A: An agricultural lease is a private contract that grants someone (i.e., the farmer- tenant) a legal right to occupy and use the land of someone else (i.e., the landlord/ landowner) for agricultural purposes. Usually leases involve an exclusive right— which means that the landlord agrees to give the tenant exclusive or primary possession to occupy and use the property identified in the lease. The property could be a whole parcel of land or a designated part of it. From a legal perspective, the lease grants the tenant what’s called a “leasehold interest” in the land. One way of thinking about this is that the lease is attached to the land itself, not the landowner or person. It’s as if the land has signed the lease. Therefore, leases are generally binding on future landowners. In effect, if the landowner were to die or sell the property, the lease continues on—unless the parties otherwise agree.

A lease is also transferrable. This means that the tenant can transfer it to someone else. For example, if the farmer-tenant were to die, the lease would generally transfer to the farmer’s heirs. This also means that if the farmer were to fall ill or simply get sick of farming, the farmer could generally transfer or assign the lease to someone else. Also, leases generally cannot be revoked. Basically, the landowner can’t suddenly change her mind and revoke the tenant’s leasehold interest or legal right to occupy and use the land after the lease agreement has been signed. Such a change of heart would typically come with implications, such as compensating the tenant for hardship or costs incurred from the broken promise.

These elements—exclusive right to occupy and use the land, binding on future landowners, transferability, and irrevocability—are the key default elements of a lease. However, a lease agreement could for the most part specify otherwise. That’s because the lease itself is a contract between the parties and the parties are free to negotiate different terms. For example, the lease could reserve some uses or permissions for the landowner under certain conditions, so long as the tenant’s uses are primary. The lease agreement could also limit the binding effect and transferability of the lease by providing that the lease terminates upon the death of one or both of the parties. It could also restrict the tenant from transferring or assigning his leasehold interest to someone else, or at least requiring the landowner’s written permission first. The lease may also allow the landowner to revoke the lease under certain circumstances.

If alternative terms are not explicitly discussed in the lease, the default rules as outlined above will generally apply. With that said, each state has its own laws specifying default rules and restrictions for lease agreements. These rules vary to a degree from state to state. It’s best to consult with an attorney experienced in leases in your state to be sure the lease terms you negotiate are permitted and appropriate.

Comparing the lease to an easement and a license: Which is the best option?

One way to help better understand a lease, and to know if it’s the best option for you, is to compare it to other somewhat similar options—the easement and the license. The following chart provides a quick overview of the distinctions between these three temporary yet potentially long- term land tenure options. The following two Q&A sections provide further explanations highlighting the significance of these distinctions.

A: An easement is a legal right to use someone else’s land for a particular purpose.
Easements are generally granted by a landowner to an individual or entity who is referred to as the easement “holder.” One key difference between leases and easements is that a lease grants the tenant a right to occupy and use land, whereas an easement simply grants the holder a right to use the land. This aspect of easements is described in legal lingo as a non-possessory and nonexclusive interest. This means that while the easement holder, in this case the farmer, has rights to use the land for one or several particular purposes, he does not have a right to fully possess or occupy the property. In addition, the landowner typically retains rights to use the property, so it’s not exclusive to the holder or the farmer. Depending on the use, the landowner could grant the same or similar easement to multiple folks.

A simple example of an easement is a right-of-way going through a property. An easement may grant the holder specific rights to use the road, but the holder can’t block or take control over it in any way. And, the landowner will likely retain rights to use the road as well. She could also grant a similar easement to others so that multiple people could have rights to use the road.

In a similar fashion, an easement could be granted to one or more farmers to use a portion of a property. In particular, an arrangement involving easements could work well in an agroforestry venture where multiple farmers are involved in various activities or uses, such as cultivating perennials, raising livestock, and so on.

