The old saying goes, “Bulls make money, Bears make money, and Pigs get slaughtered”. In today’s farming environment, market volatility speaks volume and rules on how to play the game define everything, especially profit and loss. As farmers, we play the game everyday with the commodity market.
However, within the agricultural industry, there is a new game in town, being wind energy. The key issue is how, as farmers, we can make money in the wind energy game if we do not know the rules. Specifically, who will win with this part of the “Green Energy” boom? Will it be the developer, the utility companies, the landowner, or consumers?
Most recently, in 2008, the American Wind Energy Association (AWEA) reported that the US dethroned Germany as the world leader in wind generating capacity. This market boom has developed into the hottest ticket for property owners and economic development. Many large commercial wind farms now dot the American rural landscape.
Wind developers are currently actively courting farmers and landowners for land leases to install wind farms. Many of these companies are curre ntly in a feeding frenzy mode for buying up lease agreements at low rates (i.e. option contracts) for the future development of large-scale wind projects. Thus, landowners should exercise caution and understand all aspects of the wind energy game before entering into any agreements. A few of the things a landowner should consider:
- All contracts are negotiable, but most developers come with a “take it or leave it approach”. Thus, a landowner should know, especially groups of landowners working together, that a better deal can be negotiated.
- Almost all wind energy contracts are written to progressively protect the developer and include lengthy contract requirements, often 30 pages or more.
- The first 10 years are the most profitable time for wind farm developers due to the frontloading and issuance of generous tax incentives.
- The normal payback period for a wind turbine is 9 to 11 years, just about the time the manufacturing warranty expires. However, most wind contracts are written to last 60 plus years.
- A landowner should ensure that fixed or royalty payments adequately increase with the proper rate of inflation. Some contracts use the Consumer Price Index (CPI) to forecast future revenue increase. This representation does not adequately gate the rate of inflation over time.
- Many contracts do not include provisions for project end and equipment destruction.
Lastly, landowners need to understand what rights they lose under these agreements. Some terms to watch out for:
- Confidentiality clause: prevents the landowner from discussing with other area landowners or the release of preliminary wind collection data for future use.
- Length of the lease clause: limits or extension rights will limit the ability of the landowner to enter into new agreements new developers.
- Compensation clause: There are many payment options, tax consequences, renewable energy credits, and tax credits that pertain to the compensation. A landowner must know all forms of compensation available so as to not leave money on the table.
- Assignment clause: permits the developer to sell or transfer lease rights to another party. So, a landowner has no idea who they may be dealing with in the future.
- Choice of law/Venue: Makes it so any disputes or litigation must happen in whatever state the developer chooses. How would you like to be an Indiana resident forced to bring legal proceedings in a state far away?
Perhaps the largest drawback to a long term lease, whether it be for wind, oil & gas, or other, is the cloud it puts on the title of the land. Such clouds can make transferring of the property very difficult. A landowner may find themselves spending large sums of legal fees getting the title unclouded.
Lastly, when faced with wind energy leases, it is wise to consult with an attorney who is knowled geable of the industry so as to broker the best deal possible. A skillful attorney often times can negotiate a deal for a landowner that pays the cost to hire the attorney several times over. Most importantly, take note that the developers have armies of attorneys who have drafted the agreements and handle their legal affairs. Going up against such without legal counsel of your own is like going into battle with plastic sword; you just won’t get very far.
John J. Schwarz, II, is a farmer and attorney in Steuben County, Indiana. He focuses his practice on agricultural law and legal issues important to farming communities. He can be reached at 260-665-9779 or firstname.lastname@example.org. These articles are for general informational purposes only. If you have a specific legal question, you should consult an attorney.
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