Betting the Farm on Solar: Leasing and Due Diligence Considerations

While imagery of the American Dream used to be picturesque farm towns, robust bounties and families gathered around the table for a meal, values have shifted, and once-robust farming communities have become forgotten lands, with few farmers left in sight. As generational values continue to evolve, many landowners are left with few options when faced with the looming question: “What to do with the land now?” Over the past 25 years, U.S. farmers and farmland owners have more frequently turned to solar leasing as a buffer against volatile crop prices.[1] The concept appears simple; farmland not being used for agricultural purposes is leased to solar developers to become solar farms with minimal impact to the land and the community, and all while lining the pockets of landowners for the foreseeable future. However, in practice the concept is not simple, as solar leasing business arrangements are often quite complex.

Developer Due Diligence in Leasing Land for Solar Projects

When it comes to prime real estate for solar leases, developers look to more than surface-level feasibility. An assessment of feasibility includes sub-surface matters including environmental concerns and encumbrances to title such as encroachments and easements — or worse, a generations-old grantor deed without a subsequent chain of dispositions, indicating an “heir property” situation.[2] While other title issues may be evident in a preliminary search, developers must weigh the cost of resolving such issues during the due diligence period.[3] Common title issues are unlikely to cause a major concern, but there are several significant issues that can turn the needle-in-a-haystack property into a nightmare.

First, there’s the heir property situation — where a parcel of land is owned in fractional interests across several generations. Generally, if a tract of land is an heir property, the magnitude of work required to secure clean title is considerable, increasing the time and resources necessary to cure title. To begin, you must locate all heirs. Then, if all heirs are located, they all must be like-minded and agree, in writing, to the due diligence and lease terms offered by the solar developer. Often, heirs are either unwilling to respond, unknown, or cannot be located. Even if you can locate all heirs and they all respond, there is still the possibility of a hold-out heir that is not in agreement with their counterparts. Given that clearing heir property title is often lengthy and uncertain, heir property may eliminate a project from consideration.[4]

A second significant title issue is third-party encumbrances. A title report will reveal whether any party has a lien on the property. The most common types of liens seen include mortgages, operating loans, unpaid taxes, and unsatisfied judgments related to an unpaid debt. In making sure encumbrances do not disrupt solar operations, developers must obtain a Subordination, Non-Disturbance and Attornment Agreement from all current lenders, so that if any lender forecloses and the land does change hands, the new owner would take the property subject to the lease.

A third significant title issue is easements. While recorded easements can be burdensome and require careful diligence to ensure the necessary permissions or modifications are addressed in the lease agreement, unrecorded easements are much trickier to address. Similarly, utility rights of way that are negotiated, recorded and then never developed, nevertheless appear on a title report. All too often, a title search will reveal easements held by telephone or electric companies or railroads; this is a title issue, even if no wires were run and no tracks were laid. While some states have a process for extinguishing rights of way that have gone undeveloped for a specified number of years, it is important to seek advice from legal counsel when faced with these scenarios.

Beyond the surface of the land, developers need to consider subsurface mineral rights. You may wonder, is it possible to grant surface rights to one party and subsurface rights to another? The answer is: It depends. While it is possible for a third party to hold subsurface mineral rights for mineral extraction purposes while a solar developer holds surface rights to the land, if the two interests coexist, the holder of subsurface rights could interfere with the surface right holders’ interest, making the tract of land less desirable to solar developers.

Zoning, Tax Implications and Future Use

Solar developers are often required to obtain a conditional use permit, which requires a process of public notice and hearing, and approval by the local zoning board and county commissioners. At these hearings, neighboring property owners can voice concerns about the solar project. Topics you can expect to surface are nuisance, unsightliness, glare, noise, loss of farmland to the community and declining property values. Further, zoning changes are sometimes required prior to development. In such cases, landowners need to consider whether the proposed zoning changes will make the land suitable for their anticipated future use, and if not, how difficult it would be to revert the land to its original zoning designation.

Once the land is properly zoned for use as a solar development, it likely will have significant tax implications. When land zoned for agricultural purposes is rezoned for industrial or commercial use, this comes with high tax rates and the removal of agricultural exemptions. This redesignation can come with retroactive penalties (a three-year lookback in some jurisdictions) where either the landowner or the solar developer (to be negotiated in the lease terms) will be responsible for paying the tax penalty preceding use of the land as a solar development.[5] On the other hand, solar panels may be considered taxable improvements, so there is a chance some of those fees can be recouped. As always, it is important to consult with your local tax accessor, accountant, and/or tax attorney regarding these matters.

Solar leases also require careful language designating compliance with environmental laws and regulations between the parties. The landowner will often acknowledge that the land is free of hazardous waste and the solar developer will often warrant that proper care will be taken in the use, disposal, and decommissioning of the solar development. Since the solar panels and batteries themselves contain hazardous materials, holding the solar developer liable for any environmental violations is crucial. The decommissioning costs, time and efforts between the parties should all be negotiated in the lease agreement. The future intended use of the land also should be considered when determining what restoring the property to its original state will entail.[6] Before signing an initial term sheet or option for a solar project lease agreement, landowners should consider whether any future use plans for the property are expected within the most far-out time frame.

Conclusion

A solar lease is a generational decision. While solar leases can be complex, they can provide greater financial returns than any other land use for agricultural purposes and present a unique foothold in generational wealth for decades to come. Typical initial terms of solar leases can last for as many as 30 years, and often contain several extension options. A property with fewer title issues can justify higher rent payments, or even escalating rent payments, for the initial term and extensions. To avoid unexpected surprises and be prepared for the future, it is always advisable to consult an attorney to ensure proper compliance with local, state and federal laws to ensure your interests are fully protected. While solar leasing has the potential to be a lucrative endeavor for landowners and farmland communities, doing so with minimal impact is crucial so that future generations may continue to benefit from the land.

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[1] Hirtzer, Michael; Wade, Will; and Peng, Ilena. Solar Panels Spread Across America’s Heartland as Farmers Chase Stable Returns. Bloomberg News. March 7, 2024. https://www.bloomberg.com/news/articles/2024-03-07/america-s-farmers-embrace-solar-panels-to-protect-against-volatile-crop-prices

[2] Branan, Robert. Solar Leases: Clearing Matters of Title During Solar Development Due Diligence. Agricultural and Resource Economics, NC State Extension, NC State University. (2021). https://farmlaw.ces.ncsu.edu/solar-leases-clearing-matters-of-title-during-solar-developer-due-diligence/

[3] Id.

[4] Id.

[5] Leasing your Farmland for Wind & Solar Energy Development: A Beginner’s Guide for Farmers; New York Farm Bureau Legal Affairs Department, December 2016. https://www.nyfb.org

[6] Viguet, Drew. Solar Leasing for Landowners; The National Agricultural Law Center, December 1, 2022. https://nationalaglawcenter.org/solar-leasing-for-landowners