Easement appurtenant vs. easement in gross

Without getting into too much detail, there are several types of easements that may come into play for farmers and landowners wanting to collaborate on an agroforestry venture. These include “easement appurtenant” and “easement in gross.” A key difference is that appurtenant easements generally attach to the land. Again, this means that like leases they are generally binding on future landowners. Subsequent owners—whether purchasers of the property or heirs—are obligated to let whoever holds the easement appurtenant use the property as originally specified. Also, like a lease, an easement appurtenant is generally transferable. This means the holder, in this case the farmer, can transfer the easement appurtenant rights to someone else—whether upon his death or during his lifetime. In addition, like a lease, an easement appurtenant is generally irrevocable. For the most part, the landowner can’t back out once it’s granted.

Easements in gross, on the other hand, are treated as more of a right of personal enjoyment. Examples include recreational rights such as hunting, camping, and fishing. They could also include certain agricultural uses. Because easements in gross are granted more for “personal” enjoyment, they are generally not considered to be attached to the land. As such, easements in gross are not binding on future landowners and are typically non-transferable by the holder, in this case the farmer, upon his death or otherwise. In addition, generally easements in gross can be revoked by the landowner when the property is sold or upon her death.

This is a very cursory discussion of easements for purposes of comparing them to leases in the agroforestry context. Entire law school courses are taught on easements! Keep in mind too that the agreements and documentation that coincide with easements are contracts and can generally be tailored to the preferences of the parties. However, as for leases, state laws on easements vary and may have limitations on what the parties can agree to. If you’re considering an easement, it’s best to first consult with an attorney familiar with property law in your state.

A: A license is the landowner’s permission to use the land for a specific purpose. Unlike a lease or easement appurtenant, it does not attach to the land and is therefore not binding on future landowners. It is basically a personal agreement between the landowner—the licensor—and the individual or entity who is using the land—the licensee. A license can be either exclusive or non-exclusive. So it could grant the licensee sole use of the property, or it could designate a specific use or uses. A license is also typically non-transferable. In this case, a license generally can’t be transferred by either party to someone else—whether upon death, when the property is sold, or otherwise. That’s because a license is considered a personal agreement between the parties.

Licenses are quite similar to easements in gross. A key difference is that licenses are often easily revocable. Therefore, the licensee, or person using the land, has no real guarantee in the long-term nature of the arrangement. Licenses are often used in the context of oil, gas, timber, and mining. They can also be applied for various agricultural uses and could be a useful tool for certain agroforestry arrangements that don’t require a longer-term commitment.

Agricultural lease, easement, or license: How do you know which is right for you?

The decision of which of these mechanisms is best often comes down to what’s common in similar contexts as well as personal preferences, comfort level, and intentions. The following questions can help farmers and landowners determine what’s best for their situation.

Reflection for landowners

Are you okay with allowing the farmer exclusive or primary rights to occupy and use the land (in its entirety or a specific part), perhaps with certain conditions or uses reserved to you? If so, a lease may be a good option. If not, an easement or a license may be a better option.

Is it okay that the farmer can transfer his interest in the property at some point during the lease or upon his death? If so, a lease or easement appurtenant may be a good option for you. If not, you still have the option to restrict or limit the farmer’s right to transfer the leasehold interest or easement through the agreement (e.g., require written permission first or prohibit it all together). If this still doesn’t feel right, a license may be a better option.

Is it okay that future owners, including your heirs, will be obligated to follow through with the agreement you reach with the farmer? If so, a lease or an easement appurtenant may be a good option for you. If not, you still have the option to restrict or limit the binding effect of the lease or easement in the agreement. If this doesn’t feel right an easement in gross or a license may be a better option.

Reflection for farmers

Is it important or necessary that you have exclusive or primary rights to the property, or very limited rights reserved to the landowner? If so, a lease may be a good option for you.

Are you wanting the ability to transfer your interest in the property to someone else, whether upon your death or at some point during the lease (e.g., if you get injured or sick, need to move, no longer want to farm, etc.)? If so, a lease or an appurtenant easement may be a good option for you. If this is a concern of yours, be sure to read the agreement carefully, and confirm that it does not place any restrictions on transferability. If you don’t care whether you can transfer your interest to someone else, then any of the options could be fine for you.

