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Renewable Land Leases Won’t Be a Niche Asset Class for Long

For years, the Combe Fill North Landfill in Mount Olive Township, New Jersey was, quite literally, a dump. The 65-acre plot of land operated as a municipal landfill for industrial waste and dry sewage sludge in the late 60s, until it was discovered that volatile organic compounds had seeped from the landfill into nearby groundwater. What followed was a multi-decade struggle from government agencies to not only decontaminate what was one of the most toxic sites in the United States but to repurpose the land for better use. Last month, that dream was finally achieved with the completion of a 25.6 megawatt solar farm. A far departure from the garbage heaps the landfill contained before, Combe Fill North Landfill now holds over 56,000 solar panels, enough to power more than 4,000 residential properties every year. 

At the ribbon cutting, Rob Greenbaum, Mount Olive’s mayor, told the local news that there had been a myriad of proposals for what to do with the land. “There were many proposals to put different types of use on this property, from a golf course to putting some type of commercial development, but ultimately the site was best suited for what it is now, which is one of the largest solar landfill arrays in the country.” Mount Olive’s township is undoubtedly excited for its new solar farm. Not only is the farm expected to reduce the town’s annual carbon emissions by 23,490, it will also enable Mount Olive to recoup nearly $2.3 million in past taxes it had paid to address the hazardous wastes emitted from the site.

The project was made possible thanks to a land lease agreement between CEP Renewables, the developer who owns the land beneath the panels, and the entity that leased the land, NJR Clean Energy Ventures (NJRCEV). NJRCEV will own and operate the farm, feeding the energy the solar panels generate into the local power distribution system and selling it to the wholesale energy market and CEP Renewables will receive a regular income stream for what was otherwise unusable land for several years to come.

Renewable land leases are when a landowner and developer enter into a long-term contract, typically lasting around 25 years, under which the landowner receives rental payments from the developer. These rental payments are given annually on a per-acre basis but, up until recently, these types of leases were few and far between. Renewable land leases for utility-scale projects were marketed to farmers or rural landowners as an additional source of income, so they weren’t garnering much interest from institutional investors. Now, there’s large-scale interest from many parties for locations suitable for wind and solar projects, including major utilities, independent power producers, oil and gas companies, small and medium-sized renewable energy developers, and financial institutions. These sites also have the potential for other development so these projects are also of interest to commercial and residential developers or agricultural businesses. 

This broad spectrum of interest in renewable leases is a result of progressively increasing land prices over the previous ten years. Even though the majority of wind and solar initiatives use leasing agreements rather than land sales, the cost of land ultimately determines these negotiations. The demand for this land will likely increase thanks to governmental spending to address climate change and recent ESG initiatives from corporations in every sector. 

It’s no secret that the planet is contending with a massive climate crisis, and that’s impacting seismic shifts in real estate investments. For years, ground leases in the U.S. were primarily geared towards oil and fossil fuels, but the Biden administration has rolled out some pretty aggressive measures in order to change that. The first of which was the Energy Act of 2020, which included 15 bi-partisan bills with the goal of setting a net-zero carbon economy in motion. Under the Energy Act, the Bureau of Land Management (BLM) was granted the authority to reduce rents and fees that facilities must pay in order to promote more solar and wind resources. 

Last summer, the BLM did just that. Its new policy will result in significant rent and fee reductions as well as improved rate predictability for wind and solar developers. The fixed charge per megawatt went from $3,802 per megawatt for wind and $2,172 per megawatt for solar to $2,000 per megawatt for all energy sources. This reduction decreased the cost of solar by 7.9 percent, or around two-tenths of a cent per watt. The BLM stated that lower acreage megawatt fees would encourage more effective wind, solar, or hybrid projects on public lands and could result in more income for the agency overall.

There was the Inflation Reduction Act, which extended heftier tax credits for deploying renewable energy captures. Solar power in particular is expected to dominate the alternative energy sector in 2023 because of the IRA’s investment. These decarbonization initiatives have started to heat up what used to be a rather slow renewable land lease market. Stephen Lee, co-founder of renewable investment and acquisition firm Renewa (formerly known as Paloma Solar & Wind), told me that he was shocked that the market for renewable land leases had more crickets than deals just a few years ago. “I got to be honest with you, when I started this three years ago, I was surprised that no one was doing this.” 

Lee told me that interest in renewable land leases were on the upswing, but up until very recently, renewable land lease deals took a lot of time to close because the sector was so unknown. “There’s a lot of educating we have to do whenever we reach out to the landowners we’re looking to buy from because they had never heard of these deals,” he said. “Not only do you have to explain to them what their options are, you have to build a relationship with these folks.” Since these are long-term partnerships with large upfront costs, there is often a lot of time spent getting to know the other party. “It’s a relationship building business,” Lee said, “and that takes time.”

Gage Mooring, Renewa’s other founder, told me that while the latest decarbonization measures have cast a spotlight on renewable land leases, signals from Washington had caused concern that certain tax benefits for landowners would be disappearing, which prompted a huge uptick in activity. “There was word that the Inflation Reduction Act was going to ax the 1031 exchange and that the capital gains tax was on the chopping block too, and that fear drove a lot of people to sell to us,” he explained. These tax code changes did not make it into the final draft of the act but they helped kickstart what is now a quickly growing investment strategy. 

Whether it’s from climate laws or investor sentiment, leasing excess land to renewable energy capture is a growing phenomenon. Not only is the federal government making renewable leasing on public land more accessible, private landowners and real estate investors are beginning to see renewable land leases as a good long-term option. As solar and wind farms in the United States are going up at record capacity, renewable land leases are helping America’s landowners and enabling faster adoption of renewable energy.

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