Can I Sell My Solar Lease? (Hint: “Yes!”)

So you’ve recently been approached to lease your property to a solar farm? Or maybe you currently have an operating solar farm on your property. The question often comes up: can I sell my solar lease? The answer is “yes”!

In this article we will talk about the (i) the stages of solar development and how they impact the salability of your lease (ii) the options you have for selling your solar lease and (iii) how we go about valuing your lease.

1. Stages of Solar Development:

We typically can buy your solar lease as soon as it reaches construction. Prior to construction, there is a high probability that the project will not proceed. Additionally, leases typically aren’t exercised until construction commences. Prior to the lease being exercised, you have only granted the solar developer an option to lease your property. Options are very risky and typically not salable.

Stage I: Pre-Construction

When you first sign up to lease your property to a solar farm, you typically will only have granted the solar developer an option to lease your property. These options can often last five years or longer. During this period, the solar developer will work towards getting the project “shovel ready”. Some of the key milestones include:

• Obtaining all zoning and permitting approvals
• Securing an interconnection agreement from the local utility to connect the project to the existing power grid
• Signing a power purchase agreement (PPA). PPA’s are contracts to sell the power generated by the project. They are often 15 years or longer and, typically, the counterparties have strong credit ratings. PPA’s help make a project financeable
• Arrange project financing. Renewable energy projects often cost tens, or even, hundreds of millions of dollars to construct
• Procure the panels and other equipment needed to construct the project
• Sign a contract with a reputable contractor to build the project for a certain price within a specified period of time
As you can see, the list above has many complicated development tasks that must be completed in order to have a viable solar project. As a result, as many as 80% of lease options are never exercised. For this reason, you typically cannot sell your lease prior to construction.

Stage II: Construction

Once a project reaches construction, the lease is typically exercised. At this stage, projects are considered de-risked from a development perspective. Most projects will be fully operational within a year of construction commencing. If you are interested in selling your lease and have a project that is at, or near starting construction, now would be a great time to reach out to us!

Stage III: Operating

Once a project reaches operations, it is completely de-risked from a development perspective. Solar leases are very long and the rent payments are steady. You can definitely sell your solar lease once the project is operational.

2. Options for Selling Your Solar Lease

There are two main structures for a solar lease buyout:

i. Fee Simple (sell your property and your lease)
You are selling your property along with the solar lease in a fee simple transaction. The advantages of a fee simple transaction include (i) you typically get the most money, (ii) you have a clear case for capital gains treatment on the sale proceeds, and (iii) you don’t have any ongoing obligations for expenses like property taxes, insurance, etc.
ii. Easement (only sell your lease)
If you prefer to only sell your lease, than an easement structure is best for you. While you typically receive slightly less money than you would receive for selling your land, you keep your property and all of the rights revert back to you after a certain amount of time. While easement terms vary, we typically will buy your lease out for the remaining term, which is usually 35 – 40 years. All of our economic interest in the property reverts back to you after this time. Easements may make the most sense for you if (i) you plan to own the property for many years or pass it along to your heirs, (ii) there are multiple owners of the property and making a consensus decision to sell is difficult, and (iii) there is excess property that is not encumbered by the solar lease.

3. Valuing Your Lease

We value your lease by taking the net present value of our expected future payments. In an easement deal, we assume we will collect rent over our easement term of 35 – 40 years. If we are buying your property, then we will assume we are collecting rent in perpetuity. This is why we can pay slightly more for to own the land, in addition to the lease.

4. Other Potential Benefits of Selling a Solar Lease

While everyone’s situation is different and you should always consult your own tax counsel, there are often tax benefits to selling a solar lease. The proceeds from selling your lease should be treated as capital gains. This is typically taxed at a much lower rate than the annual income which is ordinary income. Many of our clients also decide to 1031 the proceeds. This allows them to defer capital gains by using the proceeds to acquire another investment property.