Sunday, November 11, 2007

100 Year Leases

That's what was reported to me this last week. Ok, they were really 99 year leases. Ottertail Power offering 100 year leases in Sheridon County, North Dakota. Please send an anonymous copy to: Joe Richardson, Post Office Box 3112, Fargo, North Dakota 58108. I probably have the best collection of leases in North Dakota and always on the lookout for more. I am betting that this lease is one-sided as heck in that Ottertail, or the party offering, is given a 30 day out while the landowner is bound for generations. Hey, if it has a confidentiality clause in it, they would have an opportunity to sue several generations for disclosing the terms of the agreement.

Sunday, October 21, 2007

Wind Contract Clause Hall of Shame

These are from actual contracts. The names of the parties are not provided.

1. "This grant of easement of the Wind Non-Obstruction Easement expressly includes the right of [Wind Company] to enter on any part of Owner's Property to enforce [Wind Company's] rights." So if you find them sitting in your office going over your email, get 'em a cup of coffee because you gave them the right to enter upon any of your property to fish around in an attempt to enforce what they consider their rights.

2. "Payments from Third Parties and for Non-Wind Energy Purposes. [Wind Company] shall pay to Owner ten percent (10%) of any rent received by [Wind Company] from third parties such as telecommunications providers for equipment of the third pary located on or in the Wind Farm Improvements." Um, telecommunications towers pay far more than wind towers. Did you know that you gave them the franchise to lease your land for release to telecommunication company's for only 10% of the proceeds. Good deal, eh?

3. "[Wind Company] shall have the right in its sole discretion and at its sole expense, in its name or Owner's name to contest the validity or applicability to the Easement Properties or Wind Farm Improvements of any law, ordinance, statute, order, regulation, property assessment or the like made by any governmental agency or entity. [Wind Company] shall control any such contest and Owner shall cooperate with [Wind Company] in every reasonable way in such contest." "Owner" means the landowner. You just made yourself the tongue of the wind company. Whatever governmental policy they want that could conceivably effect your easement is now sought in your name and you will cooperate "in every reasonable way." Got it! You thought you were just a simple landlord.....ha!

4. "Removal of Wind Farm Improvements. Owner shall have no ownership or other interest in any Wind Farm Improvements installed on the Easement Properties, and [Wind Company] shall have the express right, at any time and in its sole discretion, to remove one or more Turbines or other Wind Farm Improvements from the Easement Properties. Owner expressly waives any statutory or common law liens to which Owner migh be entitled. Upon full or partial termination of any of the Easements, [Wind Company] shall remove all physical material pertaining to the Wind Farm Improvements from the affected Easement Properties to a depth of forty-eight inches (48") beneath the soil surface and restore the area formerly occupied by the Wind Farm Improvements to substantially the same physical condition that existed immediately before the construction of the Wind Farm Improvements (the 'Removal Obligations'). If [Wind Company] fails to complete its Removal Obligations within twelve (12) months of full or partial termination of the applicable Easement, Owner may do so, in which case [Wind Company] shall reimburse Owner for reasonable costs of fulfilling [Wind Company's] Removal Obligations incurred by Owner, less any salvage value reasonably recoverable by Owner." If the company ever went bankrupt they would not be around to haggle with you about what might be both "reasonable cost" or "salvage value reasonably recoverable." Of course if they are in bankruptcy, you have no ownership interest in the equipment and it could take you quite some time to unravel who actually has the authority to allow you to remove the equipment. In any case, it is unlikely that they would make the effort to clean up the mess when the contract specifically states that they can leave it to you and haggle over what you spent (or received in salvage) later. I have heard the arguments that the steel alone is worth the cost of cleaning up. Ya, but you do not own it and who knows who might come after you for that salvage value? Then I have heard that the pad will be reusable by another turbine. Likely that the turbines twenty years in the future will be as different as the current turbines are to those that were placed in the early eighties. There is no reason to believe the foundation pads will be usable, that you will have a power contract to place anything on them, etc.

5. "Exclusivity. Owner agree that [Wind Company] shall have the exclusive right to convert all of the wind resources of the Owner's Property." Unless the definition for "Owners Property" is carefully specified, signing an agreement including this clause gives the company the rights over all your property.

6. "[Wind Company's] Right to Terminate. [Wind Company] shall have the right to terminate this agreement as to all or any part of the Easement Properties, or as to any Turbine or other Wind Farm Improvement, at any time effective upon thirty (30) days' written notice to Owner.

Owner's Right to Terminate. Except as specifically allowed by this Section 12, this agreement and the Easements shall not by terminable by Owner under any circumsatances."

Under the contract [Wind Company] has the right to terminate upon 30 day notice and the payments upon such termination cease. The landowner is locked in for the term which, in this contract, is 20 years. Newer contracts are going for 99 year terms. That is, if they are like this one, they lock the landowner in for 99 years and the wind company for 30 days.

