A Comprehensive Guide to Solar Lease Payments
- Craig Kaiser
- Feb 1
- 8 min read
Solar leases are popular among landowners who want to supplement their income by renting their land to a renewable energy company. The leases usually last for 25 years to 50 years. During this time, the landowner receives solar lease payments negotiated between landowner and developer. These payments are typically paid on a per acre, per year basis, but this is negotiable.
It should be noted that landowners are not paying any upfront costs when signing a lease agreement with an energy developer. The installation of the solar panel system is being handled by the developers, so the landowner is not required to purchase solar panels or lease solar panels from elsewhere. After signing the lease, the landowner’s work is done and the next step is to receive payments for your property while the developer gets their affairs in order.
However, there may come a time when a landowner wants or needs to sell their solar lease payments for a lump sum up front. Selling solar lease payments has proven to be very financially beneficial to many landowners across the US, but many landowners are not aware of these benefits. This guide will discuss solar lease payments, the various structures they can take, and why many landowners who have leased their land for a solar farm are selling their payments up front for a lump sum.
What is a Solar Lease?
A solar lease is an agreement between a landowner and a solar developer, allowing the developer to install solar panels on the property for a set period. In return, the landowner receives regular lease payments. The terms, including lease duration and payment amounts, can vary based on the specific agreement.
What are Solar Lease Payments?
Solar lease payments refer to the income that landowners receive when they lease land for a solar farm. These payments vary in amounts and in length depending on what is negotiated in the lease agreement. Energy developers have tax incentives that push them to develop solar power systems in certain states which can greatly impact the value of solar leases across the country. The better the incentives in the state, the higher value a property can be for a solar farm lease.
How Much Money Can You Make Leasing Land for Solar?
There are many different ways that landowners can get paid for a solar lease, but typically, landowners are paid per acre, per year when they lease their land for a solar farm. Landowners can expect to make between $700 and $2,000 per acre per year when they lease land for solar. This is negotiable with the solar developer, so it depends on the specific agreement that is determined. These solar lease agreements generally have escalators, which are annual percentage increases in the lease payments, to combat future inflation. However, most escalators are typically 1-2%, while inflation currently trends between 5-8% and inflated costs for certain goods and services of over 30%. This is why many landowners choose to sell their solar lease payments up front for a lump sum. If you're curious if your land or your client's land qualifies for a solar lease, get a free Property Report by finding the parcel on LandApp's map. After you find your parcel, click on the Solar Energy Value Index Score for more details about the estimated payments that could be generated from a solar lease on the property.
Why Sell Solar Lease Payments?
Landowners can sell their solar lease payments and receive a large, lump sum payment during any point of their solar lease. In most cases, landowners DO NOT have to sell their land along with the lease. Other reasons that landowners choose this option is because most solar lease escalators do not outpace the inflation rate (meaning that the payments lose value over time) and because the payments are not guaranteed to last the duration of the lease- the solar farm developer can stop operating the solar farm at any time.
Inflation + Income Tax = Very Poor Financial Performance for Solar Payments: Typical solar lease payment escalators are 1%-2%, while current inflation is 5%-8% (over 30% on certain goods and services). Since this escalator of 1-2% does not match the current inflation rate, solar lease payments are losing value over time, which a majority of landowners do not understand.
Solar Lease Payments Are Not Guaranteed: Solar energy projects can be canceled at any phase of the lease, with many of them NOT lasting the full term of the lease. Once a lease has been sold, the risk of payments stopping due to canceled projects falls on the new buyer.
Landowners Do Not Have to Sell Their Land: Many landowners do not want to sell their land, but would love to diversify and mitigate risks associated with solar payments. Selling lease payments DOES NOT mean that a landowner has to sell their land along with the lease. In fact, the majority of landowners who take advantage of LandGate’s open marketplace to sell their solar lease payments choose to retain their land for future generations.
Solar Lease Sales Qualify for 1031 Exchange: Landowners who are worried about tax implications of selling their solar lease payments should definitely consider doing a 1031 exchange. An exchange allows sellers of solar lease payments to avoid paying taxes on their profits from the sale, and immediately invest into other forms of real estate such as farm/ranch land, residential property, commercial property, or a DST.
De-risk and Diversify: Solar lease payments often become the most valuable asset for landowners and many folks grow very concerned once they realize that the lease payments can stop at any time, and are actually performing very poorly relative to other financial investment options.
