Managing risk is required for agricultural enterprises to be profitable and sustainable. Leasing assets, rather than purchasing them, is a form of risk management as it typically requires less capital. Leasing arrangements between farm operators and property owners have long been used to acquire control of land. In recent years, leasing has become more common for machinery and livestock. Contractual arrangements can be crafted to lend or transfer capital, while also sharing risk. A lease agreement may be part of a plan to transfer assets to a second generation or simply an alternative form of borrowing capital. Leases can take many forms: cash, share, and flexible leases.
The terms of an equitable agreement depend on the contributions of the owner and operator as well as the motivation for the lease. Some principles for equitable leases using land with crops as an example include:
- Variable expenses that increase yields should be shared in the same percentage as the crop is shared. Inputs shared according to this principle are referred to as “equitably shared” inputs.
- Share arrangements should be adjusted to reflect the effect new technologies have on relative costs contributed by both parties.
- The landowner and operator should share total returns in the same proportion as they contribute resources.
- Operators should be compensated at the termination of the lease for the undepreciated balance of long-term investments they have made.
- Good, open, and honest communication should be maintained between the landowner and operator.
Developing written lease agreements is a good idea to ensure clear communication as well as provide references for legal purposes.
For a successful relationship between the asset owner and the asset operator or user, the following elements should be present:
- The owner and operator must be willing to risk some capital.
- The owner and operator should have mutual trust and confidence in each other.
- The operator must convince the owner that he or she has the managerial ability, honesty,and integrity to capably manage the livestock enterprise.
- The operator must be confident that the owner will deal fairly and honor the contract arrangementsfor shared returns.
- The owner should compare the return on investment in assets with alternative investments to make an informed decision relative to business and personal goals.
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All information collected from the Oklahoma State University Agricultural Economics Extension.