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November 21, 2024 - Written By Kristen A. Schmitt

Lease agreements on farmland – Oil and gas, wind and solar

Oil and gas. Mineral rights. Royalties. Wind farms. Solar energy. So many buzz words, but why is it important for you, as a farmer or landowner, to understand what they mean?

 

“The actual value of the land, if it’s valuable farmland, would still sell for the farmland price,” said Ryan Kull, an advisor and broker with Geswein Farm & Land serving southern and southeast Illinois. “If there are mineral royalties or wind turbine or solar royalties involved with the sale of the land, that usually increases the value of the land considerably because the buyer is purchasing those different streams of revenue.”

 

Oil and gas leases are legal agreements between a landowner and a company. These agreements focus on mineral rights (i.e. underground resources like oil, gas and minerals) and give permission to the lessee to explore and potentially extract oil and gas resources beneath the land under contract. As far as payments go, companies either pay upfront to explore and extract or offer a percentage of the revenue – also known as royalties.

 

Wind farm leases are legal agreements between a developer and a landowner to construct wind turbines at an agreed upon location. Payment for the use of land in this way is typically handled through monthly rental payments from the developer to the landowner over a set period of time – and usually spans several decades. Wind turbines take up a smaller amount of physical space (roughly less than an acre), which allows farmers to grow crops or graze livestock without interruption, creating a dual land use that provides a diversified revenue for the farmer or landowner.

 

Solar farm leases are legal agreements between a developer and landowner to install photovoltaic solar arrays on a specific piece of land to develop solar energy. Like wind farm leases, these are also long-term agreements that typically last between 20 and 40 years. Solar farms can coexist with other agricultural practices as crops that are shade-tolerant can grow beneath solar panels and livestock can graze between panel rows.

 

However, there are some environmental considerations to review.

 

Oil and gas leases, while potentially the most profitable, can also have the most impact through air pollution, soil damage, groundwater contamination and reduced crop yields. Oil spills happen – and these can lead to changes in soil pH, loss of topsoil, soil drainage and more. According to the USDA, oil and gas leases seem to be a route that non-farming landowners take over farmers who live on their own land and farm it.

 

Construction of wind turbines can result in soil compaction and erosion. Once installed, wind turbines can also dry out the soil around them, which can lead to drought. Noise pollution and increased bird/bat collisions are also an issue, along with dust and the visual impact of giant turbines along the landscape.

 

Solar farms, which are considered the “cleanest” of the leases discussed above, may impact soil health where installed. Common solar farm construction practices require clearing and grading large sections of land for solar panel installation, leading to major erosion and significant runoff of sediment into waterways, according to the U.S. Environmental Protection Agency and the Justice Department.

 

Does the financial incentive outweigh the environmental impact?

 

According to the USDA, “[t]he amount of money farmers receive for leasing their land for the production of energy, such as oil, natural gas, or wind, varies significantly from year to year and has typically followed the price of oil.” Solar leases in Indiana can vary between $900 to $1,500 an acre per year in rent. When compared to the rent for top Indiana corn and soybean producers, which averaged $251 per acre in 2023, solar farms can become an attractive additional revenue stream despite the environmental issues.

 

Are energy leases right for your farm or land?

 

Consider speaking with fellow landowners and farmers to learn about their experiences with these types of lease arrangements. What type of exploration or production occurred? What type of royalties were received? Seek out a lawyer with experience in these matters before signing on the dotted line. Negotiate so that whatever you’re agreeing to benefits both sides – and look for ways to build in safety holds that may lower the environmental impact of the energy production.
Consult with an advisor that has experience in the space.

 

Landowner Considerations

In many cases, landowners seek our advice and input on existing or prospective wind and solar leases. Our full time team can provide a variety of consultation services, appraisals, and negotiation strategies if you are considering the purchase or enrollment of an easement.

  • Appraisals & Market Analysis
  • Land Value & Price Per Acre Considerations
  • Pros & Cons / Weigh the Options