The following is an article written by Seth M. Baker for the February 2018 issue of Prairie Farmer Magazine. The article can be found on-line HERE.
With 27 wind projects of over 50 megawatts currently online, Illinois is a leader in wind energy in the United States. Only five states produce more wind energy than the 4,026 megawatts produced annually in Illinois. Wind energy, and its effect on Illinois farmland value is important.
Mendota Hills Wind Farm in Paw Paw was the first utility-scale wind project in Illinois starting in 2003. Others quickly followed, including Twin Groves Wind Farm in McLean County in 2008 which was the largest wind farm east of the Mississippi upon completion.
15 years in, there is significant data to show added value to the farmland where the towers sit. David Klein, Managing Broker of Soy Capital Ag Services, has been tracking data from three wind farms in Central Illinois’ McLean, Woodford and Livingston Counties over the past ten years.
Between 2009-2016, there were 22 sales of farmland with wind lease income averaging $102 per acre across those sales. These were compared to general farmland sales to determine the impact on values, which shows an average $1,162 per acre increase.
The typical income capitalization (CAP) rate (investor expected rate of return) is between 2.5 to 3.5% for good quality, central Illinois farmland. The CAP rate for the wind lease payments, based on the data above, was near 9%. This represents a significant opportunity to increase farmland returns.
While the economic benefit to the landowner is evident, there are other issues that weigh on the value of the underlying farmland. Operating around the towers can make farming more difficult. Drainage may be impacted. Noise or vibration issues may be a concern. Aerial crop spraying will be impacted. The length of remaining payments, location of the turbine and contract terms influence value as well.
These issues can make determining the value of wind payments difficult. The added income can be evaluated from an economic standpoint, but the farmability factors can be harder to value as they can vary significantly from farm to farm. It is even more difficult to put a figure on the emotional factors that can come with wind projects.
Certain areas of Illinois value the additional income differently. For example, in Henry County where local buyers dominate the land market, it has been noted that wind leases generated little to no additional premium. Farmer-buyers often discount for the concerns noted above more than investor buyers.
Determining the value of a wind lease on farmland in a newer project with limited sales data is challenging. Data from older, more established areas can be used to help determine the factors that matter to buyers and provide insight into possible values, but may show lower CAP rates as lease renewal and decommissioning issues are raised. At the end of the day, the market will determine the value and each new sale will provide additional insight.