Do you want to have a level of security that your interest in the property will remain regardless of whether the landowner sells the property or dies? If so, a lease or an appurtenant easement may be a good option for you. Be sure that the agreement does not place restrictions on the binding effect of your property interest, unless you are comfortable with it. If you don’t care whether the lease continues on after the property passes to another landowner, then any of the options could be fine for you.

At a Glance: Legal Terminology for Types of Leases—the Timeframe or “Term”

A: Typically, an agricultural lease is either what’s called a “periodic tenancy” or a “tenancy for a term of years.” The periodic tenancy runs for a short period of time such as the growing season, which is one year or less. Typically, such short- term agricultural leases will automatically renew at the end of the term unless the parties agree to terminate it. Thus, periodic tenancies could end up continuing for a long period if it were to automatically renew year after year. However, there are no assurances at the get-go given each party can simply terminate the arrangement at some point before the end of each term.

As the name depicts, a “tenancy for a term of years” is a long-term lease that covers more than one year—whether 5, 10, 50, or even 99 years. Typically, such a long-term agricultural lease automatically terminates at the end of the set term unless the parties mutually agree to renew it. Let’s say it’s a 50-year lease. The default is that the arrangement will end at that 50-year mark; however, the parties could agree to renew it at some point beforehand. The lease should include a section that specifies how the renewal process works, such as by when the parties must let each other know of their decision and the length of the renewal term.

Note also that most states allow up to a 99-year lease. However, some states set a shorter limit on the number of years. Be sure to check if your state has any restrictions on length before entering a long-term lease arrangement.

Reflection: Short-term or long-term lease?

If you answer yes to any of the following, the periodic tenancy may be suitable for you:

• Are you a beginning farmer who wants a trial run at farming?
• Are you a farmer who doesn’t mind living with a level of uncertainty on where you’ll be farming each season or year?
• Are you a landowner who wants a trial run at leasing your land or otherwise wants to preserve the option to end the arrangement early on?

If you answer yes to any of the following, the long-term lease may be suitable for you:

• Are you a farmer who needs more than a season or a single year to get your venture off the ground?
• Are you a landowner who wants a consistent tenant and doesn’t want the hassle of having to deal with the possibility of folks coming and going each season or year?

Note: Be sure to check your state law to confirm that whatever long-term lease term you decide upon is permitted!

A: Generally, if a lease is longer than a year, it must be in writing to be enforceable or upheld in court. This is because of the “Statute of Frauds,” which is a law that exists in every state in some form that requires important agreements be in writing. Among other things, any agreement that can’t be completed in one year is deemed important. Long-term leases fall within this category. Accordingly, if something goes wrong, legal recourse in court would only be available if the lease was in writing.

While legal enforceability is important, it’s not the primary reason for getting a long-term lease in writing. After all, if a dispute arises, most folks prefer to resolve it outside of court. The main reason to get a lease in writing is to preserve a good relationship between the parties. Even those with the best of memories can forget the details of a conversation a few months, years, or a decade ago. Mere conversations about leases often don’t address significant details. Tensions can build when issues arise that the parties didn’t thoroughly think through and discuss. In addition, forgetfulness and confusion tend to fuel disputes when an agreement is simply based on oral conversations.

By getting the key details in writing, the parties can prevent most if not all disputes. Ultimately, the lease solidifies or reinforces the relationship between the farmer, the landowner, and the land. How do you, the parties, want to engage with each other and the land? There’s no official formula or magic words. It’s your agreement.

Reflection

Identifying what your main concerns and fears are in entering a long-term lease arrangement can help you see the importance of getting the lease arrangement in writing. It can also help you focus your attention on finding ways to address these concerns through the negotiating and drafting process.

Take some time to consider this: What are your biggest concerns and fears— your worst-case scenarios—in entering a long-term lease?

A: These days more and more small farmers are running their farm operation through a business entity, such as an LLC or corporation. It’s a wise thing to do, mainly because it can protect the farmer’s personal assets from the liabilities of the farm business. Farm Commons encourages farmers to take this route as part of an overall liability risk-management strategy.

