Land Lease PPA Q & A (Lessee vs. Lessor)

Lessee Defined

In a lease agreement, the lessee is defined as the party that pays for the use of the asset or property. The lessor is the party that receives payments from the lessee in exchange for the usage of its asset or property.

Lessor Defined

In a lease agreement, the lessor is defined as the party that receives payments in exchange for the usage of its asset or property. The lessee is the party that pays the lessor for the use of the asset or property.

Lessor versus Lessee

What’s the difference between lessee vs lessor? When you sign a lease, are you the lessor or lessee? When engaging in a lease agreement, a legally binding contract, it is important to know the difference between these two terms.

For example, consider a rental apartment. The tenant is the lessee. The landlord is the lessor. The lessee pays rent to the landlord. The lessor receives payment from the tenant. The same is true for any lease or rental agreement. The lessee pays the lessor for the right to use the asset or property. The lessor receives payment from the lessee in exchange for the usage of the asset or property.

Operating Lease vs Finance Lease

In accounting, a distinction is made between an operating lease versus a finance lease. The difference is in the way the lease is recorded by the lessee in the lessee’s financial statements. There is also a difference in which party assumes the benefits and responsibilities of ownership of the asset or property.

Operating Lease Definition

An operating lease is a short-term off-balance-sheet lease agreement. An operating lease is not recorded on the lessee’s balance sheet. This type of lease typically spans a small portion of the asset’s useful life, and the lessor retains the risks and benefits of ownership. For example, in an operating lease, the lessor is responsible for service and maintenance of the asset throughout the duration of the lease. An operating lease is also called a service lease.

Finance Lease Definition

A finance lease, also called a capital lease, is a type of long-term lease agreement. A capital lease is recorded on the lessee’s balance sheet. This type of lease typically spans most of the useful life of the asset. In a capital lease agreement, the lessee, the party receiving the asset or property, assumes both the risks and benefits of ownership.

Questions for investors:

1. Timelines on land leases. How long do they normally go? Leases are normally at least 20 years from COD, usually with at least a decade of renewal option at solar facility’s choice. Should seek to make sure it can last for entire anticipated life of equipment.

2. When in the project does the land lease officially start? They can be structured such that either there is an initial option period until the start of construction, then a construction lease, and finally the long term lease at COD. Another alternative is a lease entered into immediately that has three different periods, beginning with a low rent development period, then construction, and finally the long term lease period (20+)

3. How is property maintenance and insurance handled? Normally, there is agreement that solar facility will only be responsible for what it does to the property and property owner will deal with preexisting conditions and impacts from offsite events.

4. Can smaller systems (<1 Meagwatt) be grouped together to get to above 1 Megawatt? Grouping is possible, provided there are similarities amongst the projects to make it appear to investors as being similar to a single project.

5. Cheat sheet for costs, i.e. land lease. This is important to calculate the profitability of farm lands. What costs a project can afford for a land lease or purchase are going to be dependent upon the cost of equipment and the revenues available from power/REC sales. I don’t have those numbers at this time.

6. Transferability of land lease. For example death of land owner or sale of lands. There is typical assignment language that can be used to assure that the lease rights are maintained for the solar facility’s life. Assignments can either carry with it a “reasonable” approval right to the solar facility’s owners or have certain types of assignment allowed in the agreement. From the solar facility’s perspective, since the facility will be used as collateral for financing, in the event of foreclosure the bank (or other entity) will need to be able to take assignment of the lease.

7. Commitment level for Delaware. Where do we stand in terms of investor interest in Delaware? We discussed this today…and I passed on the article you sent me so now we can start to move forward on these projects so that when we meet with the utility we assume that the SRECs are going to be worth what they said in the article and have them put that in their offer which will also include what rate they will purchase the kWh’s at.

8. Cap sizes on projects. How small and how big? Too small is a problem because it costs too much to structure a deal and get financing for the small amount of revenue that gets generated. The top end is probably limited by space and resource. In the West there are solar facilities being worked on that are hundreds of megawatts. There is no theoretical limit other than the land available in this area. More importantly, will be the demand for green power and/or RECs that we mention above. The market will determine the practical size.