WINDS OF CHANGE: WIND LEASE CONSIDERATIONS
Author(s): Robert S. "Sam" Arthur, Jr., Justin H. Boyd
Published: 12/22/2011
Beware of a wind developer who attempts to include unnecessarily long evaluation periods or free extensions, as such lessee may be attempting to stockpile potential wind sites, without any intent to develop and with the hope of assigning the leases to larger wind developers.
Colorado has become a leader in the wind energy industry. According to the American Wind Energy Association, our state is the third-highest wind energy generator in the United States. Farmers, ranchers, and other landowners should consider if their property is suitable for wind energy development and how such development could be integrated into the current uses of their land. Some major factors that impact the decision to enter into a wind lease are discussed in this article.
Power in Numbers
Owners of land in areas that are advantageous for wind farm development should consider joining forces. Increasing the acreage available for wind farm development will increase the landowners' leverage when negotiating with a wind developer. Landowners in high wind-speed areas may wish to collectively engage an environmental consultant to determine the suitability of their land for wind development.
Factors that may increase the value of the lease opportunities include proximity to transmission lines, local and state economic incentives, and the approval process of the local regulatory authority. Factors sometimes found in Colorado, which may decrease the suitability for wind development, include rocky or mountainous terrain and close proximity to federally protected lands. If neighbors join forces, in addition to enhancing their bargaining power, the evaluation costs can be spread among the collective group.
The Four Stages of Wind Development That Must Be Addressed in the Lease
Evaluation Stage – During this period, the wind developer studies the feasibility of the site for constructing wind turbines, evaluates environmental issues, determines the permitting process, and obtains the necessary financing. While the duration of this stage will vary, the landowner should attempt to limit this stage to a period that lasts no longer than three years. In addition, during this time the wind developer should be paying a guaranteed monthly or annual rent payment. Beware of a wind developer who attempts to include unnecessarily long evaluation periods or free extensions, as such lessee may be attempting to stockpile potential wind sites, without any intent to develop and with the hope of assigning the leases to larger wind developers.
Construction Stage – Assuming that the wind developer desires to proceed from the evaluation stage, the construction of the wind turbines will begin. The landowner should negotiate for a construction bonus that reflects the value of the site and also may be based on the number of turbines constructed. The wind developer should continue to pay the monthly or annual rent during this stage.
Operational Stage – Once the equipment has been installed, wind energy is produced and sold for profit to available markets. Generally, the landowner will receive a royalty or percentage of gross revenues received from the production of the wind energy. The landowner should negotiate the percentage of gross revenues that it receives to be increased every five or so years of the lease. While the percentage will vary from location to location, the landowner should be suspicious of any proposed royalty of 3 percent or less of gross revenues during the beginning period of the operational stage. Operations of the wind turbines can last anywhere from fifteen to fifty years.
Termination Stage – If the wind developer terminates the lease prior to even reaching the construction stage, the landowner should negotiate for a termination fee. Otherwise, the wind developer will have encumbered the landowner's property for the relatively low price of the monthly or annual rent, when the landowner could have been negotiating with another wind developer with the means to actually construct and operate the wind turbines. Assuming that the wind developer does complete the operation stage, the lease will provide for the wind developer to "decommission" the wind turbines. The landowner should receive some type of security, in the form of a bond or cash security deposit, to assure that the wind developer has an economic incentive to properly remove its equipment. The landowner should ensure that the wind developer removes its wind turbines and other equipment in an efficient manner, and leaves the land in a condition no worse than when the wind developer commenced construction.
Beware of the Landowners' Indemnifications
As with many legal agreements, parties often agree to mutually indemnify the other for any damage caused by their own acts or negligence. For example, if the wind developer breaks the farmer's fence or irrigation structures when installing its large equipment, the wind developer will fix and replace the damage; such repair or replacement costs could run into thousands of dollars. Conversely, imagine if the farmer's tractor runs into the wind turbine, which costs millions of dollars to replace. Such type of damage could force many farmers into bankruptcy. As a result, the landowner may wish to negotiate a maximum limit to its indemnification obligations, to account for the parties' potential economic risks.