However, running the farm operation through a business entity can raise issues when land tenure is involved. Nine states in the Midwest have what’s often referred to as “anti-corporate farming laws”—Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, Oklahoma, South Dakota, and Wisconsin. Anti- corporate farming laws in these states, which are in the form of state statutes or constitutional provisions, place restrictions on certain business entities from engaging in farming or agricultural practices, including owning or leasing land for agricultural production.

The restrictions and limitations on land tenure by a business entity vary in each of these states. For example, some of these states allow cooperative corporations to own or lease land. Others allow business entities that are majority owned by family members to own or lease land if certain circumstances are met.

It can be challenging to navigate the anti-corporate farming laws, but this should not be a deterrent. Farmers who live in these nine states who run their farm through an LLC, corporation, or other business entity and are wanting to enter an agricultural lease in the name of the entity are encouraged to check out Farm Commons’ resource Farmer’s Guide to Anti-Corporate Farming Laws. This resource includes flowcharts for each of these nine states, which walk through the specific requirements and available exemptions.

Reflection

If you are a farmer who lives in one of the nine midwestern states mentioned above and you run your farm operation through a business entity, take some time to review your state’s flowchart in Farm Commons’ resource Farmer’s Guide to Anti-Corporate Farming Laws. Do you foresee your state’s anti- corporate farming law being a barrier in entering a long-term lease? If so, your next step would be to consult with an attorney. There may be some creative ways to get around it.

A: The impact on the landowner’s tax obligations and other financial aspects depend on how or in what form the farmer pays rent. To answer this question, the following provides an overview of the basic options for paying rent. Generally speaking, three types of leases cover the main options: (1) cash rent leases, (2) crop share leases, and (3) hybrid leases.

At a Glance: Legal Terminology for Types of Leases—Rent Arrangement

Cash rent leases

For a cash rent lease, the tenant is required to pay a fixed amount in cash. The dollar amount could be associated per acre or it could be a set rent for the entire property. This provides a level of certainty for both parties. The landowner is guaranteed a steady stream of income, regardless of whether the farmer makes a profit. The farmer also has visibility into set costs, and can set his budget accordingly. The parties can also agree to include a section in the lease that modifies the rent if, for example, crop prices fall or production prices increase. Such a clause could provide that the rent would increase by a certain amount or percentage in good years or lower by a certain amount or percentage in poor years. Landowners who wish to have a cash rent lease are typically hands off, as they’re primarily interested in the rental payment. Thus, the farmer retains control of the farming operation.

One downside of a cash rent lease for certain landowners is that some federal and state programs require the landowner to be “actively engaged in farming” to participate or reap the benefits of the program. Cash rent leases typically do not meet this standard as the landowner is not taking on any risk or participating in the farming operation. Such programs include the Conservation Security Program administered by the Natural Resource Conservation Service (NRCS) and the Price Loss Coverage and Agricultural Risk Coverage programs administered by the Farm Service Agency (FSA).

Another point landowners need to keep in mind for cash rent leases is that because the landowner is not “actively engaged in farming,” the cash paid in rent is not subject to self-employment tax and is not considered earned income. This could have tax implications, depending on the landowner’s tax basis. One financial benefit of this is that retired landowners will not see a reduction in the amount of their social security check.

Crop share leases

The landowner is typically more involved in the actual farming or agroforestry operation with a crop share lease. In addition to granting the farmer access to the land, the landowner will typically share in the input costs, such as trees and other perennial plants. Depending on the arrangement, the farmer often provides the bulk of the labor and any remaining inputs for the duration of the lease term. In this scenario, the rent amount the farmer owes is tied to the success or failure of the farming operation. This could be based on a percentage of profits or revenues from harvests each year or season.

