Creative real estate transactions for renewable projects
Written By: Stratton Report
February 9, 2016
An interview with Alex Stone, Senior Vice President, Landmark Dividend LLC
Stratton Report caught up with Alex Stone to discuss how Landmark Dividend, an infrastructure-focused real estate investor that helps fund utility-scale renewable energy projects in both domestic and global markets, adds value to renewable energy development.
Stratton Report: How did you guys get involved with renewable energy deals?
Alex Stone: Landmark was started in 2010; we began by investing in ground leases under cell towers and billboards. Over the last 5 years we’ve acquired thousands of cell and billboard leases throughout the US, Canada, Australia and Puerto Rico. During that period, we have also diversified into other types of real estate investments, including renewable energy assets. We started in the renewable space by buying wind turbine leases from farmers. The wind business identified opportunities to buy land under existing utility scale solar farms and partner with developers for the financing of new projects. Solar land is now our primary renewables business and one of the fastest growing asset classes for Landmark.
SR: What is the benefit of having Landmark in the deal for the developers?
AS: There are a couple of reasons the developer will bring us in. While putting projects together, developers can tie up a piece of land for a project with options, which aren’t terribly expensive. That’s a good thing, because it can take 5-7 years before a project gets to NTP. But once a development is ready for construction, the developer will ask us to come in and acquire the land. The land cost is a big upfront expense and they’re often still a year away from having the project completed, turned on and generating revenue. If a development company can have Landmark make that upfront investment in land on their behalf, it significantly reduces the capital they need to get a project off the ground. The other big thing is that the investment tax credit drives solar development, but land doesn’t qualify for the ITC and is not a depreciable asset for tax purposes. So for developers to use their own money to buy land is not the most efficient use of their capital. Most of the developers that we’ve done deals with feel that partnering with Landmark increases their overall project returns by allowing them to avoid investing their capital in the land.
SR: So in your solar deals always acquire the land under the project?
AS: Mostly, but not always. With solar projects, there is no alternative use for the land underneath it since the arrays cover most of the property. Therefore, in many cases, the developer will just want us to buy the property and lease it to them for their project. However, we have also done a several deals lately where the developer will buy the land and then sell us a 30 year interest in the land (typically via an easement). This enables the developer to recoup most of the cost of the land. We then lease the land to the project company for the 30 year easement term. After 30 years, the easement goes away and the developer gets all of the land rights back. If a solar developer does that across multiple projects, they have the potential to amass residual land rights to tens of thousands of acres of land. Some developers see a real upside to owning all of that property at the end of the lease term. They may want to ”bank” the land for resale or development 30 years from now; alternatively, if in 30 years they just want to repower with new solar panels, they will control the land free and clear.
SR: In the Alta Wind Energy Center transaction [see Stratton Report, January 27, 2016] there were already manufacturing and office buildings on the land you acquired. Do you guys often get involved with other uses for land in addition to renewable projects?
AS: We prefer to only acquire the wind rights but it was the seller’s preference to sell the entire property including the buildings. Typically, we do not get involved with land uses outside of ground leases, but there have occasions, like the Tehachapi acquisition, where we’ve had to buy a building as part of a transaction.
SR: Approximately, how many solar projects have you been involved with at this point?
AS: We really ramped up the solar business in 2015. In the fourth quarter alone, we completed 12 transactions, acquiring land rights under 238 MW of renewable projects. Nine were solar deals, one was the Alta wind deal and there were two battery storage facilities.
SR: Is there any aspect of your deals which is tax-driven?
AS: Our deals are not tax driven, at least if you mean they rely on renewable energy tax incentives. We’re real estate investors. Our deals are taxed like any other real estate transaction.
SR: What advice would you give project developers to make associated real estate transactions more useful and easier to accomplish?
AG: Developers should consider creating a project company and a land company, and put a lease in place between the two. Even if the developer doesn’t initially plan to sell the land to Landmark, it’s always good to create those two entities to preserve the flexibility to sell in the future. If you don’t, once the project is built and financed, it’s very difficult to go back to your lenders and put a lease in place. You would be adding a lease payment to your deal, and that payment would be made ahead of debt service on the project, so the lender’s probably not going to agree to that. Landmark is always happy to speak with developers early in the development process and come up with a strategy for the real estate. I think we’ve been able to show our partners that we can increase the overall project returns and significantly decrease the amount of capital needed in the early stages of the development process when partnering with Landmark.
SR: Have you considered doing sale leasebacks of land for power projects that aren’t renewables or storage facilities?
AS: We have done and are interested in doing more sale leaseback transactions under other types of power generation infrastructure and storage facilities. The battery deals we just completed are a good example of this. We are also interested in investing in land under other types of power generation systems. We are actively seeking new projects in these areas.