Windmills And Wind Leases

[Rob Lentz]

Appraising ag land in rural Michigan, we are looking at the impact of windmills and leases, appropriate capitalization rates and etc. Anyone care to share their experiences? Property we're appraising has 2 windmills and the control tower on it - generating $13,500/yr. Cropland prices are strong in this area ($9-11k/ac) and there are often bidding wars between local farmers where some parcels are being purchased knowingly over market. Cap rates for vacant cropland are low (~2%). Applying a similar cap rate would suggest that the wind lease income contributes almost $675k - yet purchaser of neighboring parcel, with wind lease generating $4000/yr, says it had little impact on his decision to buy and the price he was willing to pay.

 

[Terrel L. Shields]

They don't have a large footprint thus doesn't interfere significantly with farming, even though the lease may cover 80 acres or so. I would not capitalize the annual rents at the same rate as ag. - Wind farms would have a much higher cap rate imnsho. I would treat it like any other supplemental source of income but again, do wind farm leases generally sell with a property or do the sellers retain the "air rights"? - then the problem becomes akin to mineral rights where the seller is rarely willing to give up a property with an oil or gas income and retains this income stream except the buyer pay a very dear premium.

Also, having read a wind lease, it was interesting to note that the lessor has an easement over radio interference, flickering, etc. In other words, you cannot complain to them that your TV antennae does not work, or that your house electrical system won't blink, or the radio have an awful hum.... And what are your "rights" appraised? A leased fee, partial leased fee, or fee simple?

Interesting too, is that we haven't heard much on this forum about such wind farms from people and I know they are very common across Oklahoma, Texas, and Kansas as well as California, Iowa, etc. I am curious about the economics of windfarms as we had one outfit come in, do an assessment, even leased some land, but they said there was insufficient reliable winds to justify the project. Now another company out of Texas is proposing a 60 Mw farm nearby and apparently thinks there is sufficient winds? Go figure.

 

[Michael S]

If you just threw a 10% cap rate at it you're looking at $135,000. That sounds like it works out to the equivalent of about 12-15 acres of cropland. Are you appraising 50 acres or 500? If it's the latter you're talking about a few percent of the total value, if it's the former it could be around a quarter of the total value.

How long is the lease? If it's 20+ years then capitalizing the income stream could be appropriate. If it's less than that I would probably look at the present value of the income stream until the initial lease term expires. I would probably consider discount/cap rates from something like a billboard, but probably not a cell phone tower as the latter caries a lot higher risk of becoming obsolete and not being renewed. A quick Google search indicates a typical lifespan of 20-25 years before major upgrades/replacements would be needed.

I would definitely use a cap rate or discount rate higher than 2%. Why would an investor accept a 2% return on a depreciating asset when the lease term would probably not extend out far enough (50+ years) for you to get a return of capital, let alone a return on capital? I would start with 10% for analysis purposes and adjust up or down from there depending on how long the lease term is, how strong the tenant's financials are, etc.

 

[Gobears81]

Haven't had any experience with wind turbine valuations, as they often slice out an entrance and create a separate small tax parcel for the turbine. Do you have enough information to do paired data analysis on farmland sales to determine the contributory value of the turbines? Farmland is one of the more efficient markets around here, so if you had enough information on the leases, it could be done. I agree with the other two posts about cap rates-the economics of farmland are different than the economics of wind turbines. The land is not going anywhere, whereas the lifespan of a wind turbine is finite and it is a developing energy source, so it could be huge in 20 years, or it could be gone with some other energy source replacing it.

 

[PL1957]

Lots of literature out there on wind farm valuation. It's an interesting field due to the varying opinions as to RE vs. equipment, as well as discussions as to the durability of the income stream and effects of government policy on the value of the investment. The "cap it and go home" approach doesn't really work well here ...

 

[Sid Holderly]

The leases in my area are for 30 years with an option for an additional 30 years. with a inflation rate of 2% or the CPI.
The tower rate (at a point in time that I have data from) was $2,500 per megawatt and each is 1.65 to 2.1 megawatt. Additional lease fee is for access roads
, buried cable easements and other needed infrastructure. Roads and buried lines may account for $1,200 to $2,000 per tower additional.
The towers sell with the land and can not be separated.
Lease rate may go up is capacity is at greater than a set point, but can not below the stated amount.

There have been very few sales with towers. Based on the land sales and reported tower income the cap rate was about (6 to 15%).
The value derived was about $70,000 per tower (larger units) based on comparing with to without sales and this compares to
a present value using an 8 to 10% cap rate (8% @ 30 yrs or 10% @ 20 yrs).

On the sales in crop land area this added about $341 to $1,200 per acre depending on tract size 80 to 600 acre sale.

The question is will they be here 30 years from now? The discount rate may need discounted for failure probability %. Some wind farms are in bankruptcy
and others appear strong.

This data is from a small sample so the whole market is likely a lot more fluid. I have heard but not seen data on their minimum needed rate of 10 cents per KWH.
This is still above out local rates. Many companies are required to use a cetain percentage of renewable energy.

Rural residential values may have increase because the roads were improved to carry the weight of the construction equipment, a demand by the county.
A house can be no closer than 1,800 feet from a tower. The tower posts are about 250 to 495 feet and each blade is about 125 to 160 feet long. Maximum speed us about 12-20 rpm
or a tip speed of about 150 to 235 miles per hour.

There are many within a half mile of the home farm and can not be herd unless you are under one on the vast majority of days. On very quiet days with little t o wind
a slight whir can be heard, but on very low wind days few run. They are turned off unless they have the power sold. Most of the time less than half the towers are running
on a few occasions all have been seen running.

Some wind farms pay on royalties and some do not, so the formulas may be vastly different from windfarm to windfarm.

The local wind farm web site is: http://meadowlakewindfarm.com/ This wind farm could power 169,000 homes.

 

[Gobears81]

Rural residential values may have increase because the roads were improved to carry the weight of the construction equipment, a demand by the county.
A house can be no closer than 1,800 feet from a tower. The tower posts are about 250 to 495 feet and each blade is about 125 to 160 feet long. Maximum speed us about 12-20 rpm
or a tip speed of about 150 to 235 miles per hour.

Around here, the consensus is that wind turbines cause some value declines to residential values. Every situation is different of course, but it doesn't seem that many people want to be near a turbine, and even 1800-feet of proximity would put some people off in my opinion. I would venture that as being at least an offset to any road improvements. But, regulations for turbines in Illinois are probably a little different, and there is both noise and shadow flicker issues around here.

 

[Terrel L. Shields]

The royalty subject has come up with our royalty owner groups and the lease terms vary widely.

 

[Sid Holderly]

The mean, median, and $/sf in the townships with wind towers is a little higher than in the neighboring ones without towers over the past 5 years. The
volume of sales is so low that basing adjustments on any effect is not supported to the negative side, but possibly the other way. About 2 to 11 residential sales per township per year.

 

[Gobears81]

The mean, median, and $/sf in the townships with wind towers is a little higher than in the neighboring ones without towers over the past 5 years. The
volume of sales is so low that basing adjustments on any effect is not supported to the negative side, but possibly the other way. About 2 to 11 residential sales per township per year.

Maybe there are more regulations in Indiana than Illinois for this type of thing because there are houses near wind turbines in Illinois that have to be less than 1800 feet away. There does seem to be a ton of turbines in the west section of Indiana, although it is kind of no-mans land also.