1 agreements with landowners and local governments financing wind power: the future of energy may 8,...
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Agreements with Landowners and Local Governments
Financing Wind Power: The Future of EnergyMay 8, 2008, Scottsdale, AZ
Matthew S. MosesNixon Peabody LLP1100 Clinton SquareRochester, NY 14604
P (585) [email protected]
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Introduction• Wind power projects are essentially real estate projects• Most significant development assets:
– site control– right to build– tax agreement
• Goal – create financeable project• Objectives:
– take care of real estate details at earliest possible time– fix project costs to greatest extent possible, including state
and local tax cost
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Real Estate Matters
• Goal – obtain site control to all project property from turbine to point of interconnection
• Landowner Agreements– Potential interests and instruments
• Easement• Lease• Fee• License• Option• SNDA
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Real Estate Matters (cont’d)• Key issues
– Scope• Control of entire farm/ranch – location of improvements determined later• Contemplated improvements
– Access roads– Laydown areas– Collection wires
» Overhead» Underground
– Turbines – foundations and towers– Transformers– Substation/Switchyard– Met towers– Communications towers– Fencing
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Real Estate Matters (cont’d)
– Payment• Fixed
– Pros: easy to calculate and administer; predictable revenue to landowners
– Cons: landowners may disfavor
• Variable – Royalties
– Pros: landowners want to share in wealth
– Cons: difficult to calculate; unpredictable; risk of opening books to landowners; government may want similar deal
• Signing bonus
• Revenue expectation management
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Real Estate Matters (cont’d)
– Environmental• Land disturbance and restoration
• Repair of farm/ranch improvements
– drainage tile, farm roads, ditching, irrigation system
• Minimal impact on current and future farm/ranch use
• Hazardous Substances
– protect against activities of landowner
– Decommissioning• Standard of decommissioning – what stays and what goes
• Security
– When funded
– Amount – net of salvage value
– Form of instrument – bond, letter of credit, fund/escrow account, parent guarantee
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Real Estate Matters (cont’d)
– Indemnification and insurance• Limit to just project and project-related activities
– Taxes• Beware of indemnification for increases in tax on landowner property
– Financing issues• Free alienability – no restrictions on assignment or transfer
• SNDA – subordination and non-disturbance agreement
– Project agreements not subject to foreclosure by a landowner’s lender
– Need to work with landowners’ lenders
• Project mortgage allowed
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Real Estate Matters (cont’d)
• Other Real Estate Matters
– Title insurance• involve title insurance company early on in process
– Municipal franchise and road permits
– Substation/switchyard• transfer to utility
– Project mortgage• Stands in position of project real estate, ahead of
farm/ranch mortgage
• Landowners not involved
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Real Estate Matters (cont’d)
• Trouble Spots
– Financing – issues that may stand in the way of closing• Incomplete real estate interests
– Power collection system – not all dots connected
– Roads – adjacent landowners own to middle of road
• Municipal franchises
– Underlying land rights but no permit from municipality
– Road crossings
• Wrong owner – marriage, divorce, death, joint ownership, etc.
• Sale of parcel during development
• Setbacks – lack of border easement
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Real Estate Matters (cont’d)
– Construction and Operation of Project– Location of improvements
• Hyper-communication with landowners• Build project consistent with Plans and Specs / turbine
locations should match locations identified in permits• Construction loan covenants
– Construction impacts – remediation– Tax liability on underlying farm/ranch– Release of unnecessary land from project– TV, noise, shadow flicker (landscaping)
• beware of adjacent property owners
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Agreements Between Developers and Municipalities
• Goal – obtain all permits necessary to built and operate project and protect project from uneconomic taxation
• Major issues– Permits
• What’s in it for me (for local governments)• Effectively a pay-for-permit game• Governmental oversight of project
– Taxes• Property (personal and real property), Sales, Mortgage Recording, and
Transfer Taxes• Exemptions and abatement programs• Vehicle for property tax agreement (e.g. payment in-lieu of tax agreement
(PILOT), host community agreement (HCA), voluntary payment agreement (VPA))
• Appropriate amount in face of high capital cost of project– Amount project can afford to achieve hurdle rate– Local government expectations
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Agreements Between Developers and Municipalities (cont’d)
• PILOT Agreement– Term– Scope – covers all project improvements
• Include transmission line and substation/switchyard• Underwater lands? Offshore?
