Solar leases are popular among landowners who want to supplement their income by renting their land to a renewable energy company. The leases usually last for 25 years to 50 years. During this time, the landowner receives solar lease payments negotiated between landowner and developer. These payments can be negotiated to be yearly or monthly payments per acre of land being used.
It should be noted that landowners are not paying any upfront costs when signing a lease agreement with an energy developer. The installation of the solar panel system is being handled by the developers, so the landowner is not required to purchase solar panels or lease solar panels from elsewhere. After signing the lease, the landowner’s work is done and the next step is to receive payments for your property while the developer gets their affairs in order.
However, there may come a time when a landowner wants or needs to sell their solar lease payments for a lump sum up front. Selling solar lease payments has proven to be very financially beneficial to many landowners across the US, but many landowners are not aware of these benefits.
Selling solar lease payments means that landowners can immediately avoid inflation and the possibility of the developers shutting down the solar farm early, which would terminate those lease payments entirely, regardless of whether or not the lease is executed to its full term.
What are Solar Lease Payments?
Solar lease payments are negotiated between landowner and solar energy developer. Energy developers have tax incentives that push them to develop solar power systems in certain states which can greatly impact the value of solar leases across the country. The better the incentives in the state, the higher value a property can be for a solar farm lease. Solar farms have a lease agreement that includes agreed upon cash flow payments from developer to landowner. There are many different ways that landowners can get paid for a solar lease. The lease payments can either pay a fixed monthly or yearly payment. This depends on the agreement made between the developer and landowner during the leasing process. These solar lease agreements can be negotiated to have escalators to combat future inflation. However, most escalators are typically 1-2%, while inflation currently trends between 5-8% and inflated costs for certain goods and services of over 30% . Land professionals can easily help clients interested in leasing their land for solar panels by using LandGate. Leveraging LandGate’s free and commission-free marketplace, land professionals can help landowners receive offers to purchase their solar payments from the world's top buyers. LandGate also provides data analytics that empower land professionals with the knowledge of natural and renewable resources.
Land professionals can use estimated valuations to help clients accept life-changing deals based on proximity to electrical infrastructure and topography. These estimated valuations help real estate agents be prepared to assist during the negotiation process for solar leasing.
Why Sell Solar Lease Payments?
Landowners can sell their solar lease payments and receive a large, lump sum payment during any point of their solar lease. In most cases, landowners DO NOT have to sell their land along with the lease.
The main reasons why landowners across the US are choosing to sell their solar lease payments can be seen below:
Inflation + Income Tax = Very Poor Financial Performance for Solar Payments: Typical solar lease payment escalators are 1%-2%, while current inflation is 5%-8% (over 30% on certain goods and services). Since this escalator of 1-2% does not match the current inflation rate, solar lease payments are losing value over time, which a majority of landowners do not understand.
Solar Lease Payments Are Not Guaranteed: Solar energy projects can be canceled at any phase of the lease, with many of them NOT lasting the full term of the lease. Once a lease has been sold, the risk of payments stopping due to canceled projects falls on the new buyer.
Landowners Do Not Have to Sell Their Land: Many landowners do not want to sell their land, but would love to diversify and mitigate risks associated with solar payments. Selling lease payments DOES NOT mean that a landowner has to sell their land along with the lease. In fact, the majority of landowners who take advantage of LandGate’s open marketplace to sell their solar lease payments choose to retain their land for future generations.
Solar Lease Sales Qualify for 1031 Exchange: Landowners who are worried about tax implications of selling their solar lease payments should definitely consider doing a 1031 exchange. An exchange allows sellers of solar lease payments to avoid paying taxes on their profits from the sale, and immediately invest into other forms of real estate such as farm/ranch land, residential property, commercial property, or a DST.
De-risk and Diversify: Solar lease payments often become the most valuable asset for landowners and many folks grow very concerned once they realize that the lease payments can stop at any time, and are actually performing very poorly relative to other financial investment options.
Selling lease payments and investing in additional real estate opportunities or taking cash out to fund a business venture is a very good way for landowners to de-risk and diversify their assets.
Buyers are Currently Purchasing Lease Payments at a Premium: Solar lease payments are currently in very high demand by financial institutions who are willing to pay a premium to landowners who are being paid for solar leases on their property. As with any financial fad, it is very difficult to predict how long buyers will be interested in paying such a high premium for non-guaranteed, fixed cash flow streams.
Improve Financial Performance of Solar Payments: Solar payments perform very poorly relative to other financial investments. Selling lease payments allows landowners to leverage the great decisions they’ve already made by getting solar panels on their property, while also improving the financial performance of revenue generated from the project.
For instance, let’s say a landowner is scheduled to make $4 million over the course of 40 years from their solar project and they choose to sell all their future lease payments for $2 million on the first day the project starts and utilize a 1031 exchange.
