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Junior and Senior level Ag Bus. | |Colorado Agriscience Curriculum

|Section: |Advanced Agribusiness |

|Unit: |Ag Law |

|Lesson Title: |Legal Aspects—Leasing and Property Rights |

|Colorado Ag Education Standards| |

|and Competencies |AGB11/12.03 - The student will be able to formulate and analyze financial records and use the information for|

| |evaluation and planning. |

| | |

| |Understand property deeds. |

| | |

| |Describe the property rights of landowners. |

| | |

| |Understand leases. |

| | |

|Colorado Model Content |English Standard 1: Students read and understand a variety of materials. |

|Standard(s): | |

| |English Standard 4: Students apply thinking skills to their reading, writing, speaking, listening, and |

| |viewing |

| | |

| |English Standard 5: Students read to locate, select, and make use of relevant information from a variety of |

| |media, reference, and technological sources. |

|Student Learning Objectives: |Upon completion of this unit the student will be able to: |

| |Identify the types of farmland leases that are available. |

| |List the advantages and disadvantages of crop share leases. |

| |List the advantages and disadvantages of fixed cash leases. |

| |List the advantages and disadvantages of flexible cash leases |

|Time: |2 – 50 minute classes |

|Resource(s): |Agriculture and Business Management, Cooperative extension, CSU bulletins: |

| |Section 4 No. 4.7 |

| |Section 4 No. 4.8 |

| |Section 4 No. 4.6 |

| |Farm and Ranch Management, John Deere FBM10105NC |

|Instructions, Tools, Equipment,|Italicized words are instructions to the teacher, normal style text is suggested script. |

|and Supplies: |Notebooks |

| |Pens |

| |Projector |

| |Whiteboard |

| |Use lease agreement in pdf. File for an example |

|Interest Approach: |There are many ways that farmland may be leased for agricultural production. You may want to use some of the|

| |experiences of the community as examples of leases. |

| |You can also use the Production agreement to help understand the process of determining a lease. |

| |Today you are going to be a landlord and I am going to try to lease a greenhouse from you. I am handing each|

| |of you an agreement sheet to help with the development of the lease agreement. I am going to divide you into|

| |three groups of landlords and will see which one I would like to lease my greenhouse from. Count off in |

| |three’s starting in the front left. One, two, three, one,… When I say go the 1’s go to the back, two’s to the|

| |middle, three’s to the front. Go. |

| |Each of you have a agreement as a suggestion, take 10 minutes and develop an agreement to present to me for |

| |the lease of the greenhouse. Everyone now develop the agreement. |

| |After 10 minutes of discussion and walking around to help the groups. |

| |Group 1 please present the lease agreement you have developed. Thank you group 1. Group 2 –Please present |

| |your lease agreement. Thank you Group 2. Group 3 – Please present your lease agreement. Thank you group 3.|

| |As the groups give their specifics on their agreement put them on the board or on and overhead to compare. |

| |Which lease agreement would you rather have as a tenant? Why? Allow the students to discuss why they would|

| |rather have one or the other and what provisions they like or dislike. Where there major differences in |

| |them? What are some other leases you have heard about? |

|Objective 1: |Students will identify the types of farmland leases that are available. |

| |Now let’s create a list of rules for farmland leases! Who would like to volunteer? Thank you _________! |

| |Let’s generate a list of rules that your think should be part of every farm lease. |

| |[Slide 1 and 2] Lease agreements should be working document between the parties involved. Some basic |

| |guidelines of agricultural leases are: |

| |Should be equitable for each party |

| |Specific language and clear provisions in the lease are essential |

| |Leases can be bought or made by the individuals |

| |Leases should be made for a specific contract between parties and only cover the needed provisions of the |

| |lease |

| |Cooperation is the most important part |

| |[Slide 3] There are 3 main types of agriculture leases available in our area. They are: |

| |Crop share lease agreements |

| |Fixed-Cash lease agreements |

| |Flexible-Cash lease agreements |

|Objective 2: |[Slide 4] Crop share lease agreements |

| |A lease is basically an agreement which gives the use of an asset to a lessee for a specific period of time |

| |at a specified rate. |

| | |

| |A lease does not transfer title of ownership nor an equity interest in the asset. |

| | |

| |A Crop share lease agreement provides for a specified percentage of the crop to go to the landlord and |

| |tenant. The basic premise is that each party receive income from the crop in proportion to what each party |

| |contributes to production. |

| | |

| |In a typical crop share lease agreement, the landowner contributes land and improvements, associated property|

| |expenses, and a specified amount of the variable expenses. |

| | |

| |A tenant usually contributes labor and machinery, associated equipment expenses, and a specified amount of |

| |the variable expenses. |

| | |

| |[Slide 5] Advantages of crop share leases: |

| | |

| |Less operating money may be tied up by the tenant due to landowner sharing of the variable expenses. |

| |Management may be shared between and experiences landowner and tenant resulting in more financially rewarding|

| |and effective decisions. |

| |Crop sales and input purchases may be timed for improved tax management. |

| |Risk of low yield and prices are shared between two parties. Profits and higher yields are also shared. |

| |Landowner material participation may be more easily proved for use of government programs, estate planning, |

| |building social security bases, and income tax purposes. |

| | |

| |[Slide 6] Disadvantages of crop share leases: |

| | |

| |Landowner income will be variable because of yield and price variations as well as changes in costs of shared|

