Agribusinesses have a variety of revenue sources to choose from in the diversification process. Each source has its own opportunities and drawbacks. Ag lenders and borrowers should thoroughly assess the energy resources that best fit their needs.
A solar diversification opportunity can be created with as land as section corners for community solar projects to thousands of acres for economy of scale. Keep in mind that contiguous acreage is preferred from a developer’s perspective, but there are both small community opportunities and larger, more lucrative opportunities available.
What does a more lucrative solar opportunity entail? Landowners should be less than a mile away from good transmission with capacity and have a substation close by. If there is no substation, this doesn’t void a landowner’s opportunity. However, it would require creating a substation, which can cost upwards of $4 million to $6 million and can eat into the capital budget of the project, becoming less economical for the landowner.
Many solar lease terms are currently for 35 years and often come with an automatic 35-year term extension if a landowner chooses. Therefore, an operation could continue for nearly 70 years, making it critical to write leases correctly, protect land values, and involve the next generation in these decisions.
Wind provides a different opportunity, but the leasing process is very similar. In general, wind developers are looking for 70,000 acres or half a township with multiple landowners. These are not as easy to manage due to the complexity of having multiple landowners and shared revenue. You’ll often see the formation of an LLC with involved landowners to negotiate leases with a developer – and strengthen negotiations.
Up to four turbines can be installed per section (typically one square mile), and improvements in technology now allow for up to four megawatts per wind tower. While the higher megawatt output is more efficient, it also translates into fewer turbines on the land and fewer fees to the landowner. Lease agreements are typically 30- to 40-year terms, with extensions. There is significant revenue from each turbine and how many megawatts it generates and rent collections for roads used for transmission.
Like solar, there are many considerations to make regarding screenings and developer coordination of leases, such as road easements. Management of land value (soils) and access protections (limit to intent) will need to be assessed to ensure it’s fair for the landowner. Market comparisons will need to be made for term fees and rent. Pasture (for cattle ranchers) and crop damage negotiations should be made for protection.
Conservation revenue and wildlife opportunities
Landowners can receive tax credits from a donated conservation easement. They may also receive money for a purchase easement, which gives borrowers the cash value for the decrease in value of the land due to development restrictions. Habitat credits can also be sold to offset development projects’ impacts on specific species' habitat. Examples include habitat banks KCoe Isom manages in West Virginia and Nevada with our cattle-ranching clients.
Other revenue sources
Other sources that can provide additional revenue streams for landowners (through leases, sales, grants, credits, or vouchers) include wetland and habitat banks, animal habitats, mineral development, geothermal, carbon markets, and conservation easements. Some agencies provide payments for access to hunters. The Farm Bill provides other opportunities through grants, allowing for improvements to land and water quality.
Renewable energy advisors like KCoe have the expertise and guidance to ensure that both ag lenders and their borrowers create the best scenario for their long-term bottom lines.