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Real estate has the most to gain from renewable energy

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Remember when renewable energy was considered a niche industry just a few years ago? Climatologists sounded the alarm to prepare for climate change as early as the 1950s, but the renewable energy industry was slow to develop. Just ten years ago, less than 3% of the United States’ energy supply was generated by both solar and wind power. combined. Adoption has continued at a glacial pace as only 5.7% of energy generation in the United States came from wind and solar power in 2015. Ironically, actual glaciers were melting faster than the shift to renewable energies…until very recently.

Last April, wind and solar power generation reached a record 20% of the United States‘ electricity supply. Globally, wind and solar energy have double over the past seven years. While there are myriad reasons why renewable energy has accelerated so rapidly, the fact is that the consequences of climate change can no longer be ignored, especially in the real estate sector. Climate change is hitting real estate the hardest. Unbearably hot temperatures, prolonged hurricane seasons, wildfires and other hazards damage the built environment with distressing frequency. Real estate has the most to lose with every disaster, but when it comes to renewable energy, property owners have the most to gain.

Land and deliver

Moving to replace fossil fuel on the power grid with renewable energy takes a lot of ground. On a per-watt basis, clean energy sources like wind farms, solar panels, and other facilities typically take up more land than their fossil-fueled counterparts. For example, a 200 megawatt wind farm would need to spread the turbines over 13 square miles (36 square kilometers). With the same generation capacity, a natural gas power plant could be contained within a single city block.

In April 2021, the Biden administration promised that by 2030, carbon emissions would be reduced by 50-52% from 2005 levels. By 2035, the administration’s goal is for the entire United States is supplied with pollution-free electricity. From now on, to reach the 2035 objective, solar and wind must grow by 10% per year. Estimates from Princeton University and Bloomberg News predict that if solar and wind growth is on track to meet the Biden administration’s goal, it would take a tract of land the size of South Dakota. If the United States were to become a completely carbon-free economy by 2050, powering the country would require an amount of land equal to 5 South Dakotas.

Sustainability initiatives are boosting renewable energy, but real estate players are beginning to lead the charge as the return on investment from leasing unused land to the solar and wind industries becomes more apparent. I spoke with Yoann Hispa, CEO and co-founder of LandGate, an online marketplace for commercial land in the United States and its resources, including water, minerals, wind, carbon, and solar energy. The company provides an online marketplace where land-related businesses can connect and enable developers, investors, real estate brokers and landowners to understand the benefits of energy and environmental resources.

Hispa explained to me that just a few years ago, in 2019 to be exact, 95% of LandGate’s revenue came from mining leases (oil and gas). Today, renewable energy leases represent just over 95% of LandGate’s revenue.

“Right now it’s reversed,” Hispa said. “In the past, landowners who leased mineral rights received royalties, these transactions had 30 years of cash flow. Mining royalties were purchased for, say, about 12 to 15 years into the future. To clarify, the owner of a leased property generally receives a portion of the production revenue when minerals are extracted from it, or a “royalty payment”. The lease agreement specifies the amount of the royalty payment, which can be a fixed amount per tonne of mineral production or a percentage of the production value.

“When it comes to renewables,” Hispa continued, “maybe 8 to 10 years of future cash flow has been prepaid to buy the 30s. Now what we’re seeing are these 30-year cash flow royalty agreements for rents from solar farms or wind farms on their land, these get lump sums 15 to 20 years up front, which is a lot.

Compared to leasing mineral rights, leasing renewable energy does not drain any underground resources from the earth itself. Thirty to 35 years of rent, depending on the lease agreement, accumulates for the landowner. After the end of the lease term, as long as the landowner puts a clause in the lease, the developer is responsible for the removal of the wind or solar structures, the equipment is removed and returned to the landlord. Unlike leasing mineral rights, the land is ready to develop.

Renewable energy leases are increasingly seen as a great approach for property owners to increase their income while retaining ownership of their property so that future generations can explore potential development options. This is probably why the renewable lease offers on the LandGate market are disappearing almost as quickly as they are increasing. “Oh, they’re gone in a week on the market,” Hispa said. “When they hit the market, they’re gone.”

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Solar Derby

Every landowner knows that the value of their land depends on the most revenue-generating use of that land. The data on the wealth of landowners who lease to the renewable energy sector is certainly impressive. Hispa recalled a former client who owned 640 acres of land in New Mexico that may not have been considered top quality by conventional standards. “It was pure land, unsuitable for agriculture,” he explained. This parcel of land was worth about $500 an acre. According to Hispa, the realtor for the land put it on the market, only to find the location was very close to a substation with accommodation capacity available, so a solar developer snapped it up. The Hispa client obtained a commercial land value of $500 per acre at this location as well as a lease at $500 per acre per year. “He receives a 100% dividend! Hispa exclaimed, “for 30 years or more!”

The strength of these deals is in the strength of the location, but renting land for renewable use is proving more lucrative year after year. Last February, the sale of six offshore wind leases off the coasts of New York and New Jersey generated a record profit for the US government of $4.37 billion. More than a dozen companies engaged in a three-day, 64-round bidding battle for the New York Bight, a triangle-shaped stretch of ocean. The competition exceeded expectations. According to the Home Office, it was the highest-earning competitive offshore energy leasing transaction ever, including oil and gas lease sales. Analysts noted that leases were purchased for around $10,700 per acre, more than ten times the previous high of $1,000 per acre. Even industry analysts have expressed astonishment at the level of demand, and they have attributed it to the expansion of offshore wind investments as well as effective state and federal legislation.

As interest grows and investor dollars pour in for renewable energy, more and more landowners are realizing the benefits of renewable energy, including the cost savings it can bring to consumers and the value increased they can bring to investors. Chakyl Camal, a two-time Olympic swimmer and CEO of Panthera Group, an Australian property investment and management company, is acutely aware of the value of renewable energy. “Okay, electricity is the most precious commodity on earth, Camal said. “It is so valuable that wars are fought over it. We believe that people fight for oil, but people really fight for what oil creates, which is electricity.

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Panthera has recently embarked on green energy infrastructure with the long-term goal of establishing solar power generation for each of the shopping centers it develops. “Right now we’re in a situation where electricity costs have gone up 350%, which means my rates have gone up 350%. Nothing I invest in rises and appreciates at this value. So if you think about it, energy is the most valuable thing on one of my properties because it’s going up faster than the land value of that building,” Camal said. “All I have to do to fight over this value is connect the panels together and the sun will give it to me? It’s obvious.

Demand for cleaner energy sources is expected to grow across most market categories in 2022 as climate change awareness and support for ESG considerations grows. As it is often claimed that real estate accounts for nearly 40% of global carbon emissions (even with regional variations), homeowners understand that a global shift to renewable energy is essential to protect their properties and ensure the safety of people who are there. But a big payback is the bonus that comes with healing the planet.