How Diversified Revenue Streams Impact Ag Borrowers

Kala Jenkins
February 10, 2021
Read Time: min

Diversifying revenue streams

With the recent impacts of COVID-19, ag and financial partners alike are turning their attention to diversified income streams for financial stability.

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Revenue diversification is increasingly important to ag businesses across the country, especially in light of the impacts the COVID-19 pandemic has had on the industry. To make their land more profitable and resilient, many farmers and ranchers are taking advantage of renewable energy resources, such as solar and wind generation. While diversification can be a great option for agribusinesses, lenders and borrowers should understand the diversification process and any potential risks involved.

“Opportunities in renewable energy are sweeping through the country, especially with the climate change policy of the new administration,” says Robert Veldman, Senior Land and Energy Consultant for KCoe Isom, an accounting and consulting firm specializing in the food and agriculture industry. As an advocate for landowners who are interested in energy hosting or land conservation, Veldman explains how a healthy diversification strategy can be attained.

“It’s important to know the long-term pros and cons, and the unintended consequences so that everyone walks away educated not only on what these opportunities bring, but also on what the impacts could be on the operation and long-term land values,” he says.

Here are five considerations for landowners and lenders in reviewing renewable energy contracts.

Diversification through renewable energy

5 Considerations for Renewable Energy Sources

Screening process

When screening for renewable energy opportunities, both landowners and lenders should be aware that many contracts can be slanted in the developer’s favor. Developers typically want to access the entire gamut of land, beyond what they need at that current moment. Contracts should incorporate expansion protections, ensure proper commodity prices are used, and perform side-by-side of state, local, and international developers.

Land value

At the end of the project, all that farmers and ranchers have left are land value and soil management. Specific contract language is needed to, among other things, protect long-term land value, protect against weed infestations, ensure access protection (for example, stating they can only create and access certain roads and not an entire stretch of land). Such events can negatively impact the land and soil both during and following development without the proper lease language requiring soil management, reclamation, and weed management plans.

Terms and sureties

Agribusinesses need to ensure fair terms to protect themselves from bankruptcy and have bonds in place with sureties to confirm the developer will remove all of the equipment and not leave it to the farmers to do without funding.

Market experience

Know the land values. Developers look at the appraised best value of land. When purchasing as an option to leasing, they typically give 10x value (for example, $300/acre = $3,000 to purchase land). While some agribusinesses may prefer money coming in each year, others strategize ways to sell off the land to the developer and take advantage of the cash now.

Revenue Stream

Typically, revenue coming in can commence with a signing bonus and development rental that will pay a landowner a small sum until construction. By construction, significant sums of rent (per acre, megawatt, royalty, or per wind tower) will begin to develop and continue through operations and energy generation. We always advise landowners to undergo an assessment to protect these funds from taxes and help them to create entity strategies or fund new equipment for the greatest value.

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Opportunities

Revenue Streams

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.

Solar

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

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.

Advising agribusinesses

Conversation Touchpoints: Understanding Two Perspectives

Below is a high-level guide for financial institutions, with important topics and touchpoints that will help protect both the landowner’s assets and the lender’s portfolio and enable a more comprehensive analysis of the stability of renewable energy opportunities.

Lendersstandpoint: What you need to consider and discuss when financing projects or clients who are impacted by leases or sales:

  1. Capital budget allocated to a project or projects in a particular state, so funding is set aside and does not need to be raised at a later date
  2. Power purchase mechanism to sell power to utility or corporation
  3. Available infrastructure to get power out of power generation area
  4. Bonds in place for salvage and bankruptcy
  5. In the queue for interconnection to transmission grids
  6. Prior history with utility or corporations for buying the power
  7. Prior history of success in certain states
  8. Do they lease, develop, and operate, or do they just focus on one or two of those options?

Landowners’ standpoint: What you need to consider to protect your clients and help them mitigate all potential risks:

  1. Baseline precondition report or photos prior to disturbance which informs reclamation plan
  2. Soil and weed management plans
  3. Bond or surety for reclamation and salvage at year 10-15 of operation from third party state- licensed Professional Engineer above and beyond county requirement
  4. Market value or industry-standard pricing per state for development rent, construction rent, and operational rent per acre
  5. Wind farm additional payments for % sharing of generation, per megawatt or per turbine
  6. Wind farm easements for all disturbances, such as roads and transmission lines, so a developer does not control all the land leased
  7. Wind farm- interim reclamation of temporary construction areas
  8. Solar-shade tolerant plants to hold soils in place under panels

The bottom line is that both landowners and lenders need to understand the nuances of these opportunities. There are real threats to both the land and its value – including eminent domain threats – and contracts must be in their favor to protect land access, soils, prevent weeds, and protect value for the long-term.

About the Author

Kala Jenkins

Senior Agriculture Consultant
As a senior agricultural consultant for K·Coe Isom, an accounting and consulting firm specializing in the food and agriculture industry, Kala improves upon the financial performance of food and agriculture producers through strategic planning, operational consulting, and risk management. Her background in farm credit and finance has provided her with

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