Posted: Thursday, June 29, 2023
Author: Joette Schalla, ALC, Ranch Broker | Licensed in CO
In 1820 the United States Government started selling publicly held land for $1.25 per acre. This event allowed citizens in urban areas new opportunities, but buying land in unsettled areas was only practical for some. Later, Congress was urged to offer free land to encourage more settlement in these unestablished regions. The Homestead Act was implemented on May 20, 1862, granting settlers 160 acres to live on, improve, and farm. In 1962 during the 100th anniversary of the Homestead Act, John F. Kennedy spoke about the act, saying it was “the single greatest stimulus to national development ever enacted.”
We are now a century and a half after the Homestead Act, and development needs have changed. As the global population has grown and the demand for energy has increased. The United States is doing its part to uphold the Paris Agreement that became effective in November 2016. This agreement includes using renewable resources for power generation to reduce emissions; in turn, this focus has created a new demand for land on which to produce these resources.
For many landowners who want to maintain their properties' natural beauty and serenity, these energy projects may not be appealing. These changes can impact your views, the amount of traffic on your access roads, and the value of your property. This is also true with the neighboring properties as well. Placing your land in conservation easements is one way to stave off development and ensure future generations will enjoy the land. But even with the adoption of a conservation easement, existing utility easements or other deed exceptions can allow for changes to your property that you may not have anticipated.
Historically hydropower has been the most used renewable energy resource. Today wind and solar-generated power are rapidly expanding. The development of wind and solar farms is not cost-effective or practical in most populated regions. However, placing these projects in rural locations where the tracts of land are larger and met with less opposition is the ideal model for energy developers.
Southeastern Colorado, like other areas, has become a hotbed for solar development. Our high desert climate with 300 plus days of sunshine per year, affordable land prices, and close proximity to a sizeable coal-fueled power plant has created an influx of renewable energy developers. These companies are seeking land to lease and, in some cases, purchase to help produce the energy that government policy is now demanding. Another factor adding to the interest in solar development is the establishment of high-tension transmission lines in rural Colorado. Xcel Energy is installing the Power Pathway Project to create over 560 miles of transmission lines and four new substations.
If you are considering a solar project on your property, there are many aspects to be aware of. The agreements can be complex, and the development's or developers' long-term viability may be uncertain. Your compensation for the project can also vary significantly, along with how the agreement is structured. Here are five principal factors landowners and potential buyers should know about these projects:
First: Not all projects will be completed. The number of properties that actually get developed for energy is much smaller than the number of properties that go under option. In Pueblo County, Colorado, roughly 1 in 5 properties leased for solar energy production will be developed. Across the nation, that ratio drops. On average, the proposed projects that make it to the production stage vs. those under option is closer to 1 in 10 properties.
Many landowners may receive option payments while the developer competes to win a bid with the local energy company. However, these payments might be all a landowner ever receives for the option on their land. Some landowners agree to an option for lease or purchase on their land, hoping to pocket those option payments, not caring if their land ever gets developed.
Second: The number of acres required for development varies by the developer and the type of project they propose. For large-scale renewable energy projects in my region, I have seen consistent numbers from 600-1000 acres minimum for solar development and 5,000-8,000 acres minimum for wind development. If you own land in close proximity to a substation, there is potential for a developer to place battery storage on that land. In some cases, this could provide an opportunity for income on just a few acres.
Third: Income opportunities to sustain property ownership. Some landowners don’t want to sell their land, and the next generation is not interested in farming or ranching. Maybe the landowner is looking for other streams of income to supplement the current operation of their business. Renewable resource development offers options to do so.
With wind development, landowners can continue to graze, recreate on, or farm the majority of their property while collecting passive income from wind towers that are built on their land. With solar development, the landowner can dedicate a portion of their land to a solar farm, generating large income streams and retaining additional acreage to continue their agricultural or recreational operations. These methods could substantially increase the monetary gain for the upcoming generations but still allow the current owner to retain the land they have worked so hard for.
Fourth: Monetizing the future value of the lease. If you contract with an energy developer and they lease your land for 40 years or more, there is an opportunity to sell that cash flow at the beginning of the lease. If a landowner chooses to sell this cash flow, once the project is successfully headed into the production phase, they can utilize a Tax Deferred 1031 Exchange to purchase additional acreage elsewhere. These cash flows, even at a discounted rate, are typically worth much more than their land would ever bring on the open market. The property owners can use the income from the sale of the cash flow to buy additional properties or investments that meet the 1031 Tax Code. This would allow them to expand their current operations or add to their breadth of ownership.
Furthermore, the property owner has retained the real estate. According to the terms negotiated, the energy developer should restore the land that has been developed at the end of the production period. This leaves the landowner with a property that can be put back into agricultural production or recreational use.
Fifth: The demand for wind and solar energy currently requires wind projects that will cover “About the size of the area of Texas by 2050.” “For solar projects, about the size of Ohio.”, according to Anna Buongiorno with Scout Clean Energy. Participating landowners will experience large windfalls for the renewable energy projects they allow on their lands. This newly achieved wealth will create another group of qualified buyers who can purchase the limited inventory of choice agricultural and recreational properties. The demand for land is not slowing down, and this should continue to support rural land values across the nation.
If you’re looking to purchase land in the path of renewable energy development, be sure to reach out to a licensed real estate broker who is a land specialist and understands what developers are looking for. If you are interested in considering a renewable energy project on your own land, consult a real estate broker with knowledge and experience with these types of projects. They can help you connect with proven energy developers and guide you through the process.
More and more landowners and investors are recognizing these potential benefits. No matter which path you plan to take with your land, remember to invest and enjoy!
