Solar development continues in the Southeast and other parts of the country, whether through independent developers or traditional utilities. As these entities move into new markets, it is important to pause and consider the state and local nuances that will impact the project, from land acquisition to zoning to permitting to financing.
Across the board, developers can position themselves to navigate the entire life cycle of solar development successfully by focusing on the end of the cycle from the beginning.
Considering what a purchaser, lender or tax equity investor is likely to require at the beginning of development can avoid a number of headaches, reduce expenses and save time. This is true for real estate deliverables (e.g., lease terms and title requirements), permitting deliverables (e.g., zoning approvals and stormwater approvals) and for general diligence items such as Phase I assessments and Federal Aviation Administration evaluations of glare.
As developers explore new states, it is critical to understand how local processes affect timing, documentation and profit modeling.
Local zoning is one area where the elements that go into a successful project can vary greatly across state lines—and within a state’s borders.
For example, local zoning boards in Georgia are gradually putting specific solar requirements in place. The same thing happened in North Carolina as solar initially spread there. In 2018, the Georgia Institute of Technology, Emory University and the University of Georgia published a model solar ordinance, just as a working group in North Carolina created a model solar ordinance in 2012 when solar started spreading across the state (updated version available here).
Another threshold issue for any project is the environmental impact and permitting. There are federal and state aspects that overlap, such as how wildlife and wetlands are impacted. Furthermore, many jurisdictions have state and local regulatory overlap on issues such as erosion control, storm water runoff and road access.
Additional regulations may be applicable if the land has been used for farming in the past, or is located in a coastal county or flood plain.
For most projects, there will be standard permits needed for any project, some that are special to the applicable jurisdictions, and some that can be avoided based on threshold triggers or land planning. In some cases, a developer may even want to target additional acreage so that a project can be designed to circumvent environmental concerns, for example, to avoid impact to wetlands or to allow for existing vegetation to remain without creating shade issues. By considering impacts early, pursuit of approvals and workarounds can be incorporated into the overall plan.
All of these constraints depend on the specific land in question, and each project is unique to its time and place. As any developer who has taken part in a public meeting at the county level knows, thorough diligence and planning does not always make things easy. Stakeholders often raise unexpected issues. But by getting ahead of the regulatory process, the project team can be prepared for those challenges as they arise.
Property tax abatements, while available for solar development in many states, also vary widely in application.
Traditional tax abatements are not available in Georgia, but the developer may be able to effect a property tax reduction by transferring title of the solar project to a local development authority in what is also known as a “bonds for title” transaction. The local development authority issues bonds to acquire the project and then leases the project back to the solar developer. The lease is a triple-net financing lease passing income tax ownership of the property and usually includes a purchase option for a nominal sum when the bonds are paid.
Most solar companies using that structure for the first time will want to tweak their standard documents to accommodate the sale-leaseback process while avoiding unnecessary transfer taxes.
In South Carolina solar developers have to negotiate fee in lieu of tax (FILOT) agreements with each county in which a development is to be constructed to abate property taxes. A FILOT provides for higher certainty on property taxes; it sets the value of real property at the original income tax basis for South Carolina income tax purposes without regard to depreciation and allows the taxpayer and the taxing entity to negotiate an assessment ratio and a millage rate.
An important question to consider before beginning FILOT negotiations with the county is whether a project meets the capital investment requirements for certain tax abatements.
Fitting Pieces Together
In determining how all the pieces of the development life cycle fit together, it is important to work with counsel who knows both the individual market and the broader renewable industry. Partnering with that kind of local counsel can help uncover blind spots and lay the right groundwork so that developers do not have to spend time and money later in the process going back to fix problems.
Development decisions are not made in a vacuum. The factors that make a project easier or harder usually have a direct impact on the economics and financing of a project. By taking the local and state nuances into account at the front end, solar developers will be best positioned to structure a deal that maximizes profitability.
Katherine Ross is a partner at Parker Poe. She provides counsel on the acquisition, sale, financing, and permitting of renewable energy facilities across the Southeast. She can be reached at email@example.com.
Bill Holley serves as counsel at Parker Poe. He has more than 15 years of experience counseling clients in the acquisition and development of a broad variety of projects, including renewable energy projects. He can be reached at firstname.lastname@example.org.
The opinions expressed here do not represent those of Bloomberg Environment, which welcomes other points of view.