Solar Leasing – Success in the Sunshine
Solar leasing is in a significant growth phase, thanks to a convergence of technical, cultural, economic and regulatory factors. So how do solar investors ensure they are deploying capital in the right areas, for the right price, and with the right legal arrangements? PLM and the LeBlanc Law Firm have collaborated on a package of land and legal services to help answer these complex questions.
Key Factors to Consider
Solar developers understand the technical aspects of a profitable utility-scale solar facility, from UV ratings to daily sunshine averages to grid access availability. PLM has worked with our clients to provide these key data points, along with other vital information needed for investors to make informed decisions, in the form of a searchable map. There are many other considerations when embarking on a campaign to acquire acreage for solar development, many of which may not be evident at first glance.
● Ownership – It is relatively easy to identify the apparent owners of a tract of land and obtain their contact information. It is much more difficult to verify such parties are, in fact, the actual owners. Are there other parties having interests in, or claims to, the property who should be included (or at least accounted for) in the lease negotiation process? Are there owners of severed minerals you will need to have waive or subordinate their surface access rights prior to the construction of a solar facility? Are there other outstanding surface encumbrances which prohibit the usage of the acreage for solar development or otherwise impact the value of a solar lease?
● Culture – How mature is your target market? In parts of the country where oil and gas development has been prevalent for generations, the typical owner of a large tract of land will be knowledgeable of the mechanics and economics of leasing and more likely than not to engage in the negotiation of a solar lease. In parts of the country without a similar history of leasing, however, landowners might be reluctant to speak with a leasing agent at all. The relationship between the landowner and leasing agent is a vital, yet often overlooked, component of success. With the stakes so high, landowners are justifiably skeptical of outreach from a company perceived to be a “fly by night” operation. A prospective lessor is more likely to engage with a counterpart who has name recognition, a known presence in the community, and a reputation for straight dealing. The success of an acquisition effort depends, in large part, on whether the leasing agent maintains an open line of communication with the landowner—picking up the phone at all hours of the day to answer questions about all aspects of the solar development process (both in general and applied to their land specifically) and to address all concerns regarding proposed lease terms.
● Politics – The profitability of a utility-scale solar facility is heavily dependent on the regulatory environment where it is located. In this respect, local relationships and a knowledge of regulatory and administrative barriers to entry play a critical role in the economics of a location and the ultimate success of a facility. A leasing agent should have local knowledge of existing permits, or special use properties, that can improve the economics and timelines of a project.
● Mechanics – Time is a critical element of lease negotiations. How fast can you respond to a potential lessor? What is “on the table” and “off the table” in terms of landowner compensation and key lease terms? Most often, there is only a small window of opportunity to evaluate the location, economics, ownership, and legal hurdles of a prospective lease. Do you have a “boots on the ground” partner to respond to opportunities and obstacles quickly?
Leasing Solar in Texas -
Texas has some of the shrewdest landowners in the nation when it comes to leasing their land for commercial purposes. The owner of a tract large enough to sit a utility-scale solar facility will likely have firsthand experience negotiating leases, right-of-way easements and similar surface encumbrances, or at least the wisdom and financial resources to engage an attorney who does. This means an outright acceptance of an offered solar lease—without a detailed counter-offer containing "landowner friendly" terms—will be the exception rather than the rule. Because you can expect the typical landowner or their attorney to push back on the developer's standard lease form, the developer should have a leasing agent who understands the "market" for solar lease terms and what concessions to the landowner can result in an economically-viable lease that gets approved for financing. In this respect, PLM will approach any solar lease acquisition effort with the following goals in mind:
1. Ensure the lease provides a development term of sufficient duration to assess the feasibility of, and lay the groundwork for, the construction of a utility-scale solar power generation facility.
2. Ensure the lease grants lessee the necessary flexibility to select one or more blocks of acreage from the optioned lands (i.e., the leased premises during the development term) for the sitting of a facility that meets the client's power generation goal in terms of megawatt (MW) capacity.
3. Ensure the lease secures the necessary rights vis-à-vis the non-optioned (i.e., released) lands to ensure the efficient operation of the solar facility. This includes not only lessee's right of ingress and egress, but also restrictive covenants prohibiting the landowner or its licensees from engaging in surface uses that diminish the facility's solar radiation intake or otherwise impair its functionality and profitability.
4. Ensure the landowner compensation package (preferably annual per acre rental w/ fixed escalator) is fair and economic from the developer's perspective and acceptable under any applicable financing arrangement. This will entail assessing the feasibility of alternative forms of compensation proposed by landowner, such as (a) percentage of gross revenues paid as royalty (with an annual per acre rental payment serving as a floor) or (b) annual rent based on MW capacity, as opposed to acreage occupied.
5. Ensure the lease's removal and remediation provisions are not overly burdensome, with special attention paid to a demand by landowner that lessee post a remediation bond at some point during the extended lease term.
6. Ensure there are no restrictions on assignability of lessee's interest or that any consent to assign provision is softened by "which consent shall not be unreasonably withheld or delayed" or qualifying language having a similar effect.
7. If the circumstances require it, ensure the lease accounts for the need to accommodate oil and gas development on the leased premises during the term of the solar lease via acreage set asides for horizontal drilling. (If the land is located in an area where oil and gas development is occurring or could potentially occur in the future and there are severed mineral interests that have not subordinated their surface use rights to the solar lease, PLM will work to ensure the lease provides for the accommodation of future mineral development without jeopardizing the economic potential of the solar lease).