues of crops, lets hope it rains, cause he will make what is needed for people to consume as well as the landlord, we all have to eat right, so make a fair deal.
9:39 AM Oct 11th
 
Operator - CHU, MO
Attention landlords...don't underestimate your farmers, some of them are smarter than you think.
These flexible type of leases are going to have to be the ticket for the future. The inputs, machinery, insurance etc. is all going through the roof. So we are going to be POB.
Agree with chamb3
2:31 PM Oct 10th
 
Operator - CHU, MO
Attention landlords...don't underestimate your farmers, some of them are smarter than you think.
These flexible type of leases are going to have to be the ticket for the future. The inputs, machinery, insurance etc. is all going through the roof. So we are going to be POB.
Agree with chamb3
2:31 PM Oct 10th
 
NW Iowa Farmer - IA
How am I an Idiot? I'm not giving $700 rent with 10.00 beans. Believe it or not but the majority of land owners just want the top cash rent. Yes there are a few that worry about the land. Most of those type of land lords are past away or close to it. Wait until SS and medicare programs get reformed and cuts made. You'll find out just how much they care. Or the kids that get it and want $$$.
6:48 PM Oct 9th
 
NW Iowa Farmer - IA
How am I an Idiot? I'm not giving $700 rent with 10.00 beans. Believe it or not but the majority of land owners just want the top cash rent. Yes there are a few that worry about the land. Most of those type of land lords are past away or close to it. Wait until SS and medicare programs get reformed and cuts made. You'll find out just how much they care. Or the kids that get it and want $$$.
6:48 PM Oct 9th
 
chamb3 - Audubon, IA
Believe it or not but the majority of land owners don't just want the top cash rent. They want long term relationships with tenants that take care their land. This is a very good option for those land owners because it allows them to receive more revenue when profits are high but it also ensures the tenant makes a profit when revenues are not as high. WIN WIN in my book!
8:09 AM Oct 9th
 
Stephen - Shabbona, IL
Just because your and idiot. Don't call farmers an idiot
8:10 AM Oct 8th
 
NW Iowa Farmer - IA
Why oh why would you do this if you were a land lord. Put the land for rent in the paper. Then take the higest bid. Why let anyone else have a share of the money, and why would u want to take risk. Farmers are idiots that will basicly take all the risk, and will farm if for about cost.
11:14 PM Oct 7th
 
NW Iowa Farmer - IA
Why oh why would you do this if you were a land lord. Put the land for rent in the paper. Then take the higest bid. Why let anyone else have a share of the money, and why would u want to take risk. Farmers are idiots that will basicly take all the risk, and will farm if for about cost.
11:14 PM Oct 7th
 



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