If you’re planning on building a solar farm, there are some things you should know about solar farm option agreements. These can affect how much you pay for your land and what you can do with it. There are also some tax implications you need to know about.

Location 

Regarding solar farm option agreements, location is often more important than quantity. This is because the best option is to get your land into the hands of the best company for the job.

The best way to do this is by using the proper legal documents. An option agreement will allow you to quickly contract a large acreage with little to no upfront capital expenses.

When you enter into an option agreement, it can take up to three to fourteen months to build a small 2 to 5 MW solar farm. Some companies offer gimmicky rate structures to lock in your land for a short term.

One of the most exciting things about an option is the potential to make a good return on your investment. However, you could be financially bound if the farm performs poorly.

It is common to see a static site after the first few years. Using the proper tools and procedures can help you evaluate the quality of the solar farm, if there is one.

Liability

When drafting a solar farm option agreement, you’ll want to pay careful attention to the contractual allocation of environmental liabilities. This includes drafting ecological indemnities and releases, indemnification clauses, remediation agreements, and representations and warranties.

In the simplest terms, a preexisting conditions clause covers a property’s known or unknown contamination so the developer can be held liable for it. However, the clause does not cover the release of contaminants that the developer caused. It does, however, cover historic disposal practices.

Another consideration to take into account is the decommissioning clause. Typically, the language in a solar lease will include the requirements to decommission the solar facility at the end of the lease term. A good agreement will also specify the restoration of the land to its pre-development condition.

When drafting a solar farm option agreement, it’s essential to consider the relevant statutory and case law. For example, recent issues have addressed the allocation of environmental liabilities in business transactions. Some district courts have ruled that private parties cannot contractually allocate their risk of ecological harm.

Lease Terms 

Many solar companies will propose an option to lease their wares. They will usually have a few short-term options, such as a few years, and a handful of longer-term opportunities, such as ten or more years. However, there are a few things to consider when choosing one of these offers. 

One of the most important considerations is the duration of the option. Solar developers are generally more willing to commit to a long-term lease than to build a new solar farm on a parcel of land. Some benefits of having a long-term lease include avoiding tax increases and the opportunity to uncap the property’s taxes.

In general, most solar leases will last for decades. This means that the rent you get from your developer should be more significant over time. For example, a modest increase in monthly rent over twenty years can be substantial.

Another factor to consider is the escalation factor. You can choose to have your payments increase at a fixed rate over time, or you can opt to allow your developer to make incremental payments. If your developer is in it for the long haul, they may be willing to provide you with a cash bonus at the end of the deal.

Tax Implications

Solar developers typically approach property owners with an option agreement when they want to contract large amounts of acreage quickly. This arrangement allows them to promptly lease large acreage for a low, upfront cost. But it also means that the property owner must agree to an exclusive lease for 2 to 6 years. In addition, the agreement can restrict the property’s marketability for solar resources.

Before granting an option, solar developers must negotiate the lease terms. They can include termination and renewal provisions, confidentiality clauses, and a statement of most essential words. There are several factors to consider, so it is important to take the time to understand the implications of these agreements.

There are several different types of leases. Each class has unique financial and tax implications. It is essential to work with an attorney before signing a lease. The IRS has guidelines for “leveraged” leases, and many big four accounting firms treat the lease as a secured loan.

In the solar market, two large banks provided 50% of the tax equity. Although some utility-scale projects have been done with debt that is effectively senior to tax equity, most of the deficit in the industry is back-levered.

Compensation Terms

The onset of PV solar construction can be a significant change for farmland. It’s essential to evaluate the risks involved and understand the compensation terms for farm products. These laws and regulations will vary by state and location.

If you’re thinking of moving your land to a solar farm, carefully review the rules and regulations for your state. While many states don’t require solar farms to follow a specific ordinance, others have stricter rules. You may need to modify your contracts and responsibilities to ensure you comply.

Whether moving to a solar farm or not, you’ll need to perform general maintenance on your land. This includes ensuring your ditch banks, roads, wooded areas, and streams are all in good condition. In addition, you’ll need to determine if any environmental issues require special attention. For example, you may need to restore eroded topsoil.

You’ll also want to consider whether your farm will be eligible for financial tax incentives. Some financial tax incentives include rebates for purchasing solar panels, inverters, and racking components.