Solar Rent vs Solar Royalties – Solar Lease Payments Explained

Solar Rent vs Solar Royalties – Solar Lease Payments Explained

It is important for landowners to be aware of the different types of solar lease payment structures that can be offered by energy companies seeking to develop solar resources owned by private property owners. Some solar deal structures are more valuable than others to landowners. This is important because these agreements can sometimes last decades, so landowners need to ensure they understand the terms they are agreeing to.

The credit for the development of these types of lease agreements can largely be attributed to the oil and gas industry’s long history of negotiating with large ranch owners and farmers who happen to settle upon valuable oil and gas reserves. The difficulty is the ability to negotiate terms that both value the risk, time, and capital being put forth by the energy company, while meeting the private property owner’s price expectations.

In today’s emerging renewable energy segments LandGate is seeing a multitude of structures being used to lease and purchase properties for highly lucrative energy generation projects. As a landowner, you should always look to educate yourself and understand the corporation and the specific project they plan to use the land for before negotiating any terms. It is important to understand why the company needs your land, and how much income is expected to be generated. Depending on the risks associated with the venture, certain lease payment structures and clauses may be more appropriate than others.

Solar Option + Fixed Annual Solar Rent Payments

Solar Lease Option

Property owners are typically first approached by developers offering a lease option. This agreement specifies the payment and term length that the developer would like to lease your land for in case they are able to build the solar farm on your property. Property owners need to understand that an option agreement does not mean you are guaranteed to have a solar farm built on your property. Generally, developers use this type of agreement to quickly contract large amounts of acreage, and then go back and decide which properties they will actually build on or decide not to lease. Developers can contract large positions with little to no upfront capital expenses. However many of the property owners may never see a solar farm built on their property, and get stuck under an exclusive lease option agreement because the developer is distracted building on a different location. Understanding what you are giving away in a lease option agreement is important as it could limit your property’s marketability for solar resources.

Annual Solar Rent Payments

Some solar lease agreements may offer a structure using a fixed annual payment for a set term length of usually about 25-30 years and can include a bonus cash payment paid once the lease is executed. Sometimes an “escalator payment” is included to account for possible inflation or tax increases which increases the annual rent payment by a fixed % each year the property is leased. This structure has predominantly been used in the farming and agricultural industries which have highly predictable revenue allowing for a fixed payment structure. This type of lease is increasingly being used by renewable energy developers as a way to acquire land at extremely low costs compared to the revenue they are able to generate over the life of the project.

If you are offered a fixed annual rent payment, we highly recommend adding an escalator of at least 2-3% to compensate for inflation. Electricity prices have increased with time, and the landowner will unfortunately not benefit from higher future electricity prices with this type of fixed annual rent payment. Clean energy projects also receive a large part of their revenues from the monetary value the government and private sectors have placed on eliminating greenhouse gas emissions. Landowners under a fixed annual rent will not capture the revenue increase caused by changes in regulatory policy or social value.

If you have been offered a solar lease agreement with fixed terms, we recommend searching for your parcel on to compare the offer with our calculated LandEstimate™. LandEstimate™ uses advanced algorithms and proprietary data to analyze the resource potential of your property.

Solar LandEstimate


Option + Royalty Payment

Another type of commonly seen lease agreement is a royalty payment. Royalty payments are based on the output or production actually generated by the project on the property. Meaning if you are assigned a 12.5% royalty on production, and the project makes $100/day, the lessor will receive $12,50 every day. This is the most common type of lease agreement found in the mineral and oil & gas industry because it mitigates the downside risk for the drilling corporation by not agreeing to long-term fixed payments, regardless of the outcome of the well. (it could be a dud) Royalty structures provide the lessor great upside, for example, when production is higher than anticipated or the product price has increased significantly during the project timeline. Unlike oil & gas well production, solar production will be fairly constant, and is likely to increase with time as maintenance of older solar panels will replace them with more efficient solar panels. Also, royalty payments can see the huge upsides of the state incentives and of the increases in local marginal prices of electricity.

Deals Using Solar Royalties Are Increasing (vs Solar Rent Payments)

The music industry, movies, wind, oil & gas, mineral, all these industries use royalty payments. Why are solar farms different?

Royalty payments based on production is the standard payment structure in oil and gas lease agreements because energy/commodity prices are extremely volatile and technology is always improving which leads to efficiencies such as increased production and lowered costs. Many of these efficiencies would be impossible to predict or project at the time of negotiating property rights with the developer, making it impossible to determine the fair lease value using a fixed rental payment over a long-term period such as 20-35 years.

By accepting a fixed rental payment at the beginning of a project, owners could be restricting the property’s earning potential for the foreseeable future. Royalty payment structures pay property owners based on the actual market value of the products being produced on their land. If that value changes, the owner is able to capture it and possibly earn more than was originally thought during the first lease negotiations.

Over a 30 year period, we can expect the technology to improve and costs to reduce overtime in just about every industry. However, this is especially true in the renewable energy industries where we have seen the cost of a solar panel decrease by over 15% since just 2018. Solar farm economics will continue to improve translating to an increase in resource value for property owners. Make sure you do not negotiate blindly, always try to fully understand the project and lease structure being offered before jumping to quick decisions. These agreements can last for decades and could leave you falling victim to predatory leasing tactics if they are not carefully read.

As landowners’ knowledge of energy resources increases, we see trends of more and more solar deals offering solar royalties.

Can I Sell my Solar Royalties or Solar Rent Payments?

Landowners receiving payments from a solar farm on their property can market and sell those future payments whether it is a royalty payment or a fixed rental payment. Royalty payments can be marketed at a higher premium than fixed rental payments because the value of the royalty may have the potential to increase at some point in the future. Property owners can market the payments they receive from a solar lease with LandGate.

Be Aware: Check What Your Property is Worth for Solar

The variables that derive a property’s resource value can change every day. Make sure you check your property’s solar value at before you sign your next solar lease agreement.

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