Editor's note: This is the second in an eight-part series, called “Paved Over,” exploring the impact of tech-driven development on U.S. farmland. Stories will focus on data center expansion, solar development, the impact to farmers losing land and possible solutions.
Beginning around 2019, Brook Duer, an attorney with Penn State’s Center for Agricultural and Shale Law, noticed an uptick in solar developers soliciting local farmers for property rights. Pennsylvania is particularly attractive for solar development due to existing infrastructure from coal and gas industries. High-voltage transmission lines run through it to major East Coast cities.
Offers can be lucrative, but Duer warned of pitfalls.
“A landowner is graduating into another class in terms of the business relationship between themselves and the solar developer. This is concerning, and they need to understand the relationship,” he said.
They become a “sophisticated landlord” when a 30- to 40-year contract is signed and must navigate liability issues, environmental issues and safety hazards. Property taxes might go up, and rollback taxes for changed use may be due.
As developers target farmers with land deals, experts warn of complex legal and financial risks. When leasing, farmers must navigate 30- to 40-year agreements that have major liability, environmental and tax implications. Meanwhile, selling land without properly structured transactions can lead to significant tax liabilities, potentially costing millions of dollars.
Local township boards often lack technical expertise, and some states don’t have enough bureaucracy to support their farmer-constituents. And while solar contracts are similar to fracking leases, which Pennsylvania farmers understand from past precedence, Duer noted distinct differences in liability. Gas leasing is standardized and well established. Solar isn’t.
“The lease agreements have been created in the last few years basically out of thin air,” he said. “This is an industry in its infancy. It doesn’t have the right channels worked out. Is it really in the farmer’s best interest?”
Selling land
Complications abound when selling land, too. Pat Karst, vice president at Indiana-based Halderman Real Estate and Farm Management, conducts a lot of 1031 tax-deferred exchanges. These transactions let farmers defer capital gains tax when selling productive land in one area to purchase it in another. The monetary implications of getting it wrong are severe.
“You could be writing Uncle Sam a check for millions of dollars if you don’t do this correctly. That’s the biggest pitfall,” he said.
Timing is critical, so Karst advises starting the process early. After signing, the seller has 45 days to identify replacement properties, which must be closed within six months. It’s a quick turnaround.
“Somebody came in last week and said, ‘Hey, I’ve got 10 days left to identify the property. I need help right now. And by the way, I need it in these very specific parameters.’ Well, you’re kind of screwed, pal,” Karst said.
If those parameters aren’t met, the property seller must pay the full tax burden.
“That’s a million dollars out of my kids’ pockets,” he said.
When talking about land sales, Karst stressed there are no villains. Land transactions represent market forces at work. When developers offer four or five times what farmland is valued for its agricultural productivity, it’s straightforward capitalism: willing buyers meeting willing sellers at market-determined prices.
When those stars align, what’s the bottom line for farmer sellers, leasers and buyers? Seek legal counsel.
“We are very concerned about [landowners] signing things without council,” Duer said.