Seal the Lease Deal: Financial Focus, Transparency Help to Expand Rented Acres
Picture this: You find out a nearby farm (that well-drained, high-producing one) is coming up for rent. The landowner has passed away and her heirs have put the 450 acres up for rent — by bid. You must have your bid packet together in a week.
“This situation is common across farm country,” says Bret Oelke, Innovus Agra farm management coach. “You have to act fast.”
If you find yourself ready to bid on a significant number of acres, do your homework first, Oelke says. That includes answering these questions about the added acres:
- Do I have machinery capacity?
- Do I have labor capacity?
- Do I have grain storage and handling capacity?
“If you don’t have to make big structure changes, you can determine the impact on your operation of various rent price levels,” Oelke says. “The problem is what you can afford to pay and what you will have to pay to rent it are probably not the same number.”
BEST FOOT FORWARD
Beyond your bid price, many other factors can push you to the top of the heap in a farmland lease decision, Oelke says. One example is a farm brand.
“Think of your farm brand as reputational capital,” he says. “You want a positive brand image so when you go into these negotiations and its close, that becomes the deciding factor.”
In addition to a farm brand, have a current farm resume and advisers ready to write you letters of recommendation. For a recent client, Oelke wrote a letter, as did the farmer’s lender and agronomist. The goal: Show, with authority, you are a good partner to a landlord.
SHOW, DON‘T TELL
It’s one thing to say you take care of a piece of farmland; it’s another to actually prove it, says Mark Gannon, owner of Gannon Real Estate & Consulting.
“You need to verify to the owner you are a good operator,” he says.
Gannon’s advice is to share yield results, fertilizer rates, chemical records, soil test results and crop insurance data with your landlord.
ANALYZE LEASE TYPES
From cash rent to share to flexible, you have several options for how to structure your rental agreement. All have pros and cons.
Good communication and financial data transparency can help sway a landlord to a more flexible arrangement, Gannon says. At his firm, they use a lease called “cash plus lease,” which includes a base rent (half paid in March and half paid on Nov. 1) with a potential flex payment due in the fall.
This is contingent on crop prices and productivity and the guideline the land should receive at least a return of 33% of the gross income for corn and 40% for soybeans. A corn example is:
- Gross income: 190 bu. corn x average price of $4.50 per bushel = $855 per acre
- 33% of gross: $282 per acre for cash rent
- Base rent: $275 per acre
- Flex rent (income above base rent): $7
- Total rent = $282 per tillable acre
“This is fair with upside for operators who market well and keep their costs under control,” Gannon says. “Everyone says they want to be fair, which is a big reason we use flex leases almost exclusively. That helps you get off the ‘guessing and guilt’ train and join the ‘open communication and fair leasing’ track.”
The 411 on Landlord Communications
An informed landlord is a happy landlord, who will likely retain your business. Karisha Devlin, University of Missouri field specialist, suggests these steps:
- Determine your message frequency. Set a schedule (monthly, quarterly or semiannual) and stick to it. A schedule shows you are reliable, Devlin says.
- Select the best communication channel. This could be email, electronic or paper newsletters or social media. Each have strengths and weaknesses.
- Share about topics that interest the landowner. Some topics to include are crop reports, management practices, price outlook and upcoming events.
- Keep the presentation of your message simple. Use text that is easy to read. Avoid farm lingo and jargon your landlord might not understand. A friendly yet professional tone can effectively engage the reader.