Selling lease payments and investing in additional real estate opportunities or taking cash out to fund a business venture is a very good way for landowners to de-risk and diversify their assets.
Buyers are Currently Purchasing Lease Payments at a Premium: Solar lease payments are currently in very high demand by financial institutions who are willing to pay a premium to landowners who are being paid for solar leases on their property. As with any financial fad, it is very difficult to predict how long buyers will be interested in paying such a high premium for non-guaranteed, fixed cash flow streams.
Improve Financial Performance of Solar Payments: Solar payments perform very poorly relative to other financial investments. Selling lease payments allows landowners to leverage the great decisions they’ve already made by getting solar panels on their property, while also improving the financial performance of revenue generated from the project.
Example: Landowner Sold Their Solar Lease Payments
For instance, let’s say a landowner is scheduled to make $4 million over the course of 40 years from their solar project and they choose to sell all their future lease payments for $2 million on the first day the project starts and utilize a 1031 exchange.
That landowner may ask, “why would I sell those lease payments as a lump sum for half of what I'm going to get paid over the course of the lease term?” The answer is that the landowner will be paid nowhere close to $4 million in real dollars once inflation (time-value-money) and taxes (typically 30%+ ordinary income tax) have been factored in. Chances are that they will not even be paid $2 million in “present value” dollars over the 40 years.
The smart landowner who sold for $2 million the day their project started, utilized a 1031 exchange (didn’t pay taxes on the sale), and diversified their payments across several real estate investments will make significantly more money for themselves and their families than the landowner who simply “sits” on their payments.
How to Sell Solar Lease Payments
Many landowners are unaware that a marketplace like LandApp, where you can market land for sale, for lease, or payments for sale, exists and only rely on offers sent to them in the mail. This is a BAD IDEA! Buyers and lessees of properties and natural resources rarely want to compete for the asset, but it is in the landowners best interest to generate competition so that they can get the most value from leasing their property or from selling their lease payments. The only way to ensure that you are receiving fair offers and getting the best deal for your family, is to get as many offers from as many buyers as possible. There are no costs (no fees or commissions) to post a listing on LandApp's marketplace- whether you're selling your land, leasing it, or selling lease payments. The key to getting the most value from your asset is to increase the level of competition by listing it on a competitive marketplace, such as LandApp. There are also no obligations to accept any offers that are received, and property owners have full control and manage their listings, which can be deleted at any time.
If you have listed your solar lease payments for sale and have picked a buyer, the process of negotiating the terms of the sale begins. This step is crucial as it determines the final outcome of the transaction. The negotiation process involves various aspects, with the primary focus being on the sale price. The sale price is a critical factor that needs to be agreed upon by both the buyer and the seller. The sale price is likely to be less than the total remaining payments due, which is why landowners should try to sell their lease payments as soon as possible for the best deal.
The buyer will consider the potential interest or investment opportunity cost. They could have earned this by having the money earlier.
Consequently, the seller needs to be prepared for the possibility of negotiating a lower sale price.
Apart from the price of the sale, it is also necessary to have a thorough and precise discussion about the other terms of the sale. These terms may include payment arrangements, such as whether it will be a one-time lump sum payment or installments over a specified period. The parties involved also need to agree upon the payment schedule and any potential penalties or interest rates for late payments. The written agreement is crucial to ensure that both parties are on the same page and have a clear understanding of the terms. This agreement should outline all the negotiated terms, including the sale price, payment arrangements, and any other conditions that have been agreed upon. The document is legally binding and protects the interests of both the buyer and the seller. It is designed to address any disputes or misunderstandings that may arise in the future.
For landowners who want to avoid losing value in their existing solar farm lease and prefer to receive a lump sum of money, selling solar lease payments can be a practical choice. It is also a suitable option for those who want to mitigate the risk of losing a potential revenue stream in the future if the project fails after 10 years. Regardless, landowners should consider consulting with an attorney for assistance with reviewing any offers. For 1031 exchanges, landowners should consider consulting with a 1031 broker. LandApp can refer landowners to specialists within our network for assistance with this process- contact us for help or if you simply want to discuss the options.
*Nothing in this blog is intended to be legal or financial guidance. Anyone seeking legal or financial guidance should consult a licensed attorney or accountant.*