One of the biggest challenges to farmers and landowners is negotiation of farmland leases in a manner that leaves both parties satisfied. Too often, fixed cash leases are negotiated and within a short period of time one person or the other is getting less than they think they should. One solution to this is to re-negotiate fixed cash leases on a regular basis and recognize that they will need to be changed to reflect the variability in the market and/or production conditions. Another solution is a flex lease.
Flex leases are designed with a base cash rent amount (negotiated at the beginning of the season) and a flexible “bonus” amount that depends on either market prices, yields, or both. The idea is to guarantee the landowner a certain amount of rent and have both parties share in the good times as well as the bad times. When set up correctly, they will adjust for changing revenue conditions.
The base rent needs to be calculated at the beginning of the season and is often tied to a published or well-documented measure. A couple of options might be: a negotiated premium/discount from the county-average rent from USDA or a percentage of historical gross revenues from the leased farm (for example 15-20%). The flex component (determined at the end of the season) can be calculated as a percentage of actual gross revenue or a measure of gross margin (gross revenue less variable costs of production). For example, you might make the flex component of the payment 20-30% of gross margin. Another flex component could be a discount in the base rent if total costs are not covered so the landowner shares in the downside risk.
A few things to remember, as you negotiate a flex lease:
1) WRITE IT DOWN, don’t rely on a verbal agreement,
2) Keep the calculations simple and transparent to avoid misunderstandings, and
3) Be willing to renegotiate if things get out of line, which can happen with big swings in farm profitability.
Flex leases should encourage communication between landowner and tenant, which will help in overall lease negotiation.