– Payment Amount• Fixed• Assessment-based with percentage abatement• Tax rate risk
– Adjustments to Payment Amount• Inflation• Variable payments based on capacity factor, energy prices, etc.• Additions to project
– Additional MW – same payment rate– No new MW – no additional payment (e.g. operations building)
• Deletions from project– Damage, destruction, condemnation, decommissioning– Reduce payment by MW dropped from project
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Agreements Between Developers and Municipalities (cont’d)
– Payment split among local governments • municipal concern (unless deal hinges on split)
– Payment security • company should not offer security but should be prepared
for request from municipality• form of security
– Parent guarantee– PILOT mortgage– LC
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Agreements Between Developers and Municipalities (cont’d)
– Special district taxes• Fire, water, sewer, refuse, ambulance, etc.• Dominance of tax base• How to control
– Bells and whistles• Capacity factor kicker• Energy price kicker• Economic development power• Host payments for community/charitable purposes• Historic preservation payments• Transaction fees
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Agreements Between Developers and Municipalities (cont’d)
– Substation/switchyard• Utility may require ownership of substation/switchyard
– Transfer after construction• Interconnection Agreement may require tax indemnification• PILOT should cover substation taxes
– Financing issues• Free alienability – no restriction on assignment or transfer• Collateral assignment• Consent to Assignment in favor of lender• Lender right to cure default• Termination – right of company to terminate if project
uneconomic
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Agreements Between Developers and Municipalities (cont’d)
• Approach to PILOT Negotiations– Due diligence on local tax system
• Scope of exemption• Statutory scheme and process for obtaining exemption
– Model full tax on project to determine municipal revenue appetite
– Model amount of tax project can afford– Establish strategy
• Portion of full tax• “Competitive” payment with other generators• “Competitive” payment with other wind projects• Portion to tax base
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Agreements Between Developers and Municipalities (cont’d)
– Build relationship with community leaders
– Negotiate terms – plan on multiple meetings• Exchange term sheets to capture ground gained
– Approvals
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Agreements Between Developers and Municipalities (cont’d)
• Host Community Agreement– Non-financial aspects of municipal agreement, but can
be brought into PILOT Agreement or used as a substitute for a PILOT Agreement
– May help “steer” payment to permitting authority
– One document – best if covers all non-tax business dealings with municipality (e.g. road use, municipal costs, decommissioning, etc.)
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Agreements Between Developers and Municipalities (cont’d)
– Potential provisions• Municipal franchise rights and road permits
• Road use
– Why needed?
» Public use
» Limit risk to project for damage to roads caused by project
» Repair – not replace – road
» Cost advantage of private bid
– Separate agreement?
– Traffic plan – list of involved roads
– Right of access to inspect and improve roads
» Agent of municipality
» Over-sized vehicles
» Construction, operation, repair and decommissioning
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Agreements Between Developers and Municipalities (cont’d)
– Pre-construction engineer’s inspection to establish baseline condition
– Reinforcement activities– Post-construction engineer’s inspection to
establish damage needing repair– Repair activities– Municipal acceptance of repair– Costs– Indemnification and insurance
» Car wreck – make sure covered by insurance policy
– Security (e.g. performance bond)
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Agreements Between Developers and Municipalities (cont’d)
• Municipal review and oversight costs– Should developer pay?– Separate agreement?– Attorneys’ fees– Engineers’ fees– Escrow account
» Initial funding» Draws» Replenishment» Interest» Return of principal
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Agreements Between Developers and Municipalities (cont’d)
• Building permits
– Who reviews application – qualifications
– Who oversees construction – qualifications
» Permit conditions
» Building codes
» Plans and Specs
– Who issues certificate of completion – qualifications
– When can project first sell energy
• Operations
– Administration of permit conditions
– Complaint resolution
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Agreements Between Developers and Municipalities (cont’d)
• Decommissioning– Standard of decommissioning– Municipal right to decommission in the event
company fails to do so– Security
» When funded» Amount – net of estimated salvage value» Form of instrument – bond, letter of credit,
fund/escrow account, parent guarantee• Insurance and Indemnification
– Limit to just project and project-related activities• Approvals
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Agreements Between Developers and Municipalities (cont’d)
• Other State and Local Taxes– Sales tax
• Statutory exemption – production equipment• BOP costs• Discretionary exemption – governmental abatement
– Mortgage recording tax• Face value of mortgage• Discretionary exemption – governmental abatement
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Q&A
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Contact Information
Matthew S. MosesNixon Peabody LLP1100 Clinton SquareRochester, NY 14604
P (585) [email protected]
