Many non-operating landowners (NOLs), well endowed with capital in the form of money, land and farm infrastructure, desire to partner with farmers to support a thriving farm operation on their land. If the primary barriers to successful farm business establishment for a new farmer are access to land and capital, it can be worthwhile to explore all options. One way for farmers to potentially fulfill their needs is to partner with NOLs who can provide capital. There are many ways in which farmers can acquire both land and capital from individuals, and the share lease is one.
The share lease is a land lease agreement that also specifies that the farmer-tenant and landowner will share the costs of producing goods and services. The agreement provides for a revenue sharing mechanism. Usually the proportion of revenue shared is equal to the proportion of costs shared. Many share leases, whether they are crop share or livestock share agreements, use the 50-50 approach, where 50% of the costs of production are absorbed by the landowner, and 50% of the costs are absorbed by the farmer. Fifty percent of gross revenues would then go to the landowner (for the farmer, this is the “share lease fee”) and fifty percent of gross revenues would go to the farmer-tenant.
The “50-50” is an example of one approach to determining the share of costs and revenues. In the 50-50 example, the desired share is set and both landowner and farmer detail who will cover what cost to achieve the desired share. The desired share can actually be set at any proportion, for example 25-75, 40-60, etc.
In another approach, the landowner and farmer do not initially set a desired share, but instead place a value on all contributions that are practical, based on available resources. For example, if after determining that the farmer’s contribution of available machinery, labor and other capital amounts to 62.5% of the total costs of the operation, and the landowner’s contribution amounted to the other 37.5%, then the agreement would incorporate these figures as the proportion of crop or revenue that would be shared. For any approach to determining the share of costs and revenues, an underlying principle of share leases is that the proportion of revenue gained is the same as the proportion of costs contributed.
One advantage of share leases is that they are relatively simple. New business entities do not need to be formed in order for the landowner to act as “investor” or “capital provider” and share in the farm business revenues. Other forms of farm partnerships, such as General or Limited Partnerships (with a capital “P”!) are more complex legal entities, and require more thorough planning and oversight. Share leases require much less time and energy to arrange. Attorneys are generally very familiar with a simple straight cash farm lease agreement, and the share lease is only a variation. The share lease may seem like a form of capital partnership between landowner and farmer, but it is typically not a legal partnership. As in a straight cash lease, there is typically a “No Partnership Intended” provision in the general terms of a share lease.
The primary disadvantage for a farmer using the share lease versus a straight cash lease with a fixed payback term is that, in a good year, the farmer might forego a substantial amount of money as revenues to the landowner. Another disadvantage of a share lease is there can be a substantial amount of time involved communicating with the landowner about management plans and options, and a lot of accounting involved to determine accurate values for costs contributed.
Share leases are much easier to craft when the farm business model is based on relatively few crops or livestock enterprises where the costs of production are relatively well known. Share leases are not as practical to use when the farm business model is complex, and it is challenging to accurately estimate the value of inputs, such as labor and management costs, that will be contributed. One option in this case is for the farmer and landowner to enter into a straight cash arrangement for a specified area of land, buildings, and/or pasture, while using the share lease mechanism for land that hosts more simple or predictable enterprises.
There are significant tax implications for pursuing a share lease, depending on whether or not the landowner meets the IRS criteria for “material participation” in the farm enterprise, and recognizes the income as self-employment income. Consult with a qualified accountant before signing any share lease agreement to discuss tax consequences.
Listed below are resources from Cooperative Extension Agencies across the country that cover considerations and options for landowners and farmers in crafting equitable crop share lease arrangements. One of the most difficult aspects of creating a share lease is being able to place a reasonable dollar value on all types of capital or costs contributed, such as land, labor or machinery. The resources contain worksheets and go into detail about how to value costs contributed. They also contain sample share lease agreements, which can be used as examples of the provisions common to these types of agreements.
Resources for Crafting a Share Lease Agreement:
“Developing Share Lease Agreements for Farmland.” Oklahoma Cooperative Extension Service. This workbook goes through detailed considerations in pursuing a share lease, and includes worksheets for determining costs and revenue sharing.
A Sharemilking agreement is specific to dairying, and is a share lease that is focused on sharing dairy infrastructure and building equity for the tenant farmer through partial ownership of the herd or other assets. The University of Missouri Pasture-based Dairy Program has comprehensive resources on share-milking agreements for livestock operations. They are available online at: http://agebb.missouri.edu/dairy/grazing/sharemilking/ . Accessed online 2/15/2012.
“Crop Share Rental Arrangements for Your Farm.” North Central Farm Management Extension Committee. This publication covers advantages and disadvantages of crop share arrangements, guiding principles used for developing equitable arrangements, and different approaches used for developing a functional arrangement. Available online at: http://www.aglease101.org/DocLib/docs/NCFMEC-02.pdf . Accessed online 2/15/2012.