For example, the parties could agree that the landowner gets a quarter of the profits each year as a rent payment. Rent payments could also be made in-kind through a percentage of actual yield or harvest. Either way, with a crop share lease both parties have stake or risk in the farming venture. The rent could increase or decrease depending on the success or failure of the farm operation. Because the landowner has stake in this way, she will likely want to retain some control over decisions or at least share in the decision-making process of how the operation is managed.

Because of the shared risk, the landowner will likely satisfy the “actively engaged in farming” requirement of some government programs and can therefore reap those rewards. Landowners can also take advantage of special tax provisions, such as Section 179, for expensing capital investments. They may also be able to utilize certain estate tax provisions available for family-owned farms, such as Section 2032A Special Use Valuation, which can reduce the estate’s tax liability. For individual tax purposes, the money the landowner receives through crop share rent will be subject to self-employment taxes and is considered earned income. This will enable non-retired landowners to build a social security base. However, retired landowners may see a reduction in their social security check due to the added income.

Hybrid leases

For a hybrid lease, the parties can choose some combination of cash rent lease and crop share lease. Typically, the goal of the hybrid lease is to provide the landowner with at least a minimum rent amount in cash. The landowner then makes a “bonus” if the production reaches a certain amount. The parties should be careful when crafting these hybrid leases as they can be complex. It can be helpful to include an equation or an example so that the parties are absolutely clear what the arrangement is. Depending on how involved the landowner is and how much risk the landowner takes on in a hybrid lease, the landowner may or may not be considered “actively engaged in farming” for purposes of federal program eligibility and self-employment taxes.

Accidental partnerships

Another caveat with a crop share or hybrid lease arrangement is that the law may consider the arrangement to be a general partnership for liability purposes. This can be the case even if the parties do not intend nor want it to be. A general partnership is created when two or more parties come together and contribute assets, management, and labor to a business venture and share the benefits and risks associated with it. This sounds a lot like a crop share lease arrangement. Hence, such an arrangement can be deemed a general partnership, which brings up liability risks for the parties. With a general partnership comes joint authority and liability. This basically means that each partner can bind the other into contracts. Each partner will be held jointly and severally liable for the actions and inactions of the other. Therefore, if one partner incurs debt or legal liability from a lawsuit connected to the agroforestry operation, the other partner would generally be on the hook even if she or he had nothing to do with it.

If the parties’ intention is not to create a partnership, be sure the lease specifies as much, such as, “This Lease does not create a partnership or joint venture and neither Party has the authority to obligate the other without written consent.”

Cash rent, crop share, or hybrid: Which is the best rent option for you?

Reflection for landowners

• Are you a landowner who wants the security of a set income in rent each year? If so, a cash rent lease may be the best option for you.
• Are you a landowner who wants to be involved in the agroforestry venture and is willing to take a risk in the profits? If so, a crop share lease may be the best option for you.
• Are you a landowner who is involved in federal programs that require you to be “actively engaged in farming” to reap the benefits? If so, a crop share lease or hybrid lease may be the best option for you.
• Are you a retired landowner who is collecting social security checks? If so, a crop share lease or hybrid lease may be the best option for you.
• Are you a retired landowner who is concerned about high estate taxes? If so, a crop share lease or hybrid lease may be the best option for you.
• Are you a landowner who has significant assets or is otherwise concerned about limiting your personal liability in association with the agroforestry venture? If so, a cash rent lease may be the best option to help limit your liability should something go wrong. Or, if you have this concern and decide to enter a crop share or hybrid lease, be sure the lease agreement explicitly states that the arrangement is not a general partnership.

Reflection for farmers

• Are you a farmer who wants autonomy and control over your agroforestry or farming operation? If so, a cash rent lease may be the best option for you.
• Are you a farmer who wants to pay a set amount each year, regardless of the success or failure of your crops? If so, a cash rent lease may be the best option for you.
• Are you a farmer who needs or wants some upfront costs paid and is willing to share in the profits to make it happen? If so, a crop share lease or hybrid lease may be the best option for you.

