Solar Energy Land Lease Question

[Toldya]

Hi everyone-

I have a relative who owns a fairly large parcel of land in the Mojave desert. He's been approached by a solar energy company who wants to lease a portion of his land (approx. 15-20 acres), upon which they propose to install solar panels. They are proposing an initial lease of 20 years, which may be renewed with mutual consent at the end of the initial lease period.

The property is zoned for commercial, agricultural, and residential use, and may be subdivided into parcels no smaller than 2.5 acres. Given the state of the residential real estate market in California, subdivision of the land for residential use is neither economically feasible nor likely. The county has approved use of the land for alternative energy production, and there are a few other similar projects going up in the area.

This aspect of the industry is out of my league, and I would like to help ensure that my relative is getting a fair deal for use of his land. Also, since this is a fairly new field of commercial tenancy, we don't have much in the way of rental information for comparable projects. They are proposing rent on a per-acre basis.

Given the speculative nature of the real estate and energy markets, we're also wondering if the demand for this type of lease is likely to drive rent prices up or down. That said, the family is concerned that they might do better to sit on the land and wait for a better offer at the risk of "missing the bus" altogether.

From what I've seen, the contract looks pretty straightforward, but I'm sure any ambiguities in the wording are intended to be in the tenant's favor. They've consulted a real estate attorney, but even he hasn't seen enough agreements of this type to ascertain whether or not the price per acre is reasonable. I was hoping someone out there might be able to offer some insight into the pros and cons of these arrangements, as well as some insight into what kind of rental range these projects are yielding.

If anyone is willing to share any information and /or experience you may have in this field (no pun intended), I would greatly appreciate your input. PM me if you like.

Thanks in advance for your help.

Steve

 

[CANative]

A lot of moving pieces on this problem. I've recently been involved in negotiations over the tax value of land in the Mojave with solar power potential. But these types of projects typically involve much larger tracts (6,000 to 12,000 acres).

Would need a lot more information about your property.

 

[nstanbru]

I read somewhere that the Los Angles DWP is planning on a huge solar panel project in Imperial County. I don't know if this is on property they own or are leasing. It might be worth taking the time to check it out.

 

[Michael S]

What's the land worth and what sort of rent are they proposing? It's basically a ground lease. Is the return sufficient for your relative? In my market you can typically capitalize a ground lease at 10% to determine the fee simple value. So if someone is offering $1.50 per square foot per year, the land is probably worth about $15/SF.

There's a lot of land in the Mojave desert. I can't imagine it's worth a whole lot unless it's next to a major road or in a built up area. A quick search on LoopNet showed several similar size parcels sold in the last year ranging from $7,000 to $12,000 per acre. So it seems like $1,000 per acre per year might be a rough starting point.

 

[Vernon Martin]

Appraisal of solar lease property

I imagine that BLM might have solar lease comps, as so many solar companies are leasing federal land in the Mojave.

 

[Toldya]

What's the land worth and what sort of rent are they proposing? It's basically a ground lease. Is the return sufficient for your relative? In my market you can typically capitalize a ground lease at 10% to determine the fee simple value. So if someone is offering $1.50 per square foot per year, the land is probably worth about $15/SF.

There's a lot of land in the Mojave desert. I can't imagine it's worth a whole lot unless it's next to a major road or in a built up area. A quick search on LoopNet showed several similar size parcels sold in the last year ranging from $7,000 to $12,000 per acre.

Your figures are pretty accurate for the vacant land. I don't expect Club Med to be building a resort in the neighborhood any time soon.

Without having done extensive research, I figure the vacant parcel they're looking at leasing is probably worth somewhere in the neighborhood of $80-$100k if it were kept intact and sold for residential and /or agricultural use. It's close to a major road with well-maintained unpaved road access, with a stable water table, 2 good private wells, and reasonable access to public electricity and cable lines. I think what might make it particularly appealing for this tenant is that it's located within a couple of miles of an Edison switching station. I'm unsure of exactly how the energy production and resale process works, but it seems that this proximity would make it more convenient for the tenant to resell the electricity to public utility companies. This would appear to make the potential return on the lease substantially higher for energy production than farming alfalfa, for example.

One issue is that the subject parcel was the family home / farm, and there's sentimental attachment for some of the heirs. As an appraiser, I know sentiment doesn't add or detract from actual value and/or HBU, but it is probably coming into play in the family's willingness to use a portion of their land for commercial lease. As proposed, the house, outbuildings, and about 5 acres would retained for family use (no lease), although there would be an easement across the unleased land for access to the lease.

Thank you all for your replies. I know this is a very tough, multi-faceted issue, and I appreciate you taking the time to respond. I'm also in the tenuous position of being asked for my opinions without contributing to family discord, so I'm walking a fine line between appraiser and relative. I definitely know better than to give the appearance of advising them as a consultant or appraiser, but they want my input nonetheless.

 

[Toldya]

I imagine that BLM might have solar lease comps, as so many solar companies are leasing federal land in the Mojave.

Good idea- thanks!

 

[Vernon Martin]

From the Las Vegas Sun:

The BLM recently released the first rent and royalties schedule for solar projects on its land. It’s based on the electrical capacity of the planned solar plant and rural agricultural land values in the home county.

Because of vast differences in land values in rural counties across the United States, rental rates on BLM rights of way vary greatly, from $7.85 per acre in Elko County to $3,139 per acre in Richmond County, N.Y.

Land in most Nevada counties, under existing leases of rights of way, would be rented for less than $50 per acre in 2010, but spike in mining country. Rent on BLM land in Storey County, for example, is $942 an acre this year.

Energy experts say the rents don’t reflect the high value of land for new uses, such as solar and wind development. In Clark County, where land prices are high and solar development is expected to flourish, land would be rented for $94.17 an acre this year. But in nearby Lincoln County, which has tens of thousands of acres of land conducive to solar development, the rent would be just $15.69 an acre.

 

[Terrel L. Shields]

In fossil fuels rents are based on a "bonus" - a one time payment of X dollars (negotiated, but typically is considered to be about one-third the market value of the mineral right - surface not involved) then there are royalty payments based on production... Perhaps you should look into a percent of the production. Otherwise, a monthly rent.

ONE caveat. Be sure to have provisions in the lease that the lease does not cover nor prevent development of the oil and gas or mineral rights within reason. AND, I would want other provisions. One - they have a time limit to remove the equipment after the end of the lease or it becomes yours. Two - any environmental damage is their responsiblity. Three - if taxes are impacted on the land, they must reimburse you for that. You don't want a $500 a month lease and your taxes go up $12,000 a year. While serviing on the board of equalization once we had a Cable TV tower that was leasing for $100 a month with a provision that the company could buy the property for $1000 if the owners died. The site was valued at $55,000 and the sole remaining owner was on dialysis....The lease was to expire in 6 months. After they left we avered that they'd best keep the old gal on life support for the next 180 days.
The Osage Indians are in court with a wind energy company in Oklahoma with the Osage arguing that the wind leases may interfere with their subsurface rights to oil and gas. http://www.tulsaworld.com/news/article.aspx?subjectid=11&articleid=20110614_12_A1_CUTLIN258728

These energy leases are going to get very complex

 

[Toldya]

Excellent points to consider. Thank you.