How to Lease Farmland for Alternative Energy
What you need to know to get started leasing your farmland for solar, wind or other alternative energy uses.
Leasing your farmland for alternative energy (solar or wind) can help the investor save on farm acquisition costs and earn you extra income.
However, solar and wind leasing are long-term contracts and should not be taken lightly. Indeed, the two parties (landowner and lessee) should understand tax implications, property valuation, and lease agreement among other factors before leasing farmland for renewable energy production. We recommend that you consult a lease agreement lawyer before signing the contract.
In this article, we will discuss the critical factors to consider when leasing your farmland for alternative energy and what to expect in the agreement.
About renewable energy in the country
According to the office of Energy Efficiency and Renewable Energy (EERE), alternative energy (hydropower, wind, solar, geothermal, and biomass) accounts for approximately 20% of the total electricity produced in the country. That said, renewable energy continues to become more popular in the United States.
This comes as the federal and state specific governments want to phase out the environment unfriendly fossil fuels and adopt clean energy. In fact, government policies are aligned toward accelerating the production of renewable energy.
It is predicted that the nation will achieve 100 percent clean energy by 2035. And so, producers are/will be leasing farmland to generate utility-scale solar and wind energy.
Basics of leasing farm land for solar and wind energy production
In a solar or wind energy lease, the landowner grants permission to the company or developer for the installation of electricity facilities and generation of alternative energy (in this case solar or wind energy). Ideally, small-scale projects require a few acres presumably less than 10 acres but utility-scale projects need huge chunks of land. In addition, solar and wind leasing are long-term contracts that may last for hundreds of years. This is because solar and wind farms are capital-intensive and take quite some time to return on investment. Therefore, such a long-lasting agreement requires careful evaluation.
How to lease farmland for renewable energy
The process of solar and wind leasing involves the following four steps
Scouting for an appropriate site for solar and wind energy project Every successful renewable energy project starts with choosing the appropriate site. On one hand, a solar energy developer assesses the amount of sun that the land receives. On the other hand, a wind energy developer has to consider the optimal wind received on the site. Other important considerations include close proximity to the transmission framework, shade obstructions, environmental and zoning issues, and other barriers.
Preliminary agreement Once a developer has identified a promising site for a solar or wind energy project, they will approach the land owner with a preliminary agreement. The preliminary agreement, also known as a letter of intent or term sheet, is a notification to the land owner of a developer's desire to set up a renewable energy project. The document serves to “hold” the land while the developer is doing a further assessment. Some companies will provide detailed notification while others will opt for a brief and informal notice. In some cases, the preliminary agreement might contain the terms of the lease and are legally binding if signed by the two parties. As the landowner, you should read between the lines to ensure the terms are favorable. A detailed letter of intent has a confidentiality clause that forbid the landowner from sharing information about the project or getting into a contract with other renewable energy companies. You should have a reputable attorney look at these documents to protect your best interest.
Option to lease If the solar or wind energy developer is interested in continuing and the terms are favorable, they will write a more legally binding document referred to as an option to lease. Through this document, the landowner authorizes the renewable energy developer to look for finances, government permits, and land parcels and examine the land further. While some investors issue an option to lease as a single document, others will attach it to the lease. It is wise to be cautions here because an option to lease does not compel the investor to literally develop the project. However, if the developer starts the project, they will be bound by the option to lease agreement.
The solar or wind lease The solar or wind lease may be the most important legal agreement between the farmland owner and the renewable energy developer. It states the lease duration, the terms of payment, rights, and responsibilities of the two parties, property taxes, liabilities, insurance, and so forth. Solar and wind leases are categorized as commercial leases. Therefore, the courts expect that parties involved in these agreements read and understand the terms to work out a better arrangement if needed. It's important to note that the law doesn’t provide the same protection for commercial leases as it does with residential leases. So, it is essential that the land owner fully reviews the lease specification and negotiates for a favorable arrangement.
Key considerations for solar and wind energy leases
Here are some key factors that a farmland owner should consider before renting out their property to a renewable energy producer.
Family considerations Usually, farmlands are jointly owned by the family members. For example, the landowners can be a wife and husband and such a parcel of land will be inherited by their children. And as pointed out earlier, solar and wind lease last several years. This means that the lease might run to the next generation. So, it is essential to consider the effect of the lease on every member of the family. It's important to ensure that majority, if not all, family members accept the shift from agricultural production to energy production. It's also important to consider how the lease will influence the way your children, grandchildren, and great-grandchildren will use the farmland. You should review or have a farm transition plan before leasing the land.
Dual uses of the farmland Although wind energy projects allow for farming activities to take place on leased land, solar energy might not. This is because wind energy facilities are set up wide apart leaving substantial space for farming. On the contrary, Solar panels occupy a great portion of the farmland preventing agricultural activities. Nevertheless, some companies permit the farmers to practice low-impact farming such as beekeeping, growing crops, and livestock grazing in the field hosting the solar energy project.