A: This issue gets at the heart of the uniqueness of an agroforestry lease. Agroforestry ventures require significant costs upfront. The farmer who takes on this investment in full has a lot at stake. It could be years before his investment pays off through profits of the agroforestry venture. He could lose everything if the lease were to end early. What if the landowner backs out? What if the landowner dies or sells the land and the lease is terminated? What if the government takes the land by eminent domain? What if the zoning laws change and he can no longer farm? Will the farmer have a safeguard to get some of his upfront investment back?

The issue of how the trees are valued and accounted for touches upon many key elements of an agroforestry long-term lease¬—including the rent amount, how improvements are handled, what happens if and when the lease ends, what happens if the farmer wants to exercise an option to purchase the land, and so on. Ultimately, it will impact any decision or issue that deals with money and accounting between the parties throughout the duration of the lease. The checklist that follows highlights this issue in relevant places to help the parties navigate it all.

Before diving into the details, it can be helpful to start with a higher-level principle. What it comes down to is two questions: Who owns the trees and how are the trees valued? The parties’ agreed-upon answers to these questions will vary depending on the specific circumstances of the arrangement and each party’s preference and intention. The point is that the lease should clearly address these questions as they trigger significant implications.

An example can be helpful to explain. Let’s say the parties agree to a 50-year lease. In year 10, the landowner decides to sell the land and insists that the lease terminates. Let’s put aside for the moment the fact that this would be in breach of the lease if the lease stated that it is binding on all future landowners. In the first five years, the farmer invested more than $50,000 in trees. So the issue becomes: what does the lease have to say about who owns these trees, and how are they valued at this 10-year mark?

The lease should have something to say about it. Otherwise, imagine the disputes that would arise! The parties are free at the outset to devise a creative approach to this issue that best fits their needs and circumstances. There is no one-size-fits- all answer. That said, what follows are some potential approaches that you might adapt to your circumstances and needs.

Approaches for who owns the trees

The answer to the first question, who owns the trees, could depend upon a number of factors. For example, who paid for the cost of trees upfront? If the parties share in the cost, perhaps they share in the ownership. If the landowner pays for the trees, most likely the landowner will own them or vice versa. Is it a crop share lease arrangement? If so, the parties may decide to split ownership along the same lines as the crop share percentages. Or maybe the value is somehow already calculated into how the percentages are broken down and the landowner owns the trees outright.

Also, what is the rent amount? The parties could decide to keep the rent amount low to account for the long-term value that the trees will add to the overall property value. A lower rent could be one way to pay the farmer back, in part or in full, for his upfront investment. If the rent amount is more akin to the local agricultural going rate, it very well may be that the farmer will want to preserve some ownership interest in the trees to account for this added property value in the long run.

With this said, whether and how the trees actually impact the property value will depend on a multitude of factors—including the size and location of the parcel, the suitability for row crops, development demand, the kind of trees and how they are spatially arranged, and so on. The ultimate question in each case remains: if, how, and when in the time span of the lease will the trees add to or detract from the market value of the land?

Approaches for how to account for the value of the trees

The answer to the second question—how the value of the trees is accounted for— presents some challenges. Assessing the value of trees is not a common exercise! It will depend on a number of factors as just mentioned. One approach would be to assess the value at the amount initially paid, which in our example would be $50,000. However, the value will naturally increase as the trees mature. Another approach would be to assess the value of the trees for the nuts or fruit they bear in a given year. Based on this, their value will increase based on their maturity, up to a point.

Yet another approach would be to base the value on the overall property value. In this case, if the issue were to arise, the parties could hire an appraiser to come out and assess the value of the land or ground only. The value of the trees would be derived from the difference of the ultimate selling price of the property and the appraised value of only the land itself.

In addition, the parties could decide to split the valuation of the trees into two components: (1) the value of the trees “as trees” and (2) the value of the trees “as crops.” This could be a useful concept if the farmer wants to own the rights to the proceeds from the trees’ crop production—i.e., fruits, nuts, and so on—through the duration of the lease. The landowner then retains the rights to any and all longstanding ecological and other benefits resulting from the trees through the lease and thereafter. In such a scenario, the farmer would get all the revenue from selling the crops while the landlord would receive things like conservation program payments, as well as any added value to the land price if and when the land was sold.

