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How do adjustable cash rent leases affect farm program payments?

Agriculture.com Staff 04/27/2007 @ 10:11am

In recent months, farm tenants have expressed interest in adjusting existing cash rent leases in an attempt to broker some of the risk associated with rising commodity prices and the stave off the possibility that the landlord will raise the cash rental rate.

But, there's a potential problem with fiddling with cash rent leases: How might any adjustment impact the way farm program payments are split between the tenant and the landlord?

Under FSA rules, if a lease is a cash lease, then the tenant is entitled to the government payments. For share leases, the payments must be split between the landlord and tenant in the same proportion as the crop is shared under the lease.

Thus, the question is: What effect a so-called flexible cash lease has on the allocation of the government payments between the landlord and the tenant? A flexible cash lease might technically be a "share" lease and require the government payments to be split between landlord and tenant. Under FSA regulations, a lease is a "cash lease" if it "provides for only a guaranteed sum certain cash payment, or a fixed quantity of the crop (for example, cash, pounds or bushels per acre)."

All other types of leases are share leases. The key point is that if the lease is a "cash lease," the tenant gets 100% of the farm program payments.

What FSA gets concerned about is whether adjustable cash rent provisions change the character of the lease from "cash" to "share." FSA could take the position that the lease is a share lease even though the lease is labeled a cash lease and the parties (including farm managers) think they have a cash lease.

So, the parties may think they have a cash lease with the tenant getting all of the farm program payments. But, if FSA views the arrangement as a share lease, the parties could be booted out of the farm program with payments already made required to be paid back. That's a terrible result.

But, there may be a way to deal with this problem. Because the FSA regulation defines a cash lease as including a lease for a fixed quantity of the crop, tenants can shift some risk of price fluctuations to the landlord and still qualify the lease as a cash lease so that all FSA payments go to the tenant.

Clearly, landlords and tenants must:

  1. Make sure that the lease comports with how they intend to divide the farm program payments, and
  2. Make sure the lease complies with the farm operating plan that has been filed with FSA.

On April 2, FSA issued Notice DCP-172 in which FSA discusses the impact of various lease agreements on farmers participating in the Direct and Counter-Cyclical Payment Program. The Notice provides examples various types of lease arrangements and whether those arrangements fit within the regulatory definition of a cash lease or a share lease.

The bottom line -- if any portion of the rental payment is based on gross revenue, it's a share lease. But, if a flex or variable lease pegs rental payments to a set amount of production based on future market value that is not associated with the farm's specific production, it's a cash lease.

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