That landowner may ask, “why would I sell those lease payments as a lump sum for half of what I'm going to get paid over the course of the lease term?” The answer is that the landowner will be paid nowhere close to $4 million in real dollars once inflation (time-value-money) and taxes (typically 30%+ ordinary income tax) have been factored in.
Chances are that they will not even be paid $2 million in “present value” dollars over the 40 years.
The smart landowner who sold for $2 million the day their project started, utilized a 1031 exchange (didn’t pay taxes on the sale), and diversified their payments across several real estate investments will make significantly more money for themselves and their families than the landowner who simply “sits” on their payments.
Why Sell Solar Lease Payments on a Marketplace
Many landowners are unaware that a marketplace like LandGate, where you can market land for sale, for lease, or payments for sale, exists and only rely on offers sent to them in the mail. BAD IDEA! Buyers and lessees of properties and natural resources rarely want to compete for the asset. Many times landowners get trapped into an illusion of a competitive process by thinking that everyone who wants to either purchase or lease their asset is aware that it is available because they are receiving letters in the mail. That is not the case. The only way to ensure that you are receiving fair offers and getting the best deal for your family, is to get as many offers from as many buyers as possible. That is why LandGate was created, and why it has become the largest marketplace in the world for landowners wanting to get a fair deal with their property. There are no costs (no fees or commissions) to post a listing on LandGate to get your lease payments in front of all the purchasers in the market. The key to getting the most value from your asset is to increase the level of competition by listing it on a competitive marketplace, such as LandGate. There is also no obligation to accept any offers that may be submitted and users completely control and manage their own listings which can be deleted at any time.
The Process of Selling Solar Lease Payments
There are many perks to selling solar lease payments for landowners who have an active solar farm on their property. Solar farms can significantly increase property value and leasing land for a solar farm can generate extra income. However, some landowners may view this new cash flow as high-risk since it is not guaranteed and loses money over time due to inflation. To reduce inflation risks, selling your solar lease payments as a one-time payment to a potential buyer is an option that many landowners are choosing to take advantage of. The closer the project gets to construction or production date, the more valuable the payment cash flow becomes because it becomes less risky from a purchasing perspective. In order to receive the maximum offers for solar lease payments, sellers will ideally want to list their lease payments either a few months prior to, or during the construction phase.
Finding a Buyer
To sell solar lease payments, the initial action is to take a proactive approach by listing the payments on a marketplace that potential buyers actively search on. The buyer could be an individual interested in investing in solar lease payments. They could also be a specialized company that focuses on purchasing these types of payments. The buyer could even be the solar company itself. The process of finding a buyer for solar lease payments involves conducting thorough research and reaching out to different entities. LandGate’s marketplace offers easy access to this unique set of buyers. Landowners can list their solar lease payments for free on LandGate. Additionally, land professionals can post on behalf of their clients for free. LandGate does not charge any commissions on the sale, either! It is important to engage in negotiations and evaluate each of the different offers received from potential buyers. To make an informed decision about the sale, it is important to think about the terms and conditions. Landowners can receive multiple offers from groups interested in purchasing their solar lease payments by entering a competitive marketplace, and comparing multiple offers will allow the seller to select the most advantageous option that aligns with their financial goals and requirements.
Negotiating the Sale
Once a buyer is found, the process of negotiating the terms of the sale begins. This step is crucial as it determines the final outcome of the transaction. The negotiation process involves various aspects, with the primary focus being on the sale price. The sale price is a critical factor that needs to be agreed upon by both the buyer and the seller. The sale price is likely to be less than the total remaining payments due, which is why landowners should try to sell their lease payments as soon as possible for the best deal.
The buyer will consider the potential interest or investment opportunity cost. They could have earned this by having the money earlier.
Consequently, the seller needs to be prepared for the possibility of negotiating a lower sale price.
Apart from the price of the sale, it is also necessary to have a thorough and precise discussion about the other terms of the sale. These terms may include payment arrangements, such as whether it will be a one-time lump sum payment or installments over a specified period. The parties involved also need to agree upon the payment schedule and any potential penalties or interest rates for late payments. The written agreement is crucial to ensure that both parties are on the same page and have a clear understanding of the terms. This agreement should outline all the negotiated terms, including the sale price, payment arrangements, and any other conditions that have been agreed upon. The document is legally binding and protects the interests of both the buyer and the seller. It is designed to address any disputes or misunderstandings that may arise in the future.
Landowners should consider consulting with an attorney for assistance with reviewing any offers. For 1031 exchanges, landowners should consider consulting with a 1031 broker. LandGate can refer landowners to specialists within our network for assistance with this process! For landowners who want to avoid losing value in their existing solar farm lease and prefer to receive a lump sum of money, selling solar lease payments can be a practical choice. It is also a suitable option for those who want to mitigate the risk of losing a potential revenue stream in the future if the project fails after 10 years.
*Nothing in this blog is intended to be legal or financial guidance. Anyone seeking legal or financial guidance should consult a licensed attorney or accountant.*