Grass harvesting and livestock grazing Wind turbines are installed in a way that they can support grass harvesting and livestock grazing. The rows of wind turbines are spacious enough to allow small and medium-sized hay harvesters to pass without causing any harm. Besides, the turbines are tall and firm enough for cattle to rub or lean for shade. On the other hand, solar panels are set closer to the ground and consume a lot of space. With such a setup, solar farms are not compatible with large farm animals such as horses or cows. Indeed, a solar farm is only suitable for smaller livestock species such as goats, sheep, pigs, or chickens. However, you should be careful with goats and pigs as they tend to be more destructive and can chew the cables. If the developer accepts that you graze livestock on the leased land, ensure that they commit to keeping the entrances and exits closed during installation, maintenance, and demolition. Similarly, you may request to be notified when the lessee plans to construct, repair or demolish any part of the property to avoid disrupting your livestock.
Crops Solar energy developers can permit you to cultivate some high-value crops mostly hand-harvested vegetables or flowers between rows of photovoltaic panels. One advantage of solar panels is that they provide shade which prevents loss of moisture in hot and dry climates. So, they decrease the need for watering especially in dry climates. Furthermore, a farmer can harvest rainwater run-off and use it for irrigation. Be watchful that cables are buried sufficiently deep to avoid getting damaged during plowing and planting. Also, you can harvest hay where solar nodules are spaced wide enough to allow the movement of simple hay cutters. Again, remember to be cautious when using machines on the solar farm as they might throw stones and hit the panels. A normal lease contains a clause that holds you liable for the damage you cause to the investor’s property, and holds the developer liable for any loss or damage that they cause to your assets.
Hunting and wildlife conservation Some renewable energy lessees allow farmland owners to hunt and conserve wildlife as long as animals kept do not interfere with project material. However, hunting should be done with utmost caution as it may damage the solar or wind energy facilities. In the lease agreement, you should retain the right to utilize the land for hunting. If the clean energy equipment is set up during hunting season, and you ordinarily earn money from hunting licensing costs throughout that time, the agreement could perhaps allow you to seek compensation for lost revenue. If hunting is permitted under the lease, you will be expected to cover for any damage caused by hunting done by you or those authorized by you.
Beekeeping and other land uses Bee apiaries can be comfortably kept alongside solar arrays. You can set up habitat improvements such as bird and bat boxes or log piles as well.
What are the tax implications
The installation of solar panels or wind turbines on your farmland can impact how the property will be taxed. Indeed, the taxes will rise if the renewable energy facilities set up in your land increase its per acre value. States such as Ohio, disqualify farmland with solar or wind energy projects from the Current Agricultural Use Valuation (CAUV) reduced tax assessment. Others such as New York consider farmland with clean energy projects as “real property” and are taxed as such. And so, your local tax analyst will assess the increase in value resulting from solar modules or wind turbines to the exact value of your land.
A rise in market value also called the taxable value might hike your taxes. Such an increase can also elevate other levies including drainage districts, fire, highway, ambulance, library, lighting districts, and so forth. In addition, it increases special municipal water taxes and sewer districts if the farmland is no longer primarily used for agricultural activities. The renewable energy developer is liable for and should pay all personal property levies and evaluation that accrues on the renewable energy equipment including taxes induced on electricity generation. Moreover, the developer should commit to the agreement to pay for or compensate you for any surges in taxes.
Renewable energy tax exemption for farms
Land used predominantly for generating solar or wind energy power is exempt from property tax hikes for 15 years after the wind or solar energy facilities are installed. Property taxes will rise after the 15-year term expires. Furthermore, if the land is no longer used mainly for renewable energy production, the property taxes will rise. You must apply for the tax waivers as the landowner by applying to your municipal tax assessor. The majority of wind and solar agreements are periods not less than 20 years. Because the exemption is only valid for 15 years, your taxes will rise 15 years after you install renewable energy equipment.
Land used primarily for wind or solar energy production is exempt from an increase in property taxes for 15 years following the installation of wind or solar energy equipment. After the 15-year period ends, the property taxes will increase. Additionally, if the land ceases to be used primarily for renewable energy generation, the property taxes will increase. You, as the landowner, are responsible for applying for the exemption by applying to your local tax assessor. Most wind and solar leases are for terms of at least 20 years. Since the exemption only lasts for 15 years, your taxes will return to normal 15 years after the renewable energy equipment is installed.
Neighbors and community
Most states allow neighbors to review the project and write a review. Some of your neighbors and community members might object to the idea of solar or wind energy production in the neighborhood and give your project a bad review. Although issues such as noise and air pollution during construction could be genuine concerns, they can be discussed and solved. As the farmland owner, you might want to meet with your neighbors and address their concerns.
Liability and insurance
Setting up an alternative energy project might put the farmland owner and other users at risk. Therefore, the lease agreement will require that both parties have insurance. You will want to talk to your insurance agent to know what is available.
It goes without saying that it is also important to save the documents, profit and costs of these interactions. Take a look at Farmbrite to help keep track of track of key notes and other items that you need to keep safely in one spot.
To sum up
Leasing your farmland for renewable energy is a great way to supplement your income. Even so, you should be cautious when making this decision. You can consider all the factors mentioned in this article to avoid getting into trouble. We recommend that you consult a wind or solar leasing attorney, accountant, insurance expert, energy professional, and financial planner for the best advice.