A site scout left a card about our 46 acres. He said power adjacency.

We've held 46 acres for nine years, row crop lease, taxes paid, no plans. It sits about a mile from a transmission line and there's a substation on the far side of the county road. Last month somebody who introduced himself as a site selection consultant asked whether we would sign a 12 month option for a data center user he represents.

What he floated verbally: $75,000 option fee for 12 months, two 6 month extensions at $50,000 each, purchase at $65,000 an acre. All option money credited to price at closing. Rezoning and any studies at buyer's cost.

I don't know how to think about any of this. The farm lease brings in about $9,000 a year, so the option fee alone is eight years of income for doing nothing except taking the land off the market. But I also don't know what I'd be giving up if this is worth more than $65k an acre, and I have no way to judge that. What does power adjacency even mean in practice, is it the substation or the transmission line or something else entirely?

Answer

1stephen_ok9CO2CPRO6

Power adjacency is shorthand for how quickly and cheaply a large load can be energized on your site, and it is almost never the visible line that decides it. What decides it is available capacity at the substation, whether the utility has to build new transmission or a new switchyard, and where the user sits in the utility's interconnection or large load queue. A site can be 800 feet from a 345kV line and be useless because the nearest station is fully subscribed for six years.

So the sequence matters. The consultant is buying option time to get a load letter or capacity study from the utility, plus water availability, plus fiber routes, plus zoning. If capacity comes back clean, your 46 acres becomes a different asset than it was the day before. If it comes back at year seven, they walk and you keep the fee.

Which is why I'd push on two things rather than the per acre number. First, extension fees that step up and are not credited to price, so their delay costs them something. Second, a price mechanism, either an escalator on later extensions or a right for you to get a second appraisal if the term runs long, because the value of a powered site and an unpowered site are not the same number.

On your side of the table, you want a land use attorney licensed in your state reading the option, and a CPA on the treatment of option payments, because that varies and I'm not qualified to tell you how it lands. What I would not do is negotiate the price before you understand which utility queue your acreage sits in. Call the utility's economic development contact yourself and ask what large load requests look like in that district. They talk to landowners.

4 replies

3bmoreno23AB1B

No experience to offer, I'm reading this to learn. But the part that jumped out at me is that all the option money is credited to the price. Doesn't that mean the fee isn't really payment for the option, it's just a deposit you get to keep if they walk? Which is still fine, I just want to make sure I understand what you are being paid for.

2marcus_hale41CG4A

ember has it, the credit language is the whole economics of the option. Non-refundable and credited means you keep it if they walk and it reduces the price if they close, so you are paid for the tie-up only in the walk case.

Things I would read line by line before I got excited about the number. Who bears the cost and the risk of a failed rezoning, and can they extend for free while an application sits in front of a planning commission. Is the option assignable, because these get flipped to the actual end user and you want to know whether your counterparty at closing is the consultant's shell or someone with balance sheet. What survey, title, and environmental deliverables do you owe, and on whose clock. And whether there's an exclusivity or non-disclosure clause that stops you from getting a second opinion on price while you are under option.

Also, 18 to 24 months is short for this use. Ask what happens in month 24 when the utility study is not back. I'd want a longer term at a higher extension fee rather than a short one that expires exactly when the answer arrives.

1tashaford30PB2APRO7

meridian's point about calling the utility yourself is the part I'd act on first, because it costs nothing and it's the only piece you can learn without a lawyer.

The thing I'd be careful about is the nine years of holding. If your basis is low and this closes, the tax picture on a single large sale is not something to work out from a forum thread, and the answer can change what structure you want to sign the option in. Worth a conversation with your CPA before you sign anything, not after. arbor, do you know whether the option as drafted lets you continue the farm lease during the term? On a 24 month tie-up that's $18,000 you don't want to accidentally give away.