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Variable Cash Rent Arrangements: Types and Evaluation

Gary Schnitkey

Summary

After attending this session, participants will understand how to design a variable cash rent arrangement for leasing farmland. Participants also will understand how variable cash rent arrangements compare to share rent and cash rent arrangements.

Variable cash rent arrangements vary cash rent based on some formula. Likely due to recent increases in price variability, variable cash rent arrangements have increased in use in the Midwest. In Illinois, for example, most professional farm managers now use some form of a variable cash lease.

During this session, common forms of cash rent arrangements first will be described. Results from a survey of Illinois professional farm managers will be presented detailing common variable lease arrangements. Focus will be given to arrangements basing cash rent on a percent of gross revenue, as these are the most prominent variable lease type. Methods of specifying prices and yields for determining revenue will be described and forms will be passed out that aid in revenue definition and calculation. The goal of presenting this material will be to aid participants in designing a cash rent arrangement.

Second, a FAST Microsoft Excel spreadsheet will be presented that evaluates the risks and returns of a variable cash rent arrangements. This spreadsheet compares the risks and returns of variable cash rent arrangements to share rent and cash rent arrangements. In so doing, individuals will be able to see how the risks and returns of variable cash rental arrangements compare to other, commonly used leases.

Details

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