Rent and Other Consideration
There are several factors to consider when determining the rent: market rental rates; the Landowner’s costs; the amount the tenant can afford to pay; and other costs or benefits the farmer or landowner add to the arrangement.
For a more thorough explanation, including alternative methods of payment, see the Determining Rent Fact Sheet (COMING SOON!) and resources in the Rent section of the Farm Leasing Tool (COMING SOON!)
Non-cash or in-kind consideration is an alternative to cash rent. Examples include a CSA share, cordwood, or property maintenance services (not otherwise required by the lease). Both parties should consult their respective advisors to understand the tax considerations associated with these kinds of arrangements. See In-Kind Rent Fact Sheet.
For a lease to be a legal contract, there must be some exchange of value. If there is “no rent” at all, the rights conferred are considered a gift, which renders the lease unenforceable, and subjects the relationship to different tax consequences. Therefore, an agreement in which the land user pays no rent is not a legal lease contract. Items, services, and even promises qualify as in-kind consideration. The value contributed by each party doesn’t need to be equal – it just needs to have some value. See the In-Kind Rent and the No “Free Rent” Fact Sheets.
A share lease (also referred to as crop-share or livestock-share) is an agreement in which the rent is a share of the crop or livestock produced on the leasehold, or more accurately, the value of the production. The landlord does not necessarily receive the actual product. A share lease may split production costs and profits 50/50 (or some other proportion). A share lease reduces risk to the tenant, while the landowner must be willing to take on a share of the expenses, risks and rewards of the operation.
Farm landlords who are not involved in the farm operation are subject to income tax on their rental income. Landowners who “materially participate” in the farming operation must include the rental income as earnings that are subject to self-employment tax. According to the 2014 IRS Farmer’s Tax Guide, the test of whether a landowner “materially participates” is if the arrangement with a tenant specifies the Landowner’s participation and s/he meets certain criteria demonstrating that participation.
Farm tenants can generally deduct rent paid on their Schedule F (the IRS form that itemizes farm income and expenses). However, if any part of that rent is considered payment toward a purchase of the farm (i.e., in a lease-to-own provision in the lease), that part might be considered a conditional sales contract, not rent, and is treated differently by the IRS.
There is no simple method or standard for determining farmland leasing rates. Cash rental rates for farmland depend on the local market, the quality of the rented parcel, and the landowner.
County-level statistics can be useful in getting a general read on what renters are paying for farmland. The USDA National Agricultural Statistics Service (NASS) compiles county-level statistics for per-acre cash rental rates for irrigated farmland, non-irrigated farmland, and pasture. NASS has maps of average lease rates by state. One can subscribe to the NASS Cash Rents Report by region (Northeast) and cash rents can be searched using the NASS Quick Stats tool. For the “Cash Rents” data in QuickSTATS, paste this into your browser: https://quickstats.nass.usda.gov/?sector_desc=ECONOMICS&commodity_desc=RENT&agg_level_desc=COUNTY
Searching “[state name] farmland lease rates” online will also yield resources, including PDF versions of the NASS reports for your state and any state extension resources.
In general, cropland rental rates are higher than hay and pasture land. New England cropland lease rates can range from $40 per acre/year to $300 per acre/year. If the soil is decent, and there is no infrastructure such as buildings, municipal water, fencing, etc. a reasonable cropland lease rate might be $75 per acre/year.
Landlords and farmers should not, however, base rental rates solely on benchmark data like NASS county-level data. These are only averages that can obscure big differences in land rental rates across a county. Actual farmland rents may diverge significantly from the available benchmarks for a variety of reasons specific to the parcel, area, and owner.
When determining rental rates, an understanding of the going rates in your area is critical. Landlords and farmers have several potential sources of information, including other landlords and producers, ag lenders, Farm Service Agency employees and ag real estate agents. Some state extension services have information on rental rates. The staff at your local Conservation District or USDA Farm Service Agency offices might have a pulse on local cropland leasing rates.
Landlords might consider basing their rental rates on land values. Others base lease rates on the landlord’s carrying costs, which would be different for town-owned farmland than privately owned farmland. Some farmers and landlords negotiate the rent based on a farmer’s business plan, which can show what the business can reasonably carry for land rent. Many farmers and landowners work out a payment that is flexible, such as one based on how well the farmer does financially that growing season, instead of a fixed amount of cash per acre.
Typically, landlords and renters begin thinking about rental rates for the next crop season soon after harvest.
Our Toolbox for Farm Leasing contains guides for landowners and farm tenants, as well as lease templates. See also UVM Extension’s Online Tools For Determining Farmland Rental Rates.
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If you have a story of a successful or unusual example of leasing farmland, we’d love to hear from you. Contact us!