News & Thought Leadership from Sulloway & Hollis
Negotiating a Fair Wind Energy Facility Lease for a Landowner
As of late 2012, two wind energy facilities are operating in New Hampshire and a third is under construction. The Granite Reliable Power facility located in Coos County consists of 33 separate 3.0 megawatt (“MW”) wind turbines sited along remote mountain ridges. (A wind turbine consists of a high tower which supports an electrical generator turned by lengthy blades.) A subsidiary of Iberdrola Renewables has been operating a 24 MW wind facility in Lempster, New Hampshire since 2008, and another Iberdrola subsidiary is constructing a 48 MW wind facility in Groton, New Hampshire. At least two other wind energy facilities to be located in New Hampshire are in the planning stage.
A developer of wind energy facilities may approach a landowner who owns high elevation land to commit to a long term lease for the development and operation of a wind energy facility (“Wind Lease”). Location of a wind energy facility turns both on the availability of land with good wind potential and the availability of a nearby transmission loop with sufficient capacity to carry the electricity generated. Developers will also consider the level of community support or opposition to a project.
Any wind energy facility over 30 MW must have approval of the New Hampshire Site Evaluation Committee. Obtaining such approval is an expensive procedure for any developer. However, it has the advantage of avoiding the need for separate local approvals.
Similar to any long term lease of real property, both the landowner and the developer have much at stake and must carefully negotiate their respective rights. As is the case with companies who propose to lease land for the erection of telephone cell towers, the first draft of any Wind Lease presented to a landowner should be viewed as only the tenant’s first offer. Negotiation will be needed to reach an appropriate rental amount and to ensure that the rights of the tenant do not overreach. A landowner’s negotiating strength will turn upon how important his land is to the feasibility of the overall project.
Most landowners will need legal assistance from an attorney experienced with Wind Leases to protect their interests in negotiating with a wind facility developer. Important matters to consider in negotiating and drafting a Wind Lease to protect the interests of the landowner include the following:
Cooperation Agreements Among Landowners. The developer will need Wind Leases in place with all landowners whose land is needed for the project. This includes not only the land that will be the site of the wind turbines, but also the land needed for transmission lines and access roads. Therefore, Cooperation Agreements among landowners may be needed. Such agreements can address sharing rents for wind turbines where placement of wind turbines is uncertain or will be along a common border.
Duration of the Wind Lease. Wind leases will typically include a development term of 2 to 5 years and an operational term of 20 to 25 years, with renewal rights. During the development term, the tenant will need to conduct wind studies on the leased properties to determine the best location for wind turbines. When the landowner enters into a Wind Lease, it will be unknown whether the wind energy facility will actually be constructed. The lease should clearly terminate if the tenant does not obtain regulatory approvals and proceed with construction within a stated period of time.
“Shrink Wrap” Provisions. A tenant will typically want to lease all of the landowner’s real estate for purposes of evaluating where wind turbines and transmission lines and access roads will be located. After completion of construction, the Wind Lease should have terms which shrink the scope of the leased premises back to a circular area with a diameter of 500 to 600 feet centered on the midpoint of each tower supporting a wind turbine and corridors typically about 100 feet in width for distribution lines and access roads. The landowner should ensure that the description of leased premises given by any previously recorded notice of lease is appropriately amended to reflect any shrinking of the area which is actually leased after completion of construction. Enforcement provisions should be considered to force tenants to so amend recorded notices of lease.
No Build Areas. While the landowner may be required to lease all of his property for the initial development period of a Wind Lease, certain portions of the property where no wind turbines or transmission lines are to be located can be designated as no build areas. A landowner who resides on the property can protect his home from noise and visual impacts in this manner. Landowners who reside on land to be leased should visit operating wind facilities to learn about the visual and noise impacts of wind turbines and distribution lines.
Development Term Rent. The landowner can usually expect to be paid an upfront fee at lease signing and agreed annual payments during the development term. The initial payment amount at lease signing plus the development term payments should be high enough to cover the upfront costs of the landowner, which will include a good deal of time of the landowner and most likely fees of the landowner’s attorney.
Operational Term Rent. Obtaining fair operational rent will be a landowner’s key concern. One method of determining operational rent is to multiply a fixed amount per year beginning from the commercial operation date times the installed MW hour nameplate capacity of the turbines located on the landowner’s property. For example, the wind turbines at the Granite Reliable facility each have nameplate generating capacity of 3.0 MW hours. If the fixed amount per year was $3,000 and two such turbines were located on a landowner’s property, the annual rent payment would be $3,000 times 6. (What constitute the initial “commercial operations date” needs to be carefully defined.) Since the location of the wind turbines will likely be unknown when the Wind Lease is signed, the landowner should negotiate for a minimum amount of rent to be paid regardless of whether any wind turbine is actually located on his property. Also, the landowner should negotiate as to the type of turbines to be installed and ask for their nameplate MW hour capacity.
Another option for operational rent payment is the “royalty rents” method. Under this method, rent equals a fixed percentage of the gross operating proceeds arising from sales by the tenant of electrical energy, including renewable energy credits. For example, the rent could be 4 to 5% of gross operating proceeds for each quarter of the year. (The landowner could ask that the percentage amount increase over time, such as at every 5th anniversary of the commercial operations date.) Royalty rent provisions generally offer more reward to a landowner but at more risk if operating results are poor. They are also more complicated to draft and administer. The landowner will want to ensure that sales of electrical energy are properly metered and to have the right to audit the tenant’s sales records. When the royalty rent method of payment is used, the Wind Lease should also require that sales of electricity be priced based upon arms length terms.
Inflation Adjustments. Because of the lengthy term of Wind Leases, any initial fixed rent amount per installed MW hour capacity or any minimum guaranteed rent should adjust over time to reflect possible inflation. The landowner will have to decide whether he prefers a fixed percentage increase in the fixed rent amounts at established intervals of time or to have rent amounts increase (and likely also decrease) each year in accordance with changes in the Consumer Price Index. CPI rent adjustment clauses will need to be carefully reviewed and the appropriate index agreed upon by the parties.
Miscellaneous Payments. Constructing a wind energy facility often involves the clearing of substantial timber. The landowner should insist on being paid for the timber cleared. The landowner can also ask for separate payments of a fixed amount per linear foot of overhead or underground transmission lines installed on his property. In addition to the development period rent, the landowner can ask for a separate payment for any temporary meteorological towers installed on the property.
Decommissioning Costs. Landowners should consider whether there is any appropriately funded plan in place to cover the cost of removing a wind energy facility from the property when it has reached the end of its operational life. Wind turbines typically have an operational life of around 20-25 years, although facilities can be “repowered” with replacement turbines. For wind energy facilities subject to site evaluation permitting approval, such approval will normally be conditioned on some type of appropriate decommissioning plan negotiated with local governmental authorities. Individual landowners must usually depend on such plans, and should review them.
Important “Boiler Plate”. Tenants often request extensive provisions allowing the tenant to mortgage its leasehold interest and to assign its leasehold interest, and making termination of the lease or default difficult. While the legitimate interests of the tenant must be considered, including the crucial need for mortgage financing, the landowner should insist that there be only one entity to deal with in collecting rent and in ensuring that the tenant’s obligations are carried out. If it is important that the landowner be able to mortgage his own property and keep his mortgage in first position, then appropriate subordination, non-disturbance and attornment provisions must be provided for in the Wind Lease.
For information on the firm’s practice in this area, please contact R. Carl Anderson, Member of the firm’s Real Estate, Development and Environmental Practice Group.