Alabama A&M University
S M A L L FA R M S R E S E A R C H C E N T E R
FA C T S H E E T
COLLEGE OF
AGRICULTURAL, LIFE
AND NATURAL SCIENCES
United States Department of Agriculture
Office of Advocacy and Outreach (OAO)
RISK REDUCTION LAND LEASES
There are several reasons why some consider leasing their land as a form of supplemental
income. Some may become ill, retired, absent, no longer farming, cannot afford to use the
total amount of land, or non-farmers who brought or inherited the land. If this is your situation, you may want to evaluate how leasing such land can help enhance your financial goals.
If you own land, whether it is for farming or recreational, or you’re not capable of managing
the land yourself, you have at least three options to explore. These options have unique implications when it comes to tax income and estate consequences. You have the option of
custom farming, transferring land ownership to another owner, leasing the land to another
farmer or to someone who wishes to utilize it for recreational activities.
A lease is a legal document specifying an agreement between an owner and a tenant granting occupation, or use of property during a certain period of time in exchange for rent. Two
most common forms of leases are cash, or share. For example, a cash lease would require
the tenant to pay a certain amount of money every month, six months, or once a year. On
the contrary, a share lease may require the tenant to give the owner a certain amount of total
production, or of commodity raised, or hunted on the property. If you enter into a livestock
or crop share arrangement, you may want to address marketing and storage questions in the
lease, as well. This is why it is a good idea to negotiate how the property will be managed,
how expenses will be shared, and how rent will be paid prior to entering into a lease agreement. This is for your protection in case the lease is breached. You will have documentation
in black and white which will help you in court to resolve this legal issue or conflict.
According to Alan Schroeder, choosing between a cash or share lease depends on the party’s goals and preferences toward risk. Fixed cash leases normally involves less (price and
yield) risk and management and marketing responsibilities for landlords, but do not permit
them to take advantage of any price or yield increases that occur.
On the other hand, share arrangements allow or require more landlord involvement in management and marketing. This may be a plus or minus, depending upon the party’s goals and
ability to work together. Share arrangements also permit landlords to plan crop and livestock sales to lower their income tax liability. Payments received under share arrangements
are typically subject to self employment taxes.
If you are going to lease your land for livestock use, cropping use, or non-agricultural use
such as recreation and wind energy development, it needs to be made clear in the lease
Small Farms Research
Center
Alabama A&M University
4900 Meridian Street
James I. Dawson Building
RM #219
P.O. Box 700
Normal, AL 35762
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
agreement. The key is to be specific and avoid verbal leases because over time memories fade.
Verbal leases will not help much in case a legal issue arises from a breach of lease contract.
The court will not enforce a lease that is for a year or more and not in writing.
Prior to entering a verbal or written lease, make sure to include a legal description of the property which will avoid a misunderstanding the locations and boundaries. In the event of writ-
ing an agricultural lease, make sure it involves all the property to be leased. It should specify the land location, buildings, equipment, water rights, grazing permit rights, and includes
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any type of government programs the property is committed to and you don’t want violated.
Points to Remember:
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Make sure the correct name and address of the tenant are listed.
Make sure the description of the property is accurate.
Specify the starting date the lease goes into effect and the date it expires.
Have an understanding for the amount of rent expected to be paid monthly, quarterly or annually.
Specify whether the rent is to be paid in cash, check or money order.
Secure signatures of all parties involved.
This article is an excerpt from Debra Elias, Minnesota Institute for Sustainable Agriculture “Basic Considerations for Leasing Post-CRP Land; and Alan Shroeder, Associate Professor-Natural Resources Law Specialist in the Department of Agricultural and Applied Economics at the University of Wyoming “Managing
Risk In and Through Agricultural Land Leases.”
Small Farms Research Center, Alabama A&M University
4900 Meridian Street
James I. Dawson Building, Room 219
Normal, AL
35762
Small Farms Research Center Background. The Small Farms Research
Center was developed to assist small farmers with limited resources in Alabama’s underserved communities. The center was first developed in 2000 to
assist minorities, especially women, African Americans and underserved individuals improve their farm management practices, given ones condition and
resources. The mission of the Center and the Small Farmers Outreach program
is to assist all small and limited resources farms effectively deal with risk management and food safety issues and provide them with informational sessions.
The Center has also expanded its outreach efforts to meet the needs of entrepreneurs and businessman. The center is located at Alabama A&M University
in the Dawson Building. The center specializes in following areas
Marketing and Business Plans
-Record keeping and Loan Application
-Identify alternative enterprises
-Personal Management
-Legal Issues
-Finances
-International Business and Procurement
-Accounting Issues
-Taxes
-Business Development
-Conducting seminars on Government programs and other issues
For more information about us give us a call at (256) 372-4970 and 1-866858-4970.
Website: www.aamu.edu/smallfarmers
Cooperating Units: USDA Office of Advocacy and Outreach (OAO), USDA/NIFA/ Beginning Farmers and Ranchers
Development Program (BFRDP), USDA/OAO/Outreach Assistance for Socially Disadvantaged Farmers and
Ranchers (OASDFR) Program, Alabama Cooperative Extension Systems, and Alabama A&M University.
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