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Michaela Goetz (17 months) waiting for a combine ride with her dad, Nick, at Kunz Farms in Davenport.
Photo by Natasha Goetz






A new type of business could supplant some of DNR's grazing, crop leases

November 2018
By Trista Crossley

In the last year, the Washington State Department of Natural Resources (DNR) has seen increasing interest in state lands from a new sort of lessee—solar farm companies.

According to Kathryn Mink, DNR’s agriculture assistant region manager for the southeast region, the interest is coming from both in state and out of state companies. Those companies have identified approximately 30 parcels of DNR-managed, state-owned land with solar farm potential—about 16,000 acres—that also have easy access to the electrical grid. The land is located in Adams, Asotin, Douglas, Kittitas, Klickitat, Lincoln, Whitman and Yakima counties. In many cases, the solar farm companies are also interested in surrounding parcels that are privately owned, Mink said. Out of the 16,000 acres, less than 2,000 acres are currently in dryland wheat; the majority is in grazing. DNR has sent a letter to the current lessees of those 30 parcels notifying them of the solar farm potential.

DNR operates under a “higher and better use” directive, which means they must get the most return they can from state-owned lands, and the return from a solar farm can be much higher than some types of farming, such as dryland wheat and grazing. A typical dryland wheat lease averages about $40 per acre per year. DNR is projecting a solar farm lease will range from $300 per acre up to more than $800 per acre per year. In situations where a higher and better use has been identified, DNR can terminate a lease with 180 days notice.

“For now, anyone leasing parcels from us, if we have solar interest, we’ve let them know,” Mink said. “The letter said this is not a higher and better use notice and that we will further communicate with you if that’s the case.”

While some of the activities on DNR ground lend themselves to multiple uses—think wind turbines and grazing—in the case of solar farms, Mink said it’s a different situation.

“Obviously, there will be solar arrays put on the property. Each company likely has different proprietary equipment. There will be fencing, maybe battery storage. We won’t know specifically until we auction a property off and get the bid or the plan of development from a company,” she explained. “If you look at wind, we can do dual leasing on a wind lease because you’ve got open space around the turbine. With solar, we are expecting there will be development that will be sensitive, so you won’t want cattle rubbing against the equipment. There may be parts of the property that won’t be good for solar, so there’s a potential for dual use, but it will look different than wind.”

“If we have a good feel ahead of time, we may not wind up doing a full termination of the lease,” added Pat Ryan, assistant division manager in DNR’s product sales and leasing division. “We may do a partial termination if it’s the type of ground that can be broken up.”

Mink expects the solar farm leases to run for 25 years.

DNR is moving forward on the solar farm front on four Klickitat County leases, three of which are in grazing and one in dryland wheat. One of the grazing lessees has received their 180-day termination notice. DNR has issued land-use licenses in the other two grazing leases to allow the solar companies access to the properties to see if the land is viable for a solar farm. In both of those cases, DNR has issued the farmers short-term, two-year leases in case the solar farm plans don’t move forward. In the wheat farmer’s case, he was at the end of his contract and had decided not to renew it anyway for health reasons, Mink said.

DNR manages approximately 3 million acres of state trust lands and 2.6 million of state aquatic lands that generate more than $300 million a year. Of that total, land that is leased for grazing, dryland and irrigated crops brings in about $25 million a year. That money is used to benefit public schools, state institutions, county services and aquatic restoration. Approximately 100,000 acres are leased to dryland wheat farmers.

Two years ago, DNR came under fire from wheat growers in the Horse Heaven Hills after several leases in that area were terminated under the higher and better use clause. At that time, DNR was only required to give 60 days notice. State legislators worked with ag stakeholders, including the Washington Association of Wheat Growers (WAWG), to pass a bill extending DNR’s notice requirement to 180 days. Many dryland wheat growers feel 180 days is still not enough notice, especially as many of them follow a two-year summer fallow rotation, and there is still debate over what constitutes “best” in their termination clause.

“We recognize that what you think is best and what we feel is best could be different,” Ryan said. “We defer to a WAC (Washington Administrative Code), WAC 332-22-020 paragraph 6, that says, ‘highest and best use means the legal use that will produce the highest return to the trust over an extended period of time, including interim use.’ We have to go with the WAC.”

Mink added that, in many cases, DNR itself doesn’t have more than 180 days notice.

“We can’t provide more notice than we have ourselves. We also don’t want to prematurely give notice if something doesn’t play out,” she said.

Michelle Hennings, executive director of WAWG, said that while 180 days notice is much better than 60 days notice, farmers are making crucial planting decisions several years in advance and are relying on these leases running to term to help with their financial planning.

“A typical dryland wheat producer is banking on making an income for the life of that lease,” she explained. “The bank is lending money based on the income from that land, and the farmer is often making huge financial decisions, such as buying new equipment, using the projected income from that land. For a producer who might be leasing a fourth to a third of his or her land from DNR, having that rug pulled out from under them is devastating.”

Another point of contention from WAWG is the fact that if DNR terminates a lease early, they are under no obligation to make monetary recompense to the farmers.

“If a farmer terminates a DNR lease early, they may have to pay fees, but if DNR terminates a lease early, they don’t have to pay the farmer anything,” Hennings said. “We don’t think that is fair to the producers.”

Nicole Berg, chairman of WAWG’s Natural Resources Committee and a farmer in the Horse Heaven Hills, said the move to 180 days was a step in the right direction but issues still remain with DNR’s lease process that are putting family farm operations at risk.

“A lot of times farmers can’t compete with the rental rates that DNR is charging,” she explained. “Then, when a farmer goes to sell their land, DNR is buying the land over market value by quite a lot. We as family farms can’t compete with that when purchasing the land or taking over a lease. There’s got to be a way to have a fair market value analysis done for either leases and/or selling property.”

Ryan and Mink don’t agree that rental rates have risen. According to Ryan, historically, DNR’s dryland crop share wheat leases are a percentage of a parcel’s yields, usually between 24 and 28 percent. That percentage was determined through research done in part by Washington State University and is based on the average rainfall where the parcel is located.

“Those (rates) have been static for probably close to two decades,” he said.

Leases that are cash rent, rather than crop share, are calculated by taking the five-year rolling average Portland delivered price for wheat times the 10-year production average and basing the rental rate on that. Those rates are adjusted every three years. For irrigated land, Mink said the rental rates fluctuate with the market and can have other conditions, such as water ownership, factored in. DNR also keeps tabs on what other parcels in the area are renting for.

“You could look at two leases side by side that have very different rental rates, but if you dig down, there are other factors that are coming into play,” Mink said.

As for the claim that DNR is buying property above market value, again, they disagree. Mink said the department is required by law to do an appraisal to establish that DNR is paying fair market value. She added that all the information DNR uses to make purchase decisions is available through a public disclosure records request.

“We don’t understand where that claim comes from,” Ryan said. “We do hear that, but we have an appraiser. They do a fair market valuation. They look at the assets associated with the ground, value it, and we will make an offer.”

Both Hennings and Berg say there needs to be more transparency in the process DNR uses when deciding when to invoke the higher and better use clause, and how they determine rental rates and the prices the department pays when buying land.

“Do they even do a cost analysis to get the data they need to make an informed decision before moving forward with a project?” Berg asked.

Chad Smith was one of the Horse Heaven Hills farmers who had their leases terminated early under the 60 days notice. He isn’t in favor of DNR getting into the solar farm business.

“As a family farmer, I would rather see them leave it as grazing or in crops, and it’s unfortunate that this is happening to other farmers,” he said. “If DNR signs a contract, I think they should be required to fulfill that contract to the end.”