Leases for solar energy facilities offer property owners the potential for a predictable, long-term revenue stream. But, because of the potential decades-long duration of a lease for solar energy facilities, things like inflation and increasing property values could turn today’s beneficial payment terms on a solar farm lease into a suboptimal deal in the future. When negotiating a lease for a solar farm, or any other solar energy facility, property owners should take care to consider both the amounts of future payments and the structure of those payments in order to preserve the economic benefits that come from leasing land for solar energy development.
It is difficult to place a value on payments into the future because of the variables involved and the passage of time. At the turn of the 20th century, natural gas was not a particularly valuable commodity and many oil and gas leases of the time provided for a flat-rate payment of a few dollars per year, regardless of the volume of natural gas produced. Now, natural gas is a much more valuable energy source and oil and gas owners can command much higher payments. Buyers of long-term government bonds frequently demand higher interest rates than buyers of short-term bonds because of the longer-term risk and the diminishing value of money over time that results from inflation. Think about the price of an item in 2019 and then think about its price today. Inflation over just a few years substantially reduced the purchasing power of money. Consider the potential impacts of inflation over the likely 20-30 year duration of a lease for a solar energy facility. It is very likely that $1,000 today is going to have greater purchasing power than $1,000 in 20 or 30 years. Landowners should keep this in mind when negotiating a long-term payment structure in a lease for solar energy facilities.
The long-term duration of a solar energy facility lease will likely restrict a landowner’s ability to renegotiate financial terms at a later time. That means that financial arrangements need to be evaluated and established up front. That requires a view to the future to attempt to negotiate the most economically advantageous deal possible that retains its value over time.
A fixed component of the economic value of a solar farm lease is the amount of acreage developed and used for the solar energy facility. A solar energy developer is unlikely to make long-term payments for acreage that is not actively being used as part of the solar energy project. If acreage is not going to be used as part of a solar energy facility, there is little reason for landowners to lease it. Another “fixed” component of a solar farm lease may be the infrastructure that can be placed on a property. A lease can stipulate the types of structures on the property that are authorized without a new agreement. For example, a lease may authorize solar panels, roadways and an electric substation. But, that same lease may provide that a battery storage facility requires a separate agreement, with a separate payment structure.
Unlike oil and gas leases, whose long-term revenue generation is based on royalties that are dependent on commodity pricing and production volumes, current leases for solar energy facilities are most often going to involve fixed annual payments. While a fixed payment avoids uncertainties that can arise from royalties based on commodity pricing, the effect of inflation over decades can significantly reduce the real value of fixed payments. Rather than a strictly fixed payment amount each year, property owners should consider providing for escalation in the annual rent payments based on inflation or some schedule that is clearly specified in the lease. While it is reasonable to additionally explore some form of payments based on the value of the energy generated by a solar farm, or the value of governmental credits or incentives to the operator of the solar facility, at this juncture it is difficult to evaluate the value of those payment structures versus the more traditional ground lease with a set payment structure that includes rent escalation.
Leases for solar energy facilities are complex contracts that can last for decades. When evaluating a lease for a solar farm or related facilities, it is important that property owners to evaluate the present value and use of their property and to attempt to project its value, use and economic utility in the future. Solar energy facility leases can provide a long-term income stream to property owners. But, the prospect of payments today should not outweigh the longer-term considerations to make sure that any lease deal is just as financially beneficial in the future as it is today.