| |inputs to production |

| |Accounting for shared expenses must be maintained |

| |The landowner must make marketing decisions |

| |Landowner and tenant must discuss the cropping practices and other management decisions |

| |As prices change, the lease should be reviewed for fairness. Sharing agreements may also need changed. |

|Objective 3: |[Slide 7- 10] Fixed Cash Lease |

| |A fixed cash lease is rental agreement in which the landowner receives a predetermined cash fee from the |

| |tenant irrespective of crop yields or the product prices. The tenant produces crop on the land and makes |

| |management decisions as if the tenant owned the land. |

| |Advantages of Fixed Cash Leases: |

| |The landowner has less managerial input than with other lease agreements reducing the possibility of friction|

| |between landowner and tenant |

| |There is little conflict over the division of crop, expenses, and marketing |

| |The tenant has great freedom in crop production, marketing, and participation in government programs |

| |Cash rents will less likely to be considered a “participating landlord” when calculating social security |

| |payments. |

| |Disadvantages of Fixed Cash Leases: |

| |It may be difficult to determine a cash rent acceptable to both the landowner and the tenant |

| |Cash rents are likely to be too low in times of high yields and prices, and too low I times of low yields and|

| |prices. |

| |The tenant may tend to “mine” the land or not replace nutrients, therefore reducing the productivity over |

| |time. |

| |Cash rents become fixed costs for the tenant |

| |Four methods of developing a fair fixed cash rent- |

| |Cash rent market approach—you must know the cash rents being paid in an area and adjust according to the |

| |productivity of the land, use of the improvements, and other factors about the land |

| |Landowner’s Cost or Desired return approach—This method requires calculating the landowner’s ownership costs(|

| |depreciation, interest, repair, taxes, and insurance) or establish the desired return the landowner wishes to|

| |receive on investment. |

| |Landowner’s Adjusted Net Share Rent Approach—This approach presumes the cash lease should be related to share|

| |rents. Normally fixed cash rents would be lower than share leases because the landowner shifts the risk of |

| |price and weather over to the tenant. |

| |Tennant’s Ability to Pay Approach—This approach determines fixed cash rents on the tenant’s projected return |

| |over the cost of production, using anticipated yields and prices. Subtracting out all costs and figuring in |

| |a return for labor and management from gross income leaves an approximate maximum return the tenant could |

| |afford to pay. |

|Objective 4: |[Slide 11 – 13] Flexible Cash Lease Agreements: |

| |A flexible cash lease agreement is a rental arrangement in which the landowner receives a predetermined cash |

| |fee from the tenant that is adjusted for the change in yield and price. The tenant produces crops on the |

| |land and makes management decisions as if the land were owned by the tenant. |

| |Advantages of the flexible cash lease agreements: |

| |The landlord has opportunities to share in unexpected increases of crop yield or increase in price |

| |The tenant has less risk because of lower than expected yields or prices. |

| |Disadvantages of flexible cash lease agreements: |

| |Flexible cash leases increase risk for both landlord and tenant |

| |The tenant may give up some benefits of higher yields due to the tenant’s management input, thus reducing the|

| |incentive for the tenant to do the best possible job |

| |Flexible cash leases are much harder to calculate that fixed rate leases |

| |Flexible cash lease = Base rent x current years price |

| |Base price |

| |I need two volunteers. We are going to do a party host moment! Take these three students away from the |

| |other students. Have them choose what type of lease they would like to act out. |

| |Alright let’s see what _________ (Your student’s name) lease agreement is. Excellent Job! Give _____________|

| |a hand. Let’s try another! ____________ let’s see what your agreement is. Great Work! |

|Review/Summary: | |

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|Application--Extended Classroom|Compare cash lease agreements that would be common in your area with crop share lease agreements. There are |

|Activity: |advantages to both. At what point are each equitable. |

| |Develop a hybrid lease that could include provisions should disasters happen that might lessen the risk on |

| |both sides. |

|Application--FFA Activity: |The students might use property rights as an Ag Issues topic and develop the forum on property owner’s |

| |rights. |

| |A debate on the needs and wishes of property owners or landlords vs. the needs and wishes of the tenant. |

|Application--SAE Activity: |This is a good time to look at the production agreement of the students and see if the agreements they have |

| |are what they should be. |

| |Students with larger SAE’s may want to try to develop a lease agreement that would be suitable for their own |

| |operation. They can use the attached agreement as a guide. |

| |A pseudo farm could be used to calculate the differences in the types of leases using the provided |

| |worksheets. |

|Evaluation: | Leasing |

| | |

| |What are the 3 main types of leases available in leasing agricultural land? |

| |1 |

| |2 |

| |3 |

| | |

| |What are the 4 main things a tenant usually supplies in crop share leasing land? |

| |1. |

| |2. |

| |3. |

| |4. |

| |Who supplies the production management in a fixed cash lease? |

| | |

| | |

| |What is the suggested formula used in calculating the flexible cash lease? |

| | |

| | |

| |How is risk factored into each of the leases? |

|Evaluation Answer Key: |Crop share lease—fixed cash lease – flexible cash lease |

| |Labor, machinery, machinery repair, and variable production costs |

| |Tennant |

| |4. Flexible cash lease = Base rent x current years price |

| |Base price |

| |5. Crop share and flexible cash leases have a shared responsibility from the tenant and landowner, but the |

| |fixed cash lease has the tenant taking all the risk. |

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