Base Rent plus Bonus. Corn: Base rent $ + (actual gross revenue – base revenue $ ) x % Soybeans: Base rent $ + (actual gross revenue – base revenue $ ) x % Other crop: Base rent $ + (actual gross revenue – base revenue $ ) x %
Base Rent plus Bonus. A minimum base rent is specified, plus the owner receives a share of the gross income in excess of a certain base value. This base value may the tenant’s costs of production. The bonus share may vary from one-third to one-half of the amount over the base income. Both parties must agree on how to calculate gross income, Sharing Risk Owners and tenants should carefully consider the type and degree of risk they want to as- sume. Taking on risk means greater losses when prices or yields are low, but can result in larger profits in other years. Some tenants are more willing to assume yield risk than price risk, so they can reap more benefits from superior management. However, if climate or soil type are such that a significant chance of a poor yield exists, some other means of reducing risk, such as purchasing crop insurance, should be consid- ered if the lease does not adjust for yield vari- ability. Leases that base the rent on price only or yield only may actually increase the tenant’s risk in some years. This is because prices may be high when yields are low, or prices may be low when yields are high. Thus, adjusting the rent based on only one factor, as in examples 2 and 3, does not always reflect the actual profits received in that year. Adjusting the rent for changes in both price and yield ensures that the actual rent will be closely tied to the tenant’s net income.
Base Rent plus Bonus. A minimum base rent is specified, plus the owner receives a share of the gross income in excess of a certain base value. This base value may approximate the tenant’s costs of production. The bonus may vary from one-third to one-half of the amount over the base income. Both parties must agree on how to calculate gross income, whether other payments are included in the profit calculation, and whether a loss will cause the actual rent to be less than the base rent value. Example 2 •Base rent is $75. Bonus is one-half the gross income in excess of the cost of seed, fertilizer, pesticides, labor and machinery. *Actual yield is 52 bushels of soybeans per acre and actual price is $5.50 per bushel. *Seed, fertilizer and chemical costs are $105 per acre. Labor and machinery costs are estimated at $65 per acre, using custom rates as a guide, so total costs are $170. *Profit is equal to (52 bu. x $5.50) = $286, minus costs of $170 = $116 *Rent is equal to $75 plus one-half of $116, or $133.
