Land & Renewables Connection
Landowners Should Ensure that Solar Farm Payments Retain Their Value Over Time
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.
The Renewable Energy, Zoning and Land Use attorneys at Houston Harbaugh assist clients in all matters involving solar energy and renewables, including leasing. For assistance please contact Brendan A. O’Donnell at 412-288-2226 or odonnellba@hh-law.com
About Us
These are cutting edge legal issues. The law of the future. Renewable energy, zoning and land use issues will shape the future of growth in the region. Houston Harbaugh’s Renewable Energy, Zoning and Land Use practice focuses on assisting clients maximize and protect the value of their properties, whether related to renewable energy, commercial or residential development opportunities.
As renewable energy becomes more reliable, efficient, inexpensive and technologies associated with carbon capture and storage advance, Pennsylvania, West Virginia and Ohio are in position to benefit from these two parallel energy development opportunities. The region’s geographic location and existing infrastructure presents unique opportunities for property owners to participate in solar, wind, geothermal, other renewable energy developments, as well as for carbon capture, carbon sequestration and carbon storage projects. Additionally, legacy oil, gas and coal infrastructure may be repurposed and reused in connection with new energy developments.
With any development, whether renewable energy, commercial or residential, there are a host of zoning and land use issues that directly impact the most basic parts of daily life of both individuals and communities. Determining where and how land can be developed impacts property ownership, property value, quality of life and the economic development and wellbeing of communities. Zoning and land use issues are, on one hand, matters of local concern but, on the other hand, potentially subject to county or state regulations.
The Renewable Energy, Zoning and Land Use practice draws on Houston Harbaugh attorneys’ experience in energy, oil and gas and real property matters to advance clients’ interests in both transactional and litigation matters. Houston Harbaugh’s Renewable Energy, Zoning and Land Use attorneys assist clients with matters including:
- Solar energy leases;
- Wind energy leases;
- Pore space ownership for carbon capture / carbon sequestration / carbon storage, geothermal and waste disposal;
- Ownership of legacy oil, gas and coal infrastructure for repurposing/renewable energy usage;
- Compliance with existing solar, wind and renewable energy leases;
- Surface and subsurface accommodation between competing land uses;
- Variance, Special Exception and Conditional Uses applications/hearings;
- Land use appeals;
- Eminent domain
Brendan A. O'Donnell
An attorney in Houston Harbaugh’s Oil and Gas Practice, Brendan O’Donnell has represented oil and gas owners across Pennsylvania in a wide array of oil and gas matters for over a decade. This experience has involved not only the Marcellus shale and the Utica shale, but more traditional oil and gas development as well.
Brendan maintains a diverse practice, representing clients in all matters involving oil and gas spanning the transactional and litigation realms. On the transactional front, Brendan routinely assists landowners with negotiating oil and gas leases, pipeline rights of way and surface use agreements and subsurface easements related to horizontal drilling as part of Marcellus and Utica shale development. Brendan also frequently reviews royalty statements and oil and gas ownership issues as well as preparing deeds and title curative documents. Brendan also maintains an active litigation practice, representing clients in state and federal courts, as well as private arbitration matters. This litigation often involves title disputes, pooling and unitization challenges, lease termination questions and royalty/ post-production cost claims.
Assisting clients across the spectrum from contract negotiations through litigation and appeals gives Brendan valuable first-hand knowledge about how oil and gas agreements are prepared, how disputes arise and how courts resolve these issues. Brendan stays up-to-date on developments in oil and gas law and writes frequently on the these topics. Additionally, as alternative energy generation like wind and solar are increasingly being developed in oil and gas producing regions, Brendan assists clients with navigating the interplay between these complex energy developments and evaluating solar agreements.
Brendan complements his oil and gas practice by representing property owners, including oil and gas owners, in zoning and land use matters. Brendan has represented clients before municipal bodies and in appeals to court. Brendan is also active in the firm’s Energy and Environmental Law Practice.
Regardless of the type of representation, Brendan prides himself in providing clients with realistic, pragmatic advice. Hiring an attorney is an investment and Brendan focuses on how he can provide value to clients.
Outside of the office, Brendan serves on the Town of McCandless Planning Commission and lives with his family in McCandless. Brendan has visited every one of Allegheny County’s 130 municipalities.
