Like many farmers, rented acres are key in Matt Splitter’s growth strategy. As a young farmer near Sterling, Kan., he sees many more opportunities to add leased acres versus owned acres.
To that end, Splitter, the 2021 Tomorrow’s Top Producer Horizon Award winner, is quick to adapt to landlords’ goals and wishes.
“As farm ground transfers to the next generation, the risk tolerance level of that next generation may not be there to handle the one-third/two-thirds arrangement,” Splitter says. “So, cash rent is always available to our landlords, but we’ve really been promoting a net-share lease.”
THE DETAILS
In this case, Splitter covers 100% of the input costs, while landlords cover property taxes, crop insurance and a few other minor expenses. Then, the two parties agree on the percentage of the crop that goes to the landlord to sell.
“It has turned out to be our most attractive lease arrangement,” Splitter says. “So, when the good times are really good, they get a share in that; but when the times are not as good, we’re sharing in that as well.”
LANDLORD BENEFITS
Because tenants cover the input costs, a net-share lease greatly reduces the need for a cash outlay by the landowner, says Ken Schmitt, senior vice president of farm and ranch management at Farmers National Company. Both parties win when yields and prices are high, and if they aren’t, crop insurance is available to help put a floor under the return for the landlord.
“This type of lease can work very well in areas where the risk of crop production can vary widely from one year to the next,” he says. “It also can work in areas where cash rent leases are not very common. The risk-reward to both the landlord and farmer are shared more equally under net-share leases.”
TIPS FOR SWITCHING
Ultimately, landlords have goals for their property — monetary and otherwise. If you want to switch your lease arrangement, Schmitt says the first step is to have a conversation with your landlord to find out their goals and objectives of landownership.
Also, understand their needs, risk tolerance and knowledge of today’s farming practices.
“Farmers need to remember the landowner is ultimately in the driver’s seat, as it is their land to lease in a manner they feel best suits their needs,” Schmitt says. “What might be in the best interest of the farmer may not be best for the landlord. In the end, you ideally want the outcome of the lease type with your landowner to be a win-win for both parties.”
Listen to Matt Splitter on the Farm CPA Podcast with Paul Neiffer:
