1. 1 Agreements with Landowners and Local Governments Financing Wind Power: The Future of Energy May 8, 2008, Scottsdale, AZ Matthew S. Moses Nixon Peabody LLP 1100 Clinton Square Rochester, NY 14604 P (585) 263-1306 mmoses@nixonpeabody.com

2. 2 Introduction Wind power projects are essentially real estate projects Most significant development assets: –site control –right to build –tax agreement Goal – create financeable project Objectives: –take care of real estate details at earliest possible time –fix project costs to greatest extent possible, including state and local tax cost

3. 3 Real Estate Matters Goal – obtain site control to all project property from turbine to point of interconnection Landowner Agreements –Potential interests and instruments Easement Lease Fee License Option SNDA

4. 4 Real Estate Matters (cont’d) Key issues –Scope Control of entire farm/ranch – location of improvements determined later Contemplated improvements –Access roads –Laydown areas –Collection wires »Overhead »Underground –Turbines – foundations and towers –Transformers –Substation/Switchyard –Met towers –Communications towers –Fencing

5. 5 Real Estate Matters (cont’d) –Payment Fixed –Pros: easy to calculate and administer; predictable revenue to landowners –Cons: landowners may disfavor Variable – Royalties –Pros: landowners want to share in wealth –Cons: difficult to calculate; unpredictable; risk of opening books to landowners; government may want similar deal Signing bonus Revenue expectation management

6. 6 Real Estate Matters (cont’d) –Environmental Land disturbance and restoration Repair of farm/ranch improvements –drainage tile, farm roads, ditching, irrigation system Minimal impact on current and future farm/ranch use Hazardous Substances –protect against activities of landowner –Decommissioning Standard of decommissioning – what stays and what goes Security –When funded –Amount – net of salvage value –Form of instrument – bond, letter of credit, fund/escrow account, parent guarantee

7. 7 Real Estate Matters (cont’d) –Indemnification and insurance Limit to just project and project-related activities –Taxes Beware of indemnification for increases in tax on landowner property –Financing issues Free alienability – no restrictions on assignment or transfer SNDA – subordination and non-disturbance agreement –Project agreements not subject to foreclosure by a landowner’s lender –Need to work with landowners’ lenders Project mortgage allowed

8. 8 Real Estate Matters (cont’d) Other Real Estate Matters –Title insurance involve title insurance company early on in process –Municipal franchise and road permits –Substation/switchyard transfer to utility –Project mortgage Stands in position of project real estate, ahead of farm/ranch mortgage Landowners not involved

9. 9 Real Estate Matters (cont’d) Trouble Spots –Financing – issues that may stand in the way of closing Incomplete real estate interests –Power collection system – not all dots connected –Roads – adjacent landowners own to middle of road Municipal franchises –Underlying land rights but no permit from municipality –Road crossings Wrong owner – marriage, divorce, death, joint ownership, etc. Sale of parcel during development Setbacks – lack of border easement

10. 10 Real Estate Matters (cont’d) –Construction and Operation of Project –Location of improvements Hyper-communication with landowners Build project consistent with Plans and Specs / turbine locations should match locations identified in permits Construction loan covenants –Construction impacts – remediation –Tax liability on underlying farm/ranch –Release of unnecessary land from project –TV, noise, shadow flicker (landscaping) beware of adjacent property owners

11. 11 Agreements Between Developers and Municipalities Goal – obtain all permits necessary to built and operate project and protect project from uneconomic taxation Major issues –Permits What’s in it for me (for local governments) Effectively a pay-for-permit game Governmental oversight of project –Taxes Property (personal and real property), Sales, Mortgage Recording, and Transfer Taxes Exemptions and abatement programs Vehicle for property tax agreement (e.g. payment in-lieu of tax agreement (PILOT), host community agreement (HCA), voluntary payment agreement (VPA)) Appropriate amount in face of high capital cost of project –Amount project can afford to achieve hurdle rate –Local government expectations

12. 12 Agreements Between Developers and Municipalities (cont’d) PILOT Agreement –Term –Scope – covers all project improvements Include transmission line and substation/switchyard Underwater lands? Offshore? –Payment Amount Fixed Assessment-based with percentage abatement Tax rate risk –Adjustments to Payment Amount Inflation Variable payments based on capacity factor, energy prices, etc. Additions to project –Additional MW – same payment rate –No new MW – no additional payment (e.g. operations building) Deletions from project –Damage, destruction, condemnation, decommissioning –Reduce payment by MW dropped from project

