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Where Agriculture Means Business

Eight Steps To Constructing An Effective Farmland Lease

With so many circumstances involved in any farmland lease agreement today, it’s important to construct a well-thought-out written lease that accounts for all variables relating to the specific land and parties involved.

Lessor and lessee should see the agreement as a communication facilitator that has the potential to be permanent, but also allows for adjustments that continue to meet the needs of both sides of the transaction.

To these ends, here are a few recommendations for your next farmland lease.

Write it down.

 While “handshake deals” with farmland leases were common in years past, it’s important to get everything down in writing today. This allows both parties to make sure they are in agreement on all terms and provides a baseline for any adjustments the landowner or tenant may request through the life of the lease.

In the end, when you sign that lease, you agree to every word in that document.

Define everything.

The complexity of today’s crop and greenhouse production and management makes it important to document even the simplest terms, like the beginning and end of the leasing period. It’s also critical to document things like land access; many producers today work with custom applicators, crop consultants and other input providers who, at times, will need to be on the land. It’s important to specifically account for who will be there, when they’ll be there and what they’ll be doing while there.

Outline who’s paying for what.

Improvements are constantly underway on most agricultural land. From a small seasonal improvement to larger improvements, such as rebuilding barns or greenhouses after a windstorm, a well-written lease should account for who foots the bill. Typically, that is broken down by price, with the landowner responsible for anything over an amount stipulated in the lease. On most farms, that threshold is usually $5,000 to $10,000. This includes leasehold improvements, or those made by the tenant during the lease period.

Include insurance.

Any land lease agreement should include insurance coverage from both lessor and lessee. The landowner’s policy should cover the property, including any structures, barns or buildings, as well as include liability coverage. The tenant should also have liability coverage on the leased assets and their activity on the leased land, as well as more comprehensive coverage on any leasehold improvements. A farm “umbrella” policy will generally provide liability coverage on leased property, but it is important for the tenant to confirm coverage with their insurer.

Account for taxes.

Taxes are a huge issue for land leases in the Northeast. There are tax implications to different lease structures, particularly when it comes to property taxes and agricultural land use. There are also tax advantages to how lease payments are made, and tax credits for agricultural land use, which vary from state to state. Leasehold improvements that add to the overall value of the land can have more long-term tax implications. To ensure issues like these are accounted for, both landlord and tenant should seek professional tax advice before constructing a land lease.

Work with the right people.

Business consultants, attorneys and tax professionals are all key players in putting together a well-written lease. The best first step is to start with a business consultant, like those at Farm Credit East. Doing so can help enumerate the specific considerations of both lessor and lessee, then address any issues unique to each situation. The next step should be defining the tax implications of a proposed lease agreement with a business consultant or other tax professional.

Finally, an attorney -- preferably one with agriculture experience -- can help assemble a lease that addresses all of the concerns for the involved parties. Though the ultimate goal is a lease that addresses 100% of the issues about which both parties are concerned and 0% of those in which there is no interest, there is usually some measure of compromise between tenant and landowner by the time the lease is completed and signed.

Revisit the lease often.

Through its full term, it’s important to regularly review a land lease, especially if the leased property or circumstance has undergone major change, like improvements or inter-generational changes on either side of the agreement. For example, revisiting a lease can yield a payment adjustment to account for the increased tax bill associated with improvements like new greenhouses or livestock buildings. If the agreement is long-term, one should review the lease and consider any adjustments to terms or payments every two years.

Think long-term and communicate.

Though a lessee may see a lease as a short-term way to secure farmland, some leases can last decades – even ending in outright ownership. A tenant may sign a lease thinking “I’ll pick up this piece of ground and see how it goes,” but his or her children may one day be leasing that same land from the landowner’s children. Think in these long terms when entering lease negotiations, and always maintain good communications.

Both the lessor and lessee should have a complete understanding of the lease and any adjustments made to it, so as circumstances change, everyone will be better positioned to adapt to sustain the lease if that’s the goal.

If you’re considering a new farmland lease or are looking to revisit an existing agreement, start the process by contacting a Farm Credit East business consultant.

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