Recent changes to Michigan regulations have increased the tax incentives available to property owners seeking to locate commercial solar operations on their land.
Gov. Gretchen Whitmer and the Michigan Department of Agriculture and Rural Development, or MDARD, revised the rules governing the state’s Farmland and Open Space Preservation Program in June. Farmers enrolled in the preservation program have long been allowed to have wind turbines and cell towers on their land and remain in the program. The revisions now allow landowners the same ability to place solar power production facilities on their land.
Before farmers and landowners race to sign new contracts, though, it’s important to understand the history — and be aware of a few caveats.
The preservation program
The preservation program was first established in 1975 and currently provides tax incentives for 3.4 million acres of privately held land so long as the landowners preserve existing farmland and open spaces and restrict development for a minimum period of 10 years. This represents about one-third of the state’s total 10 million acres of farmland.
Participating landowners can qualify for income tax benefits, and the property becomes exempt from special assessments for improvements such as sewer, water or lighting projects.
Prior to the recent regulatory change in Lansing, land devoted to solar power production would not have been eligible under the program. A 2017 decision by the Rick Snyder administration determined such a use was not in keeping with the goals of the preservation program.
Landowners could exit the preservation program in order to enter into a solar power development agreement, but in most cases, that required them to repay the state for up to seven years of previously received tax credits along with 6% interest. The Whitmer administration has changed course. Noting its attempts to harmonize competing interests, Whitmer stated in a press release, “We want to ensure that the placement of commercial solar panel arrays is consistent with farming operations … while also providing opportunities for renewable energy."
Requirements for solar projects
In order to ensure land on which the solar panels are placed can still be used as farmland or open space in the future, the policy change requires landowners to agree the solar development will be done in such a manner that farming can recommence if the solar panels and other infrastructure are ever removed. In addition, while the property is being used for solar production, adequate drainage must be maintained and ground-cover vegetation must meet pollinator habitat standards.
For many farmers and other property owners, the prospect of leasing property to commercial solar developers is an attractive concept. It can provide a stable, year-round source of income, sometimes even allowing a higher rate of return than could be gained from agricultural uses of the property. However, the changes to the preservation program have a few wrinkles that landowners and developers should keep in mind when evaluating potential ROI on a solar project:
Guidance issued by MDARD indicates the enrolled property only can be devoted to solar production if it is necessary to complete a “larger, in-scale solar facility.” We will see how — and if — the state intends to abide by this guidance as solar projects begin to get approved under the new policy.
While the use of the property for solar power production will not require it be removed from the program, landowners will not be able to claim tax credits during that period.
The revised policy also requires landowners to provide a surety in the form of a bond or irrevocable letter of credit. But the amount must be sufficient to assure funds will be available at the end of the solar project to restore the land to agricultural use and see that the solar panels and all related equipment above and below ground are removed.
As this policy is less than six months old, it will take some time to see how MDARD’s practical implementation of the requirements develops. Landowners considering taking advantage of this policy should be sure to consider the legal, tax and environmental requirements as they explore the options.
Adam Bruski is an attorney with the law firm of Warner Norcross + Judd LLP, where he advises clients in commercial and residential real estate transactions. He can be reached at firstname.lastname@example.org.