A letter of intent, or LOI, is a summary of the most important contractual terms that a solar developer is proposing to a landowner to eventually lease their land. LOIs are sometimes called term sheets, offer letters, or proposals.
LOIs are not contracts and are usually not legally binding. Their purpose is simply to make sure that you (the landowner) and the solar developer are “on the same page” about some basic terms. By signing an LOI, you are indicating to the developer that you probably would sign a lease or an option-to-lease contract containing those terms (as long as you are comfortable with the rest of the contract, of course). Once you sign the LOI, a developer will typically present you with a contract within 30 days.
Developers use LOIs because they will need to invest a lot of time and money if they proceed with the process and, frankly, they want to ensure that they are not wasting their time in working with you.
Every LOI is a little different, and this article will give you a quick primer on what’s commonly included in the document. By definition, an LOI is a relatively short, straightforward document, and solar developers want you to ask questions about anything in it that you don’t understand to avoid any misunderstandings later.
The decision of whether to ask a lawyer to review the LOI is up to you. Note that although an LOI is not legally binding, it may contain sections that are. These sections usually relate to confidentiality and other legal matters.
Term Definitions and Term Lengths
An LOI typically specifies the duration of two or three sequential terms, which are sometimes called phases or periods.
The first term is typically called the option term, development term, or due diligence term. This usually lasts up to 18 months but may need to be extended. During this term, the developer will engage in various activities to determine whether your property is in fact viable for a solar project. This may include but is not limited to:
- Various technical studies about your property
- Research on how a solar project on your property would connect to the electric grid
- Discussions of permitting, taxation and other issues with your local government
- Looking for potential buyers of the energy a solar farm on your property would produce
- Choosing equipment suppliers and construction contractors
- Engineering the final site layout
You are usually free to use your property however you like during this term. If everything checks out with your property, the project will move on to construction.
The second term is called the construction term, during which the solar farm is built on your land. An LOI may not specify a construction term if the project to be built on your property is relatively small, such as a community solar project that can be built within weeks. In contrast, a very large project can take several months to build. If the LOI does not specify a construction term, it is included in the first term.
The final term is called the lease term, rent term, or operational term. This term commences when the solar farm goes operational. Developers call this “commercial operation.” This term typically lasts 25 to 35 years, and can almost always be extended (renewed) for five or more years.
You will receive payments of differing amounts in all three terms. The payments increase with each successive term. An LOI will specify what you will receive in each term, and the frequency of those payments.
For the option and construction terms, most developers will pay one lump sum at the start of the term for that entire term. The LOI may also specify a different payment amount for any extension of the term, if that becomes necessary. In the lease term, most developers will pay you once per year, every year, for the duration of the term.
The LOI may also specify an escalator or simply “increase” in the lease term payments. An escalator is a progressive increase in the payment, either annually or every few years, to compensate you for rising inflation during the 25-35 year lease term. This is important because what may seem like a lot of money today won’t have nearly the same buying power 30 years from now. Escalators are usually expressed as a percentage. You may see, for example, an escalator of 1% per year, or a 3% increase every five years.
Many LOIs include a diagram (a “site layout” or “site plan”) of where the developer expects to build the solar farm (the “project”) on your property. It may also indicate where, for example, a developer plans to build a fence around the facility, or to construct a small access road for maintenance vehicles to use. These diagrams are typically marked “preliminary” and the details are subject to change during the option term due to construction, permitting, community feedback, or other issues. Note that layouts are negotiable between you and the developer. Be sure to let the developer know if you have specific requests.
The presence of a solar farm can increase your property’s value, and thus your property taxes. A solar developer will generally pay for at least the portion of your property taxes that increases as a result of the solar farm. This section of an LOI should codify that.
Removal/Decommissioning of the Project
When the lease term ends, most developers will want to replace the old solar panels and continue operating the solar farm. Whether you (or your descendants) wish to renew the lease at that point is entirely your choice.
If you do not wish to extend the lease term, the developer should remove all solar equipment and restore your property to the condition it was in prior to the construction of the project. Most LOIs contain a section to this effect and will state the approximate time it will take to do it and that the developer (or whoever owns the project in the future) will pay for it.
Exclusivity, Confidentiality, and Non-Interference
Although most of an LOI is not legally binding, some LOIs contain clauses that are. They may be called different things, and they may be combined into one section, but look out for these:
- Exclusivity means that once you sign the LOI you agree not to “shop around” your property to other developers in search of a better offer
- Confidentiality means that you will keep the terms of the LOI secret from anyone other than your family members, lawyers, and tax advisors
- Non-interference simply means you will do nothing to interfere with the developer’s work
An LOI should be clear on what sections are in fact legally binding.
This section generally clarifies that the developer, not you, owns the solar equipment, all the energy it produces, and any tax credits, renewable energy certificates, and carbon credits.
Other Sections of an LOI
An LOI may contain additional sections or describe the items above in different ways. If anything is unclear to you, by all means, ask the developer or consult a lawyer. You may also wish to consult a tax or financial advisor about the implications of receiving lease payments.