Most Nebraskans and Iowans have become accustomed to seeing wind farms popping up across the prairies of the Midwest. However, fewer of us may realize that solar farms, which are large-scale, ground-mounted arrays of photovoltaic (PV) panels, are emerging as a potential renewable energy alternative to wind power. Consequently, landowners in certain areas are being approached by developers of solar farms to discuss a potential lease of their land for the housing of a solar farm.
The use of solar energy is on the rise in the United States and in Nebraska. In fact, according to the Solar Energy Industries Association, solar energy production in Nebraska is expected to increase over 500% during the next five years. The increase is due to two main factors. One factor is the tax incentives offered by state and federal governments that help offset the cost of solar development (which incentives may be increased further under a Biden administration). The other factor is that the cost of PV cells has decreased significantly over the last few years (and will likely continue to decrease).
The rapid growth of solar energy production has caused owners of large tracts of land (including farmers) to consider whether alternative uses of their land may bring them a higher rate of return. However, solar farm developers are generally very selective when choosing potential land for a solar farm. The primary criteria such developers use when choosing land are (i) frequency of sunlight (including the absence of sunlight blocking obstructions), (ii) proximity to important infrastructure like roads and grid connection points and (iii) quality of terrain (flat and free from large rocks is most desirable). When a developer does find land that meets these criteria, it may aggressively pursue a long-term “solar lease” with the owner of the land for the development of a solar farm. In these instances, a landowner should seek the advice of legal counsel before entering into a solar lease, as it will affect the use of and earnings from the land for generations. Items to consider prior to agreeing to a solar lease include the following:
1. Lease Term – Due to the significant investment made by the developer, solar leases are generally going to be for at least 20 years, during which time the land will be unavailable for other purposes. Thus, a landowner should ensure he or she is willing to devote the land for this use for the entire length of the lease. Solar leases may also include options by the developer to extend the term of the lease and/or obtain rights to use additional land owned by the landowner. These terms should be negotiated carefully, and the implications should be fully understood by the landowner.
2. Compensation – Landowners should be particularly careful about the way their compensation is structured. A flat rental rate will provide a landowner with a steady and certain income stream on the land. However, a developer may try to structure all or a portion of the rent based on the developer’s income and/or revenue. This is generally ill-advised to the extent it can be avoided, as it reduces the certainty of income to the landowner.
3. Landowner Remedies – A landowner should ensure he or she will have a sufficient remedy in the event of a breach of the solar lease by the developer. Developers may be newer companies without significant assets. To the extent possible, a landowner should seek parent/owner guarantees and/or security deposits for his or her protection in the event the developer fails to fulfill its obligations under the solar lease.
4. Rights of Others – Mortgages, deeds of trust, farm leases and other rights in the landowner’s property that may be granted to others could preclude granting a solar lease on the land. A landowner should ensure that no such other rights in the land have been granted that could conflict with the solar lease. Failure to do so could cause a landowner to be in breach of other agreements and/or the solar lease, resulting in significant costs to the landowner.
5. Land Impact – The installation of a solar farm may cause long-term damage to the soil and/or irrigation systems of farmland. It may take considerable time and expense after the termination of a solar lease and removal of equipment for the land to be returned to a condition suitable for crop production. The allocation of the costs of returning the land to such condition should be addressed in the solar lease.
6. Taxes – Solar leases may impact the classification of land as agricultural for tax purposes. This can increase a landowner’s taxes going forward, and may result in recapture of prior tax reductions. A landowner should understand the tax impact of any solar arrangement and the lease should allocate which party is responsible for taxes during the lease term, including any tax increases.
7. Risk and Insurance – The lease should include customary indemnification and allocation of risk provisions. The parties should also ensure that adequate insurance is carried by both to cover such obligations.
8. Maintenance – The developer is typically going to be the party that is responsible for maintaining the solar equipment, but the lease should also clearly specify which party is charged with maintaining access to such equipment and/or the area surrounding the solar equipment.
9. Community Perceptions – A landowner should consider how a solar lease may impact his or her relationship with the community. Community members may object to the installation of a solar farm in their community for a variety of reasons. These include (i) opposition to the appearance of solar panels on the landscape, (ii) concern over the impact the construction and maintenance of a solar farm may have on neighboring properties (including property values) and (iii) distrust of outside developers.
Entering into a solar lease is a major decision, and landowners should not take entering into one lightly. If you have any questions regarding a potential solar lease on your land, please contact a member of our Real Estate group.
The material in this publication was created as of the date set forth above and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.