Flexible Cash Rent Lease Pitfalls

Beware of Flexible Cash Rent Lease Pitfalls
Robert Moore
Wright Law Co.
 
Many farm tenants and landlords have begun to use flexible cash rent leases as a means of sharing the windfall of high grain prices.  The flexible cash lease sets a base rental price with an adjustment based on crop prices, yields, or some other factor.  While this type of lease allows the tenant and landlord to share the benefits of high prices and risks of low prices, it has significant implications with FSA programs.
 
In Ohio, most farm leases are either cash rent or crop share.  In a cash rent situation, the tenant receives all direct and counter-cyclical payments while in a crop share arrangement the tenant and landlord split the program payments proportionally.  The issue becomes, does FSA consider a flexible cash lease a cash lease or a crop share lease?  Because the landlord shares in the risk of the lease, FSA considers a flexible cash lease to be a crop share lease.  Therefore, the landlord must receive his/her portion of program payments.
 
Two issues arise when the landlord changes from a cash rent landlord to a crop share landlord.  First, the landlord will be required to file all program eligibility forms which include names, social security numbers, and addresses of any and all owners of the land or entity owning the land.  The filings will be an additional burden on the landlord in both time and effort as well as causing more private information to be revealed to FSA than the landlord is accustomed to.   Second, the landlord’s rent and program payments may be subject to self-employment tax depending on the landlord’s level of participation in the operation.
 
Another reason a flexible cash lease is not suitable to FSA regulation is the timing of the payments.  The tenant must file a Form 502 with FSA in the early part of the year stating any land that will be rented and the rent paid for that land.  However, in a flexible cash lease arrangement, the final rent amount is not known until after harvest when the adjustment is made to the base rent.  Therefore, it is likely that the rent amount on Form 502 will not match the adjusted rent that was actually paid for the year.  Such a discrepancy is a violation of FSA regulations.
 
The timing of the payments is also an issue with “tipping” landlords.  If a tenant tips the landlord an additional amount at the end of the year, the actual rent paid will not be the same as the rent on Form 502.
 
A possible solution to the flexible cash lease dilemma is to incorporate the concept of flexible cash leases into year to year cash leases.  For example, a cash rent lease is entered into for the 2007 crop year at $100/acre.  The landlord will receive and the tenant will pay $100/acre, no more and no less.  The landlord and tenant, sometime after the 2007 harvest, can negotiate a new rental rate for 2008.  If prices and yields were high in 2007, perhaps the tenant will be able to pay a higher rent to the landlord.  The higher 2008 rental rate is not a bonus for the 2007 year but instead a reflection of a stronger financial position of crop farmers and more competition for farm ground for the 2008 crop year.
 
Regardless of whether a producer is in a cash rent, crop share, or flexible cash rent arrangement, he/she should be sure that all required FSA forms have been properly competed and filed. Errors on the FSA forms or violations of FSA regulations can cause the producer to be ineligible for program payments and repayment of past payments.  Producers should seek assistance from their local FSA office, attorney, or other knowledgeable advisor.  It may be a good idea to provide a copy of the lease to FSA so that they are fully aware of the arrangement and can advise the producer of any problems or concerns. 
 
 
Robert Moore
Attorney
Wright Law Co. LPA
4266 Tuller Road, Suite 101
Dublin, Ohio 43017
614-791-9112
614-791-9116 (fax)

Donald J. Breece Ph.D.
Associate Professor/Department of Extension
Farm Management Specialist
OSU Extension Center at Lima
Suite 202
1219 West Main Cross St. (St. Rt. 12)
Findlay, OH  45840-0702
Phone:  419-422-6106
Cell:      419-306-9403  (Most direct)
Fax:      419-422-7595
E-mail:  breece.2@osu.edu