How much should I get in rent for leasing my property to a solar farm?

Have you recently been approached about leasing your land to a solar farm?  This can be an exciting proposition!  There are many benefits that come along with leasing your property to a solar farm, like receiving a steady stream of income for up to 40 years.

The most common question we get asked is “what should my rent be”?  This can be a difficult question to answer and you’ve probably found there are limited resources at your disposal.

Like other types of real estate, lease rates for solar vary greatly by location.  Some of the factors that affect your lease rate include:  what are property values in your area, what are the alternative uses for your property, how much can the project sell power for, what subsidies are available to the project,  how close is your project to the existing grid, etc.

It is difficult to provide an exact lease rate that you should receive.  The best way to calculate your lease rate is to compare the current value of your property to the value of your property with a solar lease.  You obviously never want to enter into a long-term lease that makes your property less valuable!

Let’s consider an example:

• Let’s assume your land is currently worth $10,000 per acre.  You’re basing this off comparable sales you’ve seen for neighboring properties of the same use as your property
• Let’s also assume that you want a 25% premium value for your property if you decide to lease it to a solar farm.  This is quite common and there are a couple reasons: (1) you’re going to be asked to tie your property up for a few years while the solar developer does their due diligence.  During this period, you will be obligated to lease your land to the solar developer and will not be able to pursue other opportunities for your land that may arise.  There is no guarantee the solar farm will get built.  (2) If the lease gets exercised and the project is built, the lease will be for up to 40 years.  You will forgo all other potential uses of your property during this time.

For more information, view our blog post on considerations when leasing your property to a solar farm.

• So we’ve established that your property is currently worth $10,000 per acre and you want a 25% premium if you lease it to a solar farm, or a value of $12,500 per acre.  So, what should your lease rate be?
• Let’s assume properties trade at a 7% cap rate in your area (a cap rate is the annual return on your investment – 7% in this example.).  This would mean you would need an annual lease rate of at least $875 per acre ($12,500 * 7% = $875 annual rent)
• To keep up with inflation, you will also want to negotiate an annual increase in your rent.  These annual increases are typically at least 2%

Feel free to contact us for additional information, including what typical cap rates are in your area.