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Things you should know before signing that wind energy lease  

FARGO, N.D. – The number of wind towers and turbines going up in the region has exploded, with over 100 expected to be built within the next few months.

Practically all of these wind turbines will be going up on private farmland, but farmers need to have basic information in hand before they start negotiating land leases for wind turbines, according to Lynn Hamilton, an expert on wind energy leases from Michigan State University and Cal Poly.

Hamilton told those attending the Northwest Farm Managers meeting in Fargo recently that a landowner has three basic options regarding wind power development.

First, the land can be leased to the wind project, and this can be in either the form of a local project or an external developer. Second, the landowner can become a partner in a community owned wind project. The final option is own a residential or farm sized wind turbine for your own electrical needs.

These three options each have a different set of risks and rewards for the landowner, with renting to an outside developer having the least amount of risk, but also the smallest reward, according to Hamilton.

An intermediate risk and responsibility is present with a cooperative type partnership, but the profit potential is also greater for the landowner.

Finally, the greatest level of risk comes with individual ownership of a wind generation facility, but the profit potential is also the highest.

The vast majority of projects in the state up to now have been developed by outside investors and developers, she noted. However, there are a couple projects now being planned as a community venture. This is the trend nationwide as well, she said, with 98 percent of the wind turbines under a landowner lease arrangement.

Hamilton focused most of her remarks on the agreement between a landowner and an outside developer, noting that there is no standard lease agreement to rely upon. However, there are certain questions that need to be answered before a landowner even considers signing a lease agreement:

How much of my land will be tied up and for how long?

How much will I be paid and how will I receive payments?

Are the proposed payments adequate now and will they be adequate in the future? This becomes important since many of the leases will probably be written for at least a 20 to 30 year period.

How will a wind project impact my other land uses? Normal cropping and livestock operations won’t be affected by a wind turbine, but if you are planning on eventually developing your land, wind towers scattered about on the landscape will certainly have an impact on that plan.

Have I considered all of my other options and is this the best one for me? Hamilton said families need to discuss this type of lease with the younger generation and gain their input on the matter, since they will probably involved in decisions further into the future.

Compensation packages for wind project leases generally fall into three categories: fixed payments; royalty or percentage of the revenue payments; and a combination of the plans.

Fixed payments. The advantage to this plan is stable income and low risk for the landowners. However, Hamilton indicated it was preferable to include a payment escalator clause in such an agreement.

Royalty or percentage of the revenue payments. This gives the landowner a vested interest in the success of the project, but also requires the landowner to have some information about the power sales from that project, which sometimes the companies aren’t willing to share.

A combination of the plans. These can take in the form of:

– fixed payment plus a percentage of the revenue;

– fixed payment or a percentage of the revenue (usually whichever is greater); and

– equity partnership.

“A big factor towards getting a fair deal on a wind turbine lease is getting to know as much about the project as possible,” Hamilton said. “If you have all of the knowledge that you are capable of getting about the project, you will get a better deal. They are going to try and get as much from you for as little as possible. They don’t care if your land has been in the family for three generations. Your land is only an input to them. So the cheaper they can get your land for as long as possible to better their business model, works.”

Recently Hamilton has heard of companies asking for 99-year leases for wind projects, which she says are excessive. Most wind energy projects are designed to pay for themselves in 20 years or less and the utility then likes to have an additional 10 years for making an adequate return on their investment. Therefore, the average lease runs between 20 and 30 years.

“They don’t need a 99-year lease from you, or a 50-year lease to make it pay,” she said. “The only thing that a long term lease means is it is easier for them to sell to another party after they have owned it for 30 years and made a good return on their investment.

“In addition, you don’t have any idea what might be going on here in 99 years. You have no idea at this time what the opportunities might be here. You, as a landowner, want to limit the developer’s rights as much as possible.”

She also cautioned against signing an automatically renewable lease, which some developers are asking for. By signing such a lease you are limiting your right and the right of your heirs to ever be able to re-evaluate the lease and make changes.

When negotiating the lease, the developer may say they will only need an acre of land, which may be true after the tower is in place. But during the construction phase they will be building roads on your land and bringing in large equipment to help with the assembly. So you need to allow for those expenses and damages to your crops and fields during the construction phase.

Once these agreements are “signed and set in stone,” it’s almost impossible to go back and correct a wrong that was overlooked during the negotiating process.

Hamilton also indicated that these lease agreements could impact such things as your insurance coverage, USDA policies and your tax liability. These things all need to be checked out.

And she stressed never agree to confidentiality agreements in regards to these wind project leases.

“If you and your neighbors can’t talk to each other, you can’t bid up the price of that contract, and you end up only protecting the developer’s rights and not your own,” she said.

If the wind project ends, who is responsible for removing the wind turbine, tower and the concrete mass that was used to anchor the tower in place? And how long do they have to remove these items? And the property needs to be returned to the condition it was before. These matters need to be covered in any agreement a landowner signs, she noted.

In closing, Hamilton gave a check list that landowners need to go through before signing a lease agreement:

– Always consult a qualified attorney before signing a contract.

– Consider how a wind easement/

lease will impact how you use your land (farming, ranching, hunting, recreation, etc.). Contracts should be clear on this point.

– Consider negotiating for non-monetary compensation, such as access to wind resource data.

– Learn as much as you can about wind energy and the specific project and company in question.

– For royalty based compensation packages, consider what it would take to exercise your audit rights.

– Carefully weigh your alternatives, expectations and goals. You don’t have to sign the first contract you see.

– Work together. Whether you’re negotiating with a wind developer or trying to market your land with neighbors.

– And, worth repeating: Always consult a qualified attorney before signing a contract.

By Dale Hildebrant

Farm & Ranch Guide

3 March 2008

This article is the work of the source indicated. Any opinions expressed in it are not necessarily those of National Wind Watch.

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