These are just a few ideas for getting a close-to-accurate value of the trees over time. It’s up to the parties to decide the best approach for them.

The analogy of commercial ground leases—the reversionary interest

Looking at approaches taken in commercial ground leases can be a useful way to generate effective ways to address these two questions. Commercial businesses such as Target or Starbucks often enter long-term leases. They then spend an enormous amount of money designing and building their storefront. Who owns what in the end?

Generally, in a ground lease the landowner owns the land or ground, which the tenant is simply leasing. However, the tenant is deemed the owner of everything that the tenant adds to the land—the actual buildings or improvements that it finances and builds. Oftentimes ground leases have what’s called a reversion clause. This clause will change the ratio of “ownership” interests between the landowner and the ground tenant over the course of the lease. Thus, at some point during the lease, usually at the end, the landowner gains full ownership of the improvements—or what’s called a reversionary interest.

The reversionary interest is most easily understood through an example. Let’s take our above example of a 50-year lease. Let’s say the parties adopt a reversion clause where on day one, the tenant “owns” the trees and perennials in entirety. Midway through the lease, at 25 years, the landowner “owns” 50%. And at year 50, the landowner attains 100% ownership. Here’s how this all applies. If the property were to sell at year 10 and the lease for whatever reason did not continue on, the tenant would have a right to 80% of the value of the trees and the landowner would get 20% (reflecting one-fifth of the way through the term). The parties could, of course, agree upon a different timeline or ratio. The parties would also need to decide upfront in the lease how the value of the trees would be assessed.

The reversionary interest concept can strike a relatively fair balance of incentives and risks to both parties. The farmer has an incentive to enter the long-term lease and begin making substantial improvements, as he carries little risk in losing everything upfront. For example, if the property were to sell in the early years, the farmer would get a substantial portion of the proceeds reflecting the value of the trees. In addition, the landowner has an incentive to enter the long-term lease, because she knows that over time she will earn the benefit of the mature trees through the increased value of her property. Farmers and landowners may want to take this approach in some form to fairly address the issue of how trees and perennials are accounted for in an agroforestry lease.

Reflection

Before diving into the details of the lease terms, it can be helpful to initially reflect upon how the following pieces fit together:

• Who’s paying for the initial input costs of the trees and perennials?
• Is the rent being lowered in any way to account for the value of the trees?
• How do the parties want to allocate the ownership of the trees throughout the lease?
• What approach do the parties want to take for assessing the value of the trees at any given point?

Kevin Wolz: Insights from a 99-year agroforestry lease

Stories can help enliven any legal issue or arrangement, and positive, true stories are the best at that. Over the past few years, Farm Commons has been working with Kevin Wolz, an experienced agroforestry entrepreneur and PhD student at the University of Illinois at Urbana-Champaign. Kevin sees great potential in agroforestry to solve social and environmental issues facing our country and our world. He serves on the board of the Savanna Institute. Through his research, outreach, and entrepreneurship, Kevin is playing a leading role in advancing the benefits of agroforestry in the Midwest and beyond.

Kevin has already entered two long-term agroforestry leases in the Midwest, and aspires to enter more leases and other long-term collaborative agroforestry ventures in the years to come. He recognizes the win-win situation for himself, the environment, and the landowners—many of whom are absentee and want someone they trust to take care of and even help revitalize their land.

It’s been just over a year since Kevin entered his first long-term lease. So far it’s going well. He attributes this to the collaborative and thorough process he and the landowner engaged in when negotiating and drafting the lease. Kevin met the landowner through the Savanna Institute. She’s a sheep farmer and not really a plant person—just the opposite of Kevin. She caught wind of the benefits of agroforestry and envisioned her sheep grazing under the shade of trees. Kevin had a similar vision of integrating livestock within his agroforestry practices, but doesn’t have livestock experience himself.

