Letter: Reconsideration of Lease Option Agreement and Term Sheet with BrightNight

by: Johannes Troost, Matt Williams, Lorenzo Kristov, and Richard McCann

(Editor’s note, this letter was submitted Tuesday afternoon.  Council took no action on the long-range calendar).

We respectfully request that the Mayor and Council place an item on tonight’s or a future council meeting agenda to reconsider its approval of Item 9 of the March 24, 2020 Solar Lease decision. In its reconsideration we believe Council should (1) direct staff to research the fiscal, legal and business issues identified in this letter, and (2) pending the results of that research, rescind Council’s approval of the Item 9 resolution to allow the City Manager to execute the Lease Option Agreement and Term Sheet (collectively, the “Agreement”) with BrightNight that will “give the solar energy company an Option to Lease up to 235 acres of city-owned land near the City’s Wastewater Treatment Plant on County Road 28H for a Commercial Solar Farm and Solar Energy Testing Facility.”

Our review of the Agreement to date has uncovered serious concerns which we believe have not been fully considered by the City, and that the resolution and lease, as written, establish a legal arrangement that is harmful and disadvantageous to the City and residents in several respects. We, individually and collectively, stand ready to work with staff to facilitate their research of these issues. We are preparing a detailed document fleshing out each issue, which will be available shortly on request.

In summary, the issues are as follows:

1) Lease Rental Rates Are Undervalued and Do Not Consider Opportunity Costs

• Rates Not Appropriately Derived: Rates appeared to only consider Agricultural land rates, both farmable and unfarmable, and failed to consider other factors that would yield a market rate (matched more closely to commercial rates). Typical solar project lease rates are at least $1,000 per acre. See the article by Strategic Solar Group, titled “What’s the average solar farm lease rate” at the following link: https://strategicsolargroup.com/what-is-the-average-solar-farm-lease-rate/

Further, Yolo County was able to gain a lease rate more than four times greater for its Grasslands solar project south of Davis. The Yolo County staff report can be accessed HERE

• Better Rates Negotiated by Other Agencies: Other agencies such as Stanislaus and Yolo sought RFPs or RFQs, resulting in better lease rates and/or other revenue incentives. Choosing to seek a Sole Source procurement process is an approach that is not consistent with the City’s pattern and practice (and possibly inconsistent with formalized procurement policies and procedures).

• Rental Rate Escalator Does Not Reflect Inflation: The rental rate escalator of 2% does not appear to accurately predict inflation. Rather, a CPI should be proposed especially since other solar farm leases have higher escalator rates and since the base rental rates appear to be below market.

• Alternative Land Uses May Yield More Revenue: Analysis of other revenue generation opportunities were not considered for projects involving alternative uses. For example, Public Works staff had presented at least three alternative uses for those parcels to the Utilities and Natural Resource Commissions that may have higher financial returns to the City. Those opportunities are now foreclosed for at least the option period of the BrightNight lease.

2) Agreement Terms Unreasonably and Unnecessarily Expose the City to a Variety of Risks/Liabilities

• Excessive Lease Period With Inadequate Exit Provisions: Comparable solar farm lease option periods are less than 5 years, and comparable operating leases are far less than 49 years. For example, the solar lease with Stanislaus, County began in a single year option in 2009 and then has been extended several times, most recently with was a 4- year lease option and 25-year lease as long as certain provisions were met, such as securing a PPA. Further, those lease payments included 20% of the revenues from the still-operating almond orchard on the property. These excessive time frames represent a cost to the City without offsetting benefit. For example, it prevents the City from acting on any alternative uses with no guarantee of any benefit to the City at the end of the five-year option period.

In addition, the solar power market changes rapidly, thus raising the risk this project could be decommissioned should it become unfeasible – financially and structurally – which is probable during a 49-year period. Of related concern, the agreement is unclear on the responsibility for decommissioning and restoration costs at the site in the event of plant closure.

The City is also at immeasurable risk since it is very limited in its ability to terminate the Agreement, i.e., in the event of a “default” especially considering “default” is not defined.

• No guarantees: The Agreement has no guarantee that the City or its residents will benefit from the solar farm since the Agreement provides for no provision of energy or capacity to the City or the Valley Clean Energy Authority, and BrightNight/PVEL is free to sell its renewable energy to any buyer anywhere in the Western regional interconnection.

Further, the Agreement does not allow for beneficial “favored nation” pricing should BrightNight/PVEL sell the electricity directly to the City or VCE.

• No Provisions to Protect the City in the Event of the Lessee’s Insolvency: Further, there are no provisions in the Agreement to protect the City from the costs associated with removal of the project from the leased property in the event of a default as a result of the lessee changing ownership, dissolving, or becoming insolvent or filing bankruptcy.

• Inconsistent Assignment Provisions: The Term sheet contains two conflicting assignment clauses where one allows for the transfer and assignment, with the City’s written consent that shall not be unreasonably withheld, while another assignment clause does not allow for the assignment or transfer.

• City Not Fully Indemnified: In addition, the Term Sheet states under “Quiet Enjoyment” that the “City shall protect and defend the right, title and interest of lessee hereunder from any other rights, interests, titles and claims arising through the City,” However, the potential risks and costs associated with defending the Lessee are not addressed. Use of the terms “protect and defend” also appear to be inconsistent with the Indemnification clause.

3) Lack of Due Diligence – BrightNight/PVEL

• Brightnight Misled the City Staff on the Requirements for the Interconnection Studies at the California Independent System Operator (CAISO): Under the Cluster Study
Option, which has an application window of April 1 to 15, site exclusivity is not required, and a refundable deposit of $250,000 can be made in lieu. Under the Independent Study Process, no deadline exists while site exclusivity is required. BrightNight appears to have combined the most stringent aspects of these two different processes. (See CAISO presentation at http://www.caiso.com/Documents/2-InterconnectionApplicationOptionsandProcess.pdf).

• BrightNight’s Track Record Not Accurately Disclosed: Inconsistent with the staff report, BrightNight’s filings with the California Secretary of State, show that it’s been in business for about a year and that it’s purpose is “investment management.” (The track record discussed in the staff report appears to be attributable to the performance of a prior firm still in existence, once affiliated with Martin Hermann.) For example, the Resolution adopted by Council erroneously states “BrightNight has developed, financed, constructed and operated more than 3,000 megawatts of renewable energy since 2009.” This experience statement is correctly attributable to 8-minute Solar Energy, which is not a party to this agreement.

• Real Property Negotiators Disclosed in the Closed Session Agenda May Not Exist: The February 11, 2020 Council meeting agenda under “Closed Session” states the negotiating party is “Davis Energy Technology Center,” however, this entity does not appear on either the California or Delaware Secretary of State business search registry.

• Conflicts of Interests Not Addressed: BrightNight and PVEL have many related parties. It does not appear that staff considered potential conflicts of interests between BrightNight and its affiliates and PVEL and its affiliates. To the extent there is a conflict of interest, this may invalidate the Agreement or future agreements related to the design and construction of the project.

The aforementioned is only a partial list of concerns, and we will share our additional concerns and other questions that staff should consider prior to moving forward on the Agreement. Based on our concerns, we believe reconsideration is the right recourse for the City and Community, and we look forward to working with you and staff to renegotiate this project and/or consider other projects that are more favorable.

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