7. "Confidentiality. Owner shall not disclose to others (except Owner's family, legal counsel, respective Mortgagees and Assignees, and financial advisors who recognize and agree to preserve and maintain the confidentiality of such information) the terms of this agreement and ifnormation about [Wind Company's] methods, power production, or availability of Wind Farm Improvements unless the information is already in the public domain. Owner also agrees not to use such information for Owner's own benefit or permit its use by others for their benefit or to the detriment of [Wind Company]."

I will close with the confidentiality clause as it is truly a doozy and warrants more writing. For instance, in order to prove that your wife was told of the need to maintain confidentiality and agreed to it, I would suggest you use a Non-disclosure Agreement prior to telling your wife the terms of the agreement. Should your wife leak information to her friend and begin a chain, you might be liable and will need to prove that you told your wife of the need for confidentiality. So too with your lawyer, banker, etc. You may not list the value or otherwise inform prospective purchasers of your land of the value you are receiving for your wind under this clause. When I asked a representative of this company about that, he said that you could contact the company and let them know who it is you wish to tell and they would not unreasonably withhold permission to inform them of the value. This clause drips liability like few others.

You will not get this kind of information from your general farm organization....

Thursday, August 2, 2007

Resource Based Payment View

This shows how much each quarter section is paid using a resource model. In this model, using a 1.5 MW capacity turbine with 100 meter rotor diameter, the amount available for leasing is $5,000 annually (with escalators).

Twenty-five percent of the $5,000 goes to the owner of the land upon which the turbine tower and road sits (2 or fewer acres). The remaining 75% goes into the wind resource pool to be shared by all whose wind resource is likely to be impacted.

We have 305.7 acres above which the wind is disturbed or consumed by the turbine. Thus, each acre receives approximately $12.27. I did some rounding in the figures provided.

Landowner of the NE quarter of Section 1 has 19.6 acres used and is entitled, therefore, to 6.4% of the wind pool or about $240 per annum. NW quarter of Section 2 has 9.4 acres receiving $116 per annum; SE quarter of Section 1 has 82 acres of wind resource used and receives an annual payment of $1,005; SW quarter of Section 2 has the real estate for the wind turbine and collects that $1,250 annually along with his/her 16.5% share of the wind pool for another $619 or $1,869 annually; NE quarter of Section 3 has 16.6 acres taken for 5.4% of the wind pool paying $203 annually; NW quarter of Section 4 has 116 acres taken and receives 38% of the wind pool for $1,425 annually; and, last SW quarter of Section 4 has 11.7 acres receiving about 3.8% of the wind pool or $143 annually.

Everybody is fairly paid.

Thursday, July 19, 2007

Wind Resource Compensation

The graphic to the left lays a foundation for discussion over how an equitable resource-based compensation formula could be used. Note: you may click the image for a larger view.

This is using a 100 meter rotor diameter ("rd") turbine. The arrows show the most pronounced direction of the wind and the dashed lines reflect a 45 degree angle that encompasses most of the directional variation in the two seasons, summer and winter (Red River Valley). The wake extends 10 times the rotor diameter; however, the small erosion of wind resource between 8 and 10 times the distance from the rotor might arguably allow for a distance of 8x rotor diameter.

The green curved lines to the side are 4x rotor diameter reflecting the disturbed wind lateral to the turbine and therefore the diminishment of prospects for having wind turbine development within that distance.

The total acres covered are: 305.7. The wind turbine itself takes at most 2 acres of land out of agricultural production. Furthermore, a farmer will have that 2 acre obstacle to plow and plant around.

A common lease/easement compensation for a 1.5 megawatt wind turbine (by those who negotiate) is $5,000 per annum. As it now stands, only the owner of the real estate upon which the turbine is located is compensated. As you can see in the graphic, this means that the owner of the NW quarter in Section 4 loses his wind resource asset without compensation.

Oil Comparison

The practice of compensating only for where the turbine is located is quite like my allowing and being fully compensated for an oil well located on my property that sucks the oil out from under the neighbors land without compensating them - something that existing regulations do not allow. In grabbing all of the oil under the neighbors property, I might argue as some have, that I was lucky enough to be the one who received the well and that is just how life goes. The "I'm lucky and you are not" argument has been used. It amounts to "because I am lucky, I have the right to take your wind resource without compensation."

Toward a Solution

We should view the $5,000 per annum as an amount that could compensate for ALL of the assets consumed. I propose, for the sake of discussion, that all who contribute resources consumed by a turbine (or at least parties equaling something above 75%) negotiate to do a deal. Just as is the case with oil, if one minor party refuses to negotiate or come to terms that the others want to accept, that party is compelled.