Over the course of a few months, Kevin worked with her on various projects, including planting prairie plants. Over time it dawned on Kevin that this would be a perfect property for a long-term lease. It was close to home, he would have the benefit of animals without having to deal with them, and the 10-acre size was perfect for a pilot project. But, as Kevin explains, “The most important part was that our personalities clicked. When you’re going into a long-term agreement with someone, that’s the most important thing.”

Kevin brought up the idea of a long-term lease arrangement during one of his visits. She was just as excited and instantly saw the synergistic potential. Her sheep would get shade, she’d have pollinators in the garden, Kevin would be around to help out and look after things, and she’d get rental income. At this time, they had no document or template, or really anything to go off. They started by jotting down some ideas and key points. They then contacted Farm Commons to help them with the details and drafting process. With Farm Commons’ help, they continued to engage in several back-and-forth discussions, and finally came up with the essential terms and ultimately a final agreement.

It’s a 99-year cash rent lease with a 5-year trial period for the 10-acre parcel. Kevin didn’t have a lot of money upfront to pay for the trees and perennials to get started. Yet, seeing the potential upside and overall value of the arrangement, the landowner agreed to put some money in. For Kevin’s share, he gets the right to harvest the trees and take 100% of the profits throughout the duration of the lease. For the landowner’s share, she owns the trees and gets to benefit from the trees’ ecological services to her sheep and the land.

The following highlights some of the key aspects of the lease:

• Given the landowner wanted to secure her investment in the trees, she and Kevin also entered a separate Memorandum of Understanding (MOU) agreement that outlined specific obligations and responsibilities to ensure that the trees are established successfully and endure. It also outlined a precise planting plan and design so that the landowner’s expectations were clear and could be met.
• Given the landowner’s sheep were also part of the equation, the lease includes specific terms that outlined the landowner’s usage rights for the alleys between the trees. If the landowner’s sheep damage or reduce the growth of the trees, the landowner must either compensate Kevin for the damage or replant the trees to mitigate those damages. Vice-versa, if Kevin’s management or harvesting practices damage or reduce the growth of the alleys, Kevin must either compensate the landowner for the damage or replant the pasture to mitigate those damages.
• Two out of the ten acres of the leased property are enrolled in the Conservation Reserve Program (CRP), a cost-share and rental payment program under the USDA Farm Service Agency. Given the landowner fronted some of the costs for the trees, Kevin agreed to allow her to take the CRP payments. These payments ultimately reflect the value of the trees that she paid for, even though Kevin is responsible for taking care of them. Kevin would have negotiated this differently if he had paid for the trees.
• The lease includes a right of first refusal, which gives Kevin the opportunity to purchase the land before anyone else does if the landowner decides to sell or receives an unsolicited offer. This relieves Kevin of some anxiety surrounding what would happen if the land were to transfer hands. Would the new landowner challenge the lease? Would she be challenging to work with? While Kevin would have to come up with the financing should the right of first refusal opportunity arise, he at least knows that he’ll have a chance to purchase the land and potentially prevent a disgruntled new landowner from taking over. The sample lease in this workbook provides an example of a right of first refusal that is similar to the one Kevin used.

Kevin has already planted a wide range of nut and fruit tree crops on the farm, including chestnuts, hazelnuts, currants, and grapes. He has been managing the trees in these early years by mowing and pruning to get them well established. In a few years, Kevin will begin harvesting from these trees and hopes to leverage this yield as part of a fruit- and nut-focused CSA. The landowner has continued to harvest hay from the alleys in between rows of trees, but will soon be grazing her sheep in these alleys instead.

So far there haven’t been any issues with the lease arrangement. Again, Kevin attributes this to their open communication and thorough consideration of the key issues at the outset. Kevin sees his symbiotic and long-term arrangement with a landowner as just the beginning. His bigger picture vision is agroforestry ventures involving more collaboration.

“Imagine if you had a landowner providing land and equipment, a tree expert, a berry expert, an animal expert—it would be the most highly functioning and efficient project out there.” He explains, “Collaboration is how to be really successful.”