When entering a lease relationship, you have to ask yourself three things
How long do we intend to engage in this relationship? What could cause the relationship to end? Can we extend the relationship if all goes well?
This chapter will help you figure out how to address these questions.
Lease Term from the Perspective of the Farmer
First, we will consider how long we intend to engage in the landowner and farmer relationship. This is known as the lease "term."
The first step in this inquiry should be a self-inquiry on the part of the farmer. What length of lease will best benefit the farmer? Then, we will turn to the other factors that will impact the length of the lease.
Check which of the following factors apply to your situation. What are your planned immediate improvements? List the improvements you intend to invest in during your first few years, and the estimated cost of each. This could be any improvement, including a packing-shed, perennial crops, or other non-movable infrastructure that is necessary to sustain your operation. Estimate how many years it will take to earn back the money spent on these improvements based on your business plan. 0-3 years 3.1-5 years 5.1-7 years 7.1-10 years 10-15 years More than 15 years
Based on the plans laid out above, you can start to estimate the range of lease terms that will work for you based on the investments you need to make on your leased property. The estimated amount of time it will take you to earn back the money you spent on these improvements is the estimated amount of years it will take for you to break even on your investments. This should be the the shortest lease length you accept so that you aren't losing money on your investments.
However, let's aim higher. How long would the lease need to be for you to profit off of your planned investments to the degree you intend? This lease term can be the higher end of the lease term for which you search and negotiate. This exercise is intended to help you articulate the range of lease terms that would work best for you. Of course, you still have to negotiate with the landowner and contend with the other forces we describe in this section.
State Laws Limiting Lease Terms
Now we've articulated the farmer's goal for the lease term based on planned improvements and the business plan, but of course that isn't the end of the story. Some states limit the terms available on agricultural leases! See the figure below for some representative examples and how these limits impact a farmer's investment risk.
You may want to only consider leasing land in states that allow leases longer than a certain length. A fair amount of risk accrues if the lease term is limited by law. Even if you trust your landowner to renew your lease, if the land changes hands for any reason–death, or if the landowner is forced to sell because of economic pressure–the new landowner will have no responsibility to renew the lease at the end of the lease term.
Some of these limits are for agricultural leases only. If that is the case for your state, consider if your use of the land might fall outside the definition of agriculture in your state (processing or timber, for example). If you think it might, talk to an attorney if your use will allow you a longer lease term.
Landowner Preferences for Lease Term
If your lease term is limited by state law or by your landowner’s desires to a shorter-than-you-wanted lease term, you will want to pay particular attention to the renewal process. As the tenant you will likely want a clause offering an optional renewal for a second identical term in order to extend the lease. You can be creative here and ask the landowner to structure the renewal in a way that would make you feel secure in signing the lease.
On the other hand, you might want to make less of a commitment than these lease terms allow. Even if signing a too-long lease is what feels risky to you, pay attention to renewal clauses in the the lease so that you can continue if that is where your business heads.
Issues to Resolve for a Smooth Termination
The lease will come to an end at some point, whether early or at the natural end of the specified term, if the lease isn’t renewed. There are many things to consider to help with a smooth transition off the leased land. See below for things you’ll want to contemplate at the beginning in order to create a harmonious ending to this agreement!
What issues around the renewal process or termination still need to be resolved? Make a note of questions that arose for you as you worked through this material so that you can take them to the negotiating table when that time comes!
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