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Valuing turbine or tower leases with farmland purchases

Getty Images 7-20-21 windturbine.jpg
How much is it worth if it comes with a land improvement lease and supplemental income?

In my part of the country, there was a parcel of land that came up for a little under $18,000/acre. The land was good, but the higher asking price was due to a land improvement lease (wind turbine/cell tower) that provided supplemental income to whomever purchased the parcel.

Most farmers inherently know that part of the asking price is in the value of the lease. Today, we will talk about valuing the lease to see it’s effect on purchase price of land.

Determining the value of a wind turbine or cell tower lease falls under the larger scope of time value of money; the idea that the value of a dollar today is worth more than that same dollar received tomorrow (or next week, next month, next year, etc.). A long-term lease is an annuity that has guaranteed annual payments over a finite number of years. Time value of money allows us to determine the present value of all the future annuity payments in today’s dollars.

The formula for present value of an annuity is:

PV0 = CFr[1-11+rN]

    • PV0  = Present value in current period
    • CF = Cashflow
    • r = rate
      • Generally, this is interest rate but there are rationales for using different rates depending on the circumstances
    • N = number of periods

The easiest way to do the calculation is in Excel (yes – accountants love Excel). In Excel, the formula looks like this:

=PV (rate,nper,pmt)

    • PV = present value
    • Rate = interest / discount rate
    • Nper = number of payments
    • Pmt = payment

As an example, you are looking at purchasing a 40-acre parcel for $600,000 ($15,000/acre) with 37 acres tillable and three acres on lease for a wind turbine (footpad, surrounding ground, and frontage road). The wind turbine lease is $8,000 for 20 years. For our purposes, we are going to use the federal long-term rate of 1.87%. Our Excel formula will look like this:

              = PV (0.0187,20,8000); PV = $132,467.50

The present value of the turbine lease is $132,467.50; the remaining tillable 37 acres now have a value of $12,636.01 [($600,000-132,467.50) / 37 acres].

It’s important to be able to separate the value of annuities from the value of the tillable acres so that you can determine whether your cost of production can support the return on investment.

There are more technical aspects and discussions that can come up with present value calculations, but this is meant as a starting point for you to get a rough estimate of where to begin.

             

In my part of the country, there was a parcel of land that came up for a little under $18,000/acre. The land was good, but the higher asking price was due to a land improvement lease (wind turbine/cell tower) that provided supplemental income to whomever purchased the parcel.

Most farmers inherently know that part of the asking price is in the value of the lease. Today, we will talk about valuing the lease to see it’s effect on purchase price of land.

Determining the value of a wind turbine or cell tower lease falls under the larger scope of time value of money; the idea that the value of a dollar today is worth more than that same dollar received tomorrow (or next week, next month, next year, etc.). A long-term lease is an annuity that has guaranteed annual payments over a finite number of years. Time value of money allows us to determine the present value of all the future annuity payments in today’s dollars.

The formula for present value of an annuity is:

PV0 = CFr[1-11+rN]

    • PV0  = Present value in current period
    • CF = Cashflow
    • r = rate
      • Generally, this is interest rate but there are rationales for using different rates depending on the circumstances
    • N = number of periods

The easiest way to do the calculation is in Excel (yes – accountants love Excel). In Excel, the formula looks like this:

=PV (rate,nper,pmt)

    • PV = present value
    • Rate = interest / discount rate
    • Nper = number of payments
    • Pmt = payment

As an example, you are looking at purchasing a 40-acre parcel for $600,000 ($15,000/acre) with 37 acres tillable and three acres on lease for a wind turbine (footpad, surrounding ground, and frontage road). The wind turbine lease is $8,000 for 20 years. For our purposes, we are going to use the federal long-term rate of 1.87%. Our Excel formula will look like this:

              = PV (0.0187,20,8000); PV = $132,467.50

The present value of the turbine lease is $132,467.50; the remaining tillable 37 acres now have a value of $12,636.01 [($600,000-132,467.50) / 37 acres].

It’s important to be able to separate the value of annuities from the value of the tillable acres so that you can determine whether your cost of production can support the return on investment.

There are more technical aspects and discussions that can come up with present value calculations, but this is meant as a starting point for you to get a rough estimate of where to begin.

             

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