It is important for landowners to be aware of the different types of solar lease payments structures that can be offered by energy companies seeking to develop solar resources owned by private property owners. Some solar deal structures are more valuable than others to landowners. These agreements can sometimes last decades, so landowners need to ensure they understand the terms they are agreeing to and know the difference between solar rent payments and solar royalty payments.
The credit for the development of these types of lease agreements can largely be attributed to the oil and gas industry’s long history of negotiating with large ranch owners and farmers who happen to settle upon valuable oil and gas reserves. The difficulty is the ability to negotiate terms that both value the risk, time, and capital being put forth by the energy company while meeting the private property owner’s price expectations.
In today’s emerging renewable energy segments, LandGate is seeing a multitude of structures being used to lease and purchase properties for highly lucrative energy generation projects. As a landowner, you should always look to educate yourself and understand the corporation and the specific project they plan to use the land for before negotiating any terms. It is important to understand why the company needs your land, and how much income is expected to be generated. Depending on the risks associated with the venture, certain solar lease payment structures and clauses may be more appropriate than others.
Solar Option + Fixed Annual Solar Rent Payments
Solar Lease Option
Property owners are typically first approached by developers offering a lease option. This option agreement usually provides for a small annual rent payment to be paid to the landowner and grants the developer an exclusive right, for 2 - 6 years, to enter into a formal lease agreement. Property owners need to understand that an option agreement does not mean you are guaranteed to have a solar farm built on your property.
Generally, developers use this type of agreement to quickly contract large amounts of acreage, and then go back and decide which properties they will actually build on or decide not to lease. Developers can contract large positions with little to no upfront capital expenses. However, many of the property owners may never see a solar farm built on their property and get stuck under an exclusive lease option agreement when a developer decides not to build or decides to build on a neighboring property. Understanding the rights you are giving away when signing a lease option agreement is important, as it could limit your property’s marketability for solar resources.
Annual Solar Rent Payments
There are many ways that landowners can get paid to lease their land for a solar farm. Some solar lease agreements may offer a structure using a fixed annual payment for a set term length of usually about 25-30 years and can include a bonus cash payment paid once the lease is executed. Sometimes an annual “escalator” is included to account for possible inflation or tax increases which increases the annual rent payment by a fixed % each year the property is leased. This structure has predominantly been used in the farming and agricultural industries which have highly predictable revenue allowing for a fixed payment structure. This type of lease is increasingly being used by renewable energy developers as a way to acquire land at extremely low costs compared to the revenue they are able to generate over the life of the project. If you are offered a fixed annual rent payment, we highly recommend adding an escalator of at least 2-3% to compensate for inflation. Electricity prices have increased with time, and the landowner will unfortunately not benefit from higher future electricity prices with this type of fixed annual rent payment. Clean energy projects also receive a large part of their revenues from the monetary value the government and private sectors have placed on eliminating greenhouse gas emissions. Landowners under a fixed annual rent will not capture the revenue increase caused by changes in regulatory policy or social value. If you have been offered a solar lease agreement with fixed terms, we recommend searching for your parcel on LandGate.com to get your free property report and compare the offer with our calculated solar lease estimate. LandGate's solar lease calculation uses advanced algorithms and proprietary data to analyze the resource potential of your property.
Solar Royalty Payments are NOT as Common as Solar Rental Payments
The music industry, movies, wind, oil & gas, mineral - all these industries use royalty payments. Why are solar farms different?
Royalty payments based on production are the standard payment structure in oil and gas lease agreements. Although commodity prices are extremely volatile, production volumes and commodity prices are generally public information, making them easier to calculate. Because there are so many variables in trying to calculate revenues and expenses associated with solar farm production, annual rental payments are more efficient. Many of these efficiencies would be impossible to predict or project at the time of negotiating a solar farm lease agreement with the developer. Over a 30 year period, we can expect the technology to improve and costs to reduce over time in just about every industry. However, this is especially true in the renewable energy industries where we have seen the cost of a solar panel decrease by over 15% since just 2018. Solar farm economics will continue to improve translating to an increase in resource value for property owners. Make sure you do not negotiate blindly, always try to fully understand the project and lease structure being offered before jumping to quick decisions. These agreements can last for decades and could leave you falling victim to predatory leasing tactics if they are not carefully read.
Can I Sell my Solar Royalties or Solar Rent Payments?
Landowners receiving payments from a solar farm on their property can market and sell those future payments whether it is a royalty payment or a fixed rental payment. Royalty payments can be marketed at a higher premium than fixed rental payments because the value of the royalty may have the potential to increase at some point in the future. Property owners can market the payments they receive from a solar lease with LandGate.
Be Aware: Check What Your Property is Worth for Solar
The variables that derive a property's resource value can change every day. Make sure you check your property's solar value before you sign your next solar lease agreement.