Location of Wind Development, Reserved Uses, and Prohibited Uses
The landowner should expressly require the wind developer to refrain from development on or use of specific portions of the land if the circumstances dictate. For example, the landowner may prohibit the wind developer from operating within 500 feet of a residence or within 25 feet of either side of a river or a creek that runs through the property. Most importantly, the lease should expressly reserve to the landowner the right to use his or her property for other uses, such as grazing, hunting, fishing, mineral exploration, or solar energy. In addition, the landowner may desire to reasonably restrict the access rights of the wind developer so as not to disrupt the landowner's peaceful enjoyment.
Taxes and Utilities
Upon construction of the turbines, the value of the property will increase. As a result, the county assessor likely will increase the property taxes assessed to the property. In addition, the utility costs on the property to operate the turbines will rise dramatically. The landowner should ensure that these increased costs incurred by the wind developer are passed on to the wind developer.
Assignment
As mentioned previously, some wind developers desire to obtain numerous wind leases without ever intending to construct or operate wind turbines. Instead, their hope is to assign these wind leases to larger wind developers. As advised above, landowners should work with their neighbors and join forces to cut out this type of middleman, and they should attempt to present their own attractive opportunity to a large wind developer. As another protection, the individual landowner also should restrict the ability to assign the lease. At a minimum, the landowner should have some type of "reasonableness" standard in being required to consent to such assignment to ensure that the assignee has the same economic capacity to both construct and operate the wind development.
The above are just some of the major factors that landowners should consider before entering into a lease with a wind developer. The wind lease may provide attractive economic security; however, given the long duration of these agreements, the landowners must ensure that their interests are protected. If you have any questions regarding wind-lease issues, please do not hesitate to contact Sam Arthur or Justin Boyd.
From Illinois
NO WELCOMING COMMITTEE FOR WIND FARMS: HAMILTON TOWNSIP AMONG COMMUNITIES IN OPPOSITION
BY DAVID GIULIANI,
December 23, 2011
“They wanted us to sign a 70-year contract,” Gonigam said. “That would affect my kids, grandchildren and great-grandchildren.”
WALNUT – Stacy Gonigam’s family decided against having wind turbines on their farm in southwestern Lee County.
Ireland-based Mainstream Renewable Power approached the family for its Green River wind farm, which is planned for Lee, Whiteside and Bureau counties.
Gonigam said she didn’t sign a contract with Mainstream because it would bind her family for a long time.
“They wanted us to sign a 70-year contract,” Gonigam said. “That would affect my kids, grandchildren and great-grandchildren.”
Gonigam also is the supervisor for Hamilton Township, population 236.
During the past summer, the township board voted unanimously for a comprehensive plan that recommended against the construction of wind turbines.
The township is not alone in its opposition. In the spring, the village board in Whiteside County’s Deer Grove, population 48, voted unanimously to regulate turbines within 1.5 miles of its boundaries. That was in response to news of Mainstream’s plans.
Now that Deer Grove has passed a zoning ordinance, the village has the right to ban wind farms in the areas near its borders, county officials say. Opposition to Mainstream’s proposal is strong in Deer Grove, so it’s doubtful the board will approve construction of turbines nearby.
While Hamilton Township’s comprehensive plan isn’t binding, it’s a statement against turbines, Gonigam said.
Sandy Cruse, a lifelong resident of Hamilton Township, said her survey found that 80 percent opposed wind turbines.
“Our area is recovered swampland,” said Cruse, whose family has a farm. “We’re 90 percent flood plain. It’s all supported by good drainage.
“We are stewards of the land, and we want to be good stewards. We’re all agricultural, and that’s what we would like to see.”
She feared that a wind farm would affect the drainage. She also said she and others don’t want the noise and shadow flicker associated with turbines.
Mainstream officials have pledged to be good neighbors, saying they want to reach out to residents.
Mainstream plans to put in 60 to 90 turbines in the first phase, the vast majority of which would be in Lee County. The second phase would include a similar number, officials say.
Last month, Whiteside County finished its review of its wind energy regulations. Officials decided against making changes.
Mainstream was expected to turn in its application to Whiteside County soon after that. But the company has yet to do so.
John Martin of Mainstream said his company is working on the application and expects to complete it soon.
The Lee County Zoning Board of Appeals has been meeting since the summer; it has recommended many changes to the existing ordinance.
On Thursday, the board will debate perhaps the biggest issue of all – the required distance between turbines and houses.
That should be the last major item of business.
The board’s recommendations will go to the full Lee County Board, which has the final say.