Over previous months many landowners and renewable developers have been racing to ensure their solar installations were up and running before the 1st April drop in FIT rates, and for those looking to the future there may be uncertain ends to new renewables projects following recent comments by Western Power Distribution about the lack of capacity in the South West due to reliance on the F-Route national grid connection, connecting the South West network to the rest of the county’s grid between Bristol and Bridgewater.
However for those with installed projects, or those with agreed grid connections, there are now emerging new opportunities to capitalise on the income received over the period of a renewables lease, provided lease conditions are favourable to investors. City fund managers looking for long term income security can see rental income from land leased to solar, biomass, wind or other large scale renewables developers is attractive due to the secure income generated over a 20 to 25 year period, or the remaining term of the lease.
There are pitfalls that can ‘make or break’ a capitalisation arrangement and the figure offered, if any, by an investor will be affected most specifically by the turnover per acre agreed with the installer, the remaining lease term and index linkages, together with the terms of the lease agreement and the risks involved. These and many other factors will need to be assessed by an investor to ensure the risk is acceptable compared to the return they would achieve. Not only would the return need to be more attractive to investors than other investments available over the remaining period of the lease, but landowners also need to ensure they are achieving a good deal. Landowners should look at the primary purpose of the income generated by a renewable lease, be it retirement or additional income for the farming business. By capitalising now landowners could use the lump sum obtained for reinvestment on the farm or estate to fund future expansion, invest in additional land or fixed equipment, or to pay off existing debt liabilities. Of course good tax and business planning advice at the outset is a must when considering such a venture, however with careful consideration and negotiation there are opportunities to agree capitalisation arrangements with investors who are currently seeking these types of long term investment.
Some particular lease terms can be problematic, however the extent of this can depend on the exact wording of the lease. For example some lessees’ (renewables developers) “walkaway” clauses can be unattractive to investors where they enable the developer to exit an agreement before the end of the term. Investors will want to weigh up the associated risk, which can to some extent depend on the consequences of effecting such a break clause. The level of investment the developer has in the infrastructure of a project, together with their financial security, will also be considered by an investor before deciding whether a particular project is a viable investment opportunity.
There is a great deal of detail to be considered by both sides to a capitalisation agreement before offers are made and advice must be taken early on to ensure that time is not wasted on a potential agreement that will never meet fruition. We are in contact with a number of investors looking to enter into negotiations to offer lump sums in return for the income generated by renewables installations.
