Agreements with Landowners and Local Governments Financing Wind

Document Sample
Agreements with Landowners and Local Governments Financing Wind Powered By Docstoc
					Agreements with Landowners and
      Local Governments
     Financing Wind Power: The Future of Energy
             May 8, 2008, Scottsdale, AZ



                 Matthew S. Moses
                  Nixon Peabody LLP
                  1100 Clinton Square
                 Rochester, NY 14604
                   P (585) 263-1306
               mmoses@nixonpeabody.com




                                                  1
                        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



                                                                      2
                  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




                                                                       3
          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




                                                                                   4
       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



                                                                              5
         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




                                                                                                6
       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


                                                                            7
           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



                                                                8
          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

                                                                         9
       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

                                                                10
   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
                                                                                      11
    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

                                                                               12
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



                                                                13
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

                                                         14
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

                                                                      15
  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

                                                                16
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




                                                     17
  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.)



                                                            18
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
                                                                             19
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)

                                                          20
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
                                             21
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
                                                                 22
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

                                                                23
    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




                                                            24
Q&A




      25
Contact Information


    Matthew S. Moses
      Nixon Peabody LLP
      1100 Clinton Square
     Rochester, NY 14604
       P (585) 263-1306
   mmoses@nixonpeabody.com




                             26