Options exist for siblings split on selling farmland
I own land with my three siblings. Two of them want to sell now at these high land prices and two of us don’t. What do you think? What are our options? I’m a 50-year-old farmer who farms the 200 acres of ground on cash rent. They agree I’m paying the trust a fair cash rental rate — the going rate in this county for the quality of land we have. My three siblings live in town, and they don’t farm.
Duffy: With respect to land prices, I don’t think we are on a “speculative bubble,” but I do think there will likely be a correction in values to more accurately reflect $4.50 corn, as opposed to $7. Personally I think this will be more gradual than sudden. There are many options, but these are limited by the conditions of the trust. One option is for you to buy out your siblings. It might be possible to do this on an extended basis so that you won’t have to have all the money at once.
The first thing you need to do is be sure you and your siblings are communicating and keeping up your relations. The second thing to do is determine the provisions in the trust and what is or isn’t possible. Finally, you need to have a plan to present to all the siblings assuming the two still want to sell. It might be possible for you and the one sibling to buy out the other two. You are not in a unique situation. Check out all the possibilities.
Stout: Without any details, I assume this farmland has been inherited from your parents or grandparents. This is a good example why good estate planning is so important for farm families. There is a lot of help available now, but that doesn’t help you at present.
If you are unable to buy the 200 acres yourself, have you and the sibling who also doesn’t want to sell considered or discussed the possibility of buying the others out? I would recommend dividing the land so that you each buy 100 acres rather than having an undivided interest with another person. I know nothing of your financial situation, but you can lock in relatively low interest rates for a 20-year loan. If you can possibly swing the deal, you should probably try to work it out rather than have unhappy family members.
The rapid increase in land prices is a cause of friction in many families. Farm heirs need the land in their farm operations. Off-farm heirs see the opportunity to enhance their financial circumstances or retirement. One option would be for all of you to sell the land and take advantage of the current strong market. A second option would be for you and your sibling to buy out the other two siblings. A third option would be to find a buyer to invest in the land the siblings want to sell with the understanding that the investor would accept the fair market rent you are paying.
Flexible cash vs. crop share lease
With grain prices so volatile, is now a good time to consider shifting from straight cash rent to a flexible cash lease? I would like to go back to a 50-50 crop share, but my landlords aren’t interested in doing so. I believe a 50-50 crop share lease would be the most equitable for both landlord and tenant. A flexible lease seems complicated; a 50-50 crop share lease is straight-forward.
Edwards: Many landowners do not want to be involved in a crop share lease because they do not want to have to market the grain, pay for the inputs, and make decisions about crop insurance and USDA programs. You could offer to do these tasks for them, as an incentive. You could also mention the state income tax credit that landowners get for providing a crop share lease to a beginning farmer, if you qualify.
The tax credit is 15% of the owner’s share of the income. Alternatively, you could develop a couple of flexible lease plans and work out some examples. Your landlords may realize that flexible leases aren’t really that complex, after all, and with a flex lease you offer some significant bonuses to them when prices are high.
Stout: Most landlords prefer the simplicity and guarantee of a straight cash rent lease, so the burden may fall on you to come up with a flexible cash lease that will appeal to all parties. There usually is a base rate that may be paid during the crop year, and then after the crop is harvested, you can calculate the flexible portion based on yield, prices and possibly other factors. I would use the yield you report to your crop insurance agent, and the price could be picked on a stated local elevator price averaged during a predetermined period of time, say, for example, October.
Make sure all of the variable factors are stated upfront in the lease. I have heard of some flexible cash leases where the landowner receives 30% of gross income calculated as 30% of actual yield times a price calculated by a predetermined formula. This way, both share in the volatility of yield and price, the two main factors that you don’t have complete control over.
Gassett: A 50-50 crop share lease is fair for both parties and straight-forward for the tenant. However, most landlords do not want the responsibility of the bookkeeping, tax reporting and marketing required to carryout a 50-50 crop share lease. Some landlords are more likely to agree to a flexible cash lease with a base rent and a cash bonus tied to transparent formula that includes both price and production with the resulting cash rent being comparable to a 50-50 crop share lease.
This article published in the March, 2013 edition of WALLACES FARMER.
All rights reserved. Copyright Farm Progress Cos. 2013.