I suggest that 25% of the amount provided for, in this case, a 1.5 MW capacity wind turbine be for the real estate (land upon which the turbine is located) and 75% be for the wind resource.

Therefore, the wind turbine site owner receives $1,250 per annum for the real estate resource consumed. However, the site owner also gets his share of the wind resource consumed. The 305.7 acre wind field owners receive collectively $3,750 or $12.27 per acre. In the case illustrated, the owner of the land upon which the turbine sits also has about 56.2 acres of wind resource consumed and would therefore receive an additional $689.57 per annum for wind resource. The owner of the NW quarter of Section 4 whose wind resource is almost entirely consumed, would have about 116 acres of wind resource taken, allowing for a compensation of $1,423.32 per annum. Now, given that this last party is being compensated rather fairly for the turbine placed on the neighbors land, there should be absolutely no gripe. Yes the NW/Section 4 party is unlikely to host a turbine on their land, but then, they don't have to plow and seed around the road and pad for the turbine either. Fair deal.?

See next post.

Tuesday, July 17, 2007

Landowner Losers: Wind Resource

Note: same scale as previous graphic, this is four sections (numbered 1 - 4) of land (grid), divided into 4 quarters each (labeled NW, NE, SW, SE). The little round circles are wind turbines using 100 meter rotors and the dashed lines are the wake of disturbed wind (extending 10x rotor diameter) behind the turbines when the wind is blowing from the two seasonal prevailing directions in the Red River Valley near Fargo.

Currently wind resource lease/easement compensation is entirely provided to the owner of the land beneath the turbine. However, once wind hits a turbine its power potential is diminished until it has time to repair to its previous strength. Sailors call this turbulence behind objects (like a sail) "dirty air." It is also referred to as a "wind shadow" or "wind wake."

The placement of a turbine upwind (in either of the seasonal prevailing wind configurations) can materially effect the value of the wind resource downwind. It is possible that a neighbors wind resource rights can be rendered worthless by the turbulence caused by a neighboring upwind turbine. Put more bluntly, the ability to develop your wind resource may be eliminated entirely without compensation by the placement of a neighboring upwind wind turbine.

In the above graphic layout of four sections of land, the yellow quarter-sections are parcels that will have their wind resource effectively stripped, without compensation, by a turbine on another quarter section. The darker, peach colored rectangles are 1/8th sections that would lose their wind resource without compensation.

We must move to resource-consumption-based compensation models. This would value the wind resource consumed - meaning the wind disruption caused to neighbors as well as the real estate the turbine is sitting on and the need for a farmer to navigate tractors and equipment around that turbine.

I will, for discussion sake, present thoughts on how such compensation might be structured in the next postings. I welcome and encourage commentary that is aimed at bringing more equity into the equation.

Wind Poaching: Existing Lease Practices

The graphic to the left is to scale. The grid in the background represents four sections of land or 16 quarter-sections. You are looking down at the land. The little round circles are turbines - the size of 100 meter rotor diameters. The angled dashed lines extending up and down, ending at the red borders or caps, show the length of disturbed wind - wake turbulence (10x rotor diameter) - or distance it takes for the wind to repair its flow to full velocity behind a turbine. You will note that they extend to the North-North-West (NNW) and to the South-South-East (SSE) of each turbine. That is because there are two prevailing wind directions in most places and here in the Red River Valley they tend to be out of the NNW in winter and out of the SSE in summer. The amount of time the wind comes from other directions is not worth noting. You will note that most windfarms have turbines stretching out on an angle to reflect these prevailing wind directions. They will place the turbines for more apart upwind and downwind from each other than perpendicular to the prevailing winds.

Currently, leases offered to landowners are only for where the turbine tower is actually placed - turbine real estate. I know of no developer who writes a lease based on consumption of the wind resource. By "consumption of wind resource" I mean the downwind turbulence until the wind repairs to full speed. Look in the bottom right four squares or four quarter-sections. Note that the SW quarter-section of Section 4 is unlikely to ever realize wind development on their land because of the coverage of turbulence from the turbines placed on the NW quarter-section. The SW quarter-section landowner loses all his ability to develop wind without compensation unless the landowner of the SW quarter-section is the same as the landowner of the NW quarter in Section 4. This is true of several landowners in this layout. Of the 16 quarter sections in this graphic whose wind resource is effected, only 7 quarter-sections will receive payment.

This practice is quite like the old practice in oil fields of paying only the landowner where the well head is located for oil extracted from a large pool under several landowner's property. It is neither right nor fair. The taking of someone's wind resource without compensation might be actionable. Unfortunately developers and the American Wind Energy Association (AWEA) know this and know that litigation in the wind fields will not be good for the industry. If litigation is to be avoided, we must change the wind lease terms to reflect the total resource consumed not just the real estate.

More coming on this topic in the next couple posts......