FOR ASPIRING FARMERS
What each side gives up under a flexible farm lease
By Sam Marwood
Here's what each side gives up under a flexible lease. The tenant can pay for improvements and fail to recover them, and doesn't own the land unless an option to buy is negotiated separately. The owner carries part of the season and gives up day to day control.
For the tenant: the improvement trap
Every dollar you put into someone else's land, on fencing, pasture, water or sheds, transfers value to them. On a short lease you won't recover it. You improve the place, the lease ends, and you've paid to make someone else's asset more valuable, possibly more valuable than you can now afford to buy.
A pure lease gives the tenant little reason to spend on soil health or infrastructure, so over a long enough run of short tenancies, farms can quietly decline. The tenant is behaving rationally and the land still loses.
There are two answers to that. One is a lease long enough that you can recover the value of what you build. The other is a written agreement that pays you for improvements when you leave. Anything else and you've paid to improve land that isn't yours.
An option to buy is a separate bargain, and there isn't one unless you negotiate it. If owning is the goal, negotiate the option into the lease, or treat this as a way of farming rather than a way of buying.
For the tenant: you do not own the land
You can farm well for a decade and own nothing at the end but your plant and your reputation. It's also much harder to borrow against land you don't own, which limits what you can do at exactly the point you're ready to do more.
For the owner: part of the season
In a poor year the owner receives less than a fixed lease would have paid, and has to be able to absorb that.
For the owner: day to day control
The tenant makes the farming decisions. The owner can write conditions into the lease, and should, but can't direct the work.
For the owner: tenant risk
Under any lease the tenant carries production and price risk and the owner receives rent, which sounds like the safe end until the tenant can't pay. That's why an owner should look properly at a prospective tenant's financial position, and whether guarantees are needed.
It isn't distrust. It's the same diligence a bank would do.
What you can do about the improvement trap
The improvements clause is covered here: What has to be in a flexible farm lease?. A good question for your accountant is what you can depreciate or deduct on improvements to land you don't own.
Read more: Lease to buy a farm, or vendor finance: two ways to own one and What kills a flexible farm lease?.
This is general information, not legal or tax advice.
The full guide, You Can Own a Farm, is free at cultivatefarms.com/resources.
You can build your own plan at cultivatefarms.com/plan.