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

Ever wondered if you can sell your wind lease? Or how much is it worth? The question often comes up: can I sell my wind lease? The answer is “yes”!

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

1. Stages of Wind Development:

We typically can buy your wind 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 wind 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 wind farm, you typically will only have granted the wind developer an option to lease your property. These options can often last five years or longer. During this period, the wind 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. Wind projects often cost hundreds of millions of dollars to construct, so securing capital is crucial
• Procure the turbines 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

As you can see, the list above has many complicated development tasks that must be completed to have a viable wind farm. 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 commencing construction. 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 operation, it is completely de-risked from a development perspective. You can sell your wind lease once the project is operational.

2. Options for Selling Your Wind Lease

Wind turbines are typically placed on very large rural properties and use comparatively little land. The landowner retains the rights to the vast majority of the property to continue farming, grazing or any other use. As a result, the wind lease is typically a fairly small portion of the overall property value.

For this reason, while we would consider buying an entire property, we typically only buy the wind lease. While 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 wind rights reverts back to you after this time.

3. Types of Wind Leases

Wind leases are typically structured as fixed payments, royalties or a combination of both:

• Fixed Payments – this is usually a fixed annual payment that escalates at certain increments
• Royalty – some wind leases just make a royalty payment based on how much revenue a wind farm generates. You will typically receive prorata percentage of the revenues, based on how many turbines are on your property. This percentage often increases over time. For example, you may receive 3% of the revenues initially, but that number may increase to 6% by the end of the lease term
• Hybrid – the most common structure is a hybrid, whereby you receive the greater of a fixed payment or a royalty. This is an ideal structure, because you have a minimum amount you are guaranteed to make each year. However, you also receive upside if the wind farm performs well or in the event of a “repowering” in the future. This is when existing turbines are replaced with newer, more productive turbines

4. Valuing Your Lease

We value your lease by taking the net present value of our expected future payments we assume we will collect rent over our ownership term, which is typically 35 – 40 years.

5. Other Potential Benefits of a Wind Lease Buyout

While everyone’s situation is different and you should always consult your own tax counsel, there are often tax benefits to selling a wind 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. 1031 rules are often not black and white when selling an income stream.