So much is said about land distribution at death, but what about rental agreements?
The Problem (submitted by S.J.)
For years, I rented land from my parents and other neighbors. When my parents passed away, it became a challenge to rent from several of my siblings. Now, as my neighbors have passed away, renting from some of their heirs has become a challenge as well. How can I make sure my son doesn’t have to go through what I’ve had to?
Negotiating rents can bring tension. You can’t solve all your neighbors’ problems, but you can solve your own potential family problems for your son.
The first step is to determine how the rent rate will be established.
- A mutual agreement is OK only if you can get people to agree.
- A set price may need adjustments as times change.
- A percentage of the county or state average may work yet may be questioned due to limited survey respondents.
- A percent return on the land may be risky both ways with swings in land values.
- A flex-rent lease, which includes a base plus a bonus sounds good, but landlords don’t always like to see where the base rate should actually start. Sometimes landlords want top dollar to be the base and then a bonus on top of that.
- A crop-share lease, which some people think is very fair, is something that few landlords actually like to participate in because of the risk.
The good news is you get to decide which of these methods is best for your situation.
The second step is knowing where these rental agreements need to be included.
- For families, they should be included in power-of-attorney documents. If you’re incapacitated, the parameters are outlined to avoid trouble before you pass away.
- If you have a revocable trust, the agreements should be included in the trust because the land is likely in the trust.
- It you have a will, it should be included in the testamentary trust so at first death, if a trust is created, the agreements are already in place.
- Agreements should be in entities like a corporation or LLC.
- Rental guidelines can be attached to deeds or life estates.
If there is a third party, there should definitely be a separate agreement in place. It is surprising how many times rental agreements are not in place between long-term landlords and tenants. That is not a problem until eventually there is a problem like you mentioned.
A few other rental details should also be included or considered:
- How long is the term of the lease? It could be as short as one year or it could be many years, depending on the state you live in. For example, in Iowa the maximum lease is 20 years.
- The lease could extend until a certain age of the tenant, such as age 70.
- The lease could include a contingent tenant, such as the current tenant’s heirs. This can be significant, in some cases.
Often I hear landlords, whether they are siblings or a third party, say, “It’s not all about the money. We want someone who will take care of our ground, mow the ditches, improve fertility, reduce compaction, plant cover crops, and give us maps.” They will even repeat, “It’s not about the money.” Then shortly after the conversation begins, they mention they have had several offers for more than you are paying. At that moment you wish you had agreements outlining how rents will be calculated. Without guidelines, it’s not just about the money, it’s ALL about the money – and most people like more of it.
Myron Friesen is co-owner of Farm Financial Strategies in Osage, Iowa. During the past 19 years, he has worked exclusively with farm families across the Midwest to develop farm transition strategies. Friesen grew up on a Mountain Lake, Minnesota, farm. He owns and operates a 910-acre crop and livestock farm with his wife and four children. farmestate.com