13. 13 Agreements Between Developers and Municipalities (cont’d) –Payment split among local governments municipal concern (unless deal hinges on split) –Payment security company should not offer security but should be prepared for request from municipality form of security –Parent guarantee –PILOT mortgage –LC

14. 14 Agreements Between Developers and Municipalities (cont’d) –Special district taxes Fire, water, sewer, refuse, ambulance, etc. Dominance of tax base How to control –Bells and whistles Capacity factor kicker Energy price kicker Economic development power Host payments for community/charitable purposes Historic preservation payments Transaction fees

15. 15 Agreements Between Developers and Municipalities (cont’d) –Substation/switchyard Utility may require ownership of substation/switchyard –Transfer after construction Interconnection Agreement may require tax indemnification PILOT should cover substation taxes –Financing issues Free alienability – no restriction on assignment or transfer Collateral assignment Consent to Assignment in favor of lender Lender right to cure default Termination – right of company to terminate if project uneconomic

16. 16 Agreements Between Developers and Municipalities (cont’d) Approach to PILOT Negotiations –Due diligence on local tax system Scope of exemption Statutory scheme and process for obtaining exemption –Model full tax on project to determine municipal revenue appetite –Model amount of tax project can afford –Establish strategy Portion of full tax “Competitive” payment with other generators “Competitive” payment with other wind projects Portion to tax base

17. 17 Agreements Between Developers and Municipalities (cont’d) –Build relationship with community leaders –Negotiate terms – plan on multiple meetings Exchange term sheets to capture ground gained –Approvals

18. 18 Agreements Between Developers and Municipalities (cont’d) Host Community Agreement –Non-financial aspects of municipal agreement, but can be brought into PILOT Agreement or used as a substitute for a PILOT Agreement –May help “steer” payment to permitting authority –One document – best if covers all non-tax business dealings with municipality (e.g. road use, municipal costs, decommissioning, etc.)

19. 19 Agreements Between Developers and Municipalities (cont’d) –Potential provisions Municipal franchise rights and road permits Road use –Why needed? »Public use »Limit risk to project for damage to roads caused by project »Repair – not replace – road »Cost advantage of private bid –Separate agreement? –Traffic plan – list of involved roads –Right of access to inspect and improve roads »Agent of municipality »Over-sized vehicles »Construction, operation, repair and decommissioning

20. 20 Agreements Between Developers and Municipalities (cont’d) –Pre-construction engineer’s inspection to establish baseline condition –Reinforcement activities –Post-construction engineer’s inspection to establish damage needing repair –Repair activities –Municipal acceptance of repair –Costs –Indemnification and insurance »Car wreck – make sure covered by insurance policy –Security (e.g. performance bond)

21. 21 Agreements Between Developers and Municipalities (cont’d) Municipal review and oversight costs –Should developer pay? –Separate agreement? –Attorneys’ fees –Engineers’ fees –Escrow account »Initial funding »Draws »Replenishment »Interest »Return of principal

22. 22 Agreements Between Developers and Municipalities (cont’d) Building permits –Who reviews application – qualifications –Who oversees construction – qualifications »Permit conditions »Building codes »Plans and Specs –Who issues certificate of completion – qualifications –When can project first sell energy Operations –Administration of permit conditions –Complaint resolution

23. 23 Agreements Between Developers and Municipalities (cont’d) Decommissioning –Standard of decommissioning –Municipal right to decommission in the event company fails to do so –Security »When funded »Amount – net of estimated salvage value »Form of instrument – bond, letter of credit, fund/escrow account, parent guarantee Insurance and Indemnification –Limit to just project and project-related activities Approvals

24. 24 Agreements Between Developers and Municipalities (cont’d) Other State and Local Taxes –Sales tax Statutory exemption – production equipment BOP costs Discretionary exemption – governmental abatement –Mortgage recording tax Face value of mortgage Discretionary exemption – governmental abatement

25. 25 Q&A

26. 26 Contact Information Matthew S. Moses Nixon Peabody LLP 1100 Clinton Square Rochester, NY 14604 P (585) 263-1306 mmoses@nixonpeabody.com