By Alan Pryor and Richard McCann
On Tuesday night, more than 20 people called into the City Council meeting to oppose the recent decision by the Council to enter into a no-bid lease option agreement with a solar development firm, BrightNight Energy. The option would allow the company to subsequently lease a 235-acre parcel of City-owned land next to the City’s waste water treatment plant for up to 49-years to develop a 25 megawatt (MW) solar photovoltaic project.
The decision to award the contract followed an unsolicited bid by the solar company to enter into an exclusive, sole-source lease contract with the City allowing it to build a privately-owned solar system on the land. To say this decision by Council (only Lucas Frerichs voted"No") was highly controversial is an understatement. The extensive citizen complaints centered on the following facts:
1) The City did not even bother to request bids from any other company and got a lease rate that was objectively low – only $333/acre vs other industry rates averaging $1,000/acre.
2) The City did not even investigate the possibility of acquiring the solar system itself and keeping all of the revenues themselves without any capital outlay. Yolo County recently executed such a deal for their Grasslands Park Solar system and receives as much as 70 times the revenue as will the City based on the proportional size of their solar system.
3) The entire process (except for the final predetermined Council decision) was highly secretive and decided behind closed doors. Council and Staff did not even consult with noted industry experts on the citizen advisory commissions (the Utilities Commission, the Natural Resources Commission, and the Open Space and Habitat Commission) who were all in the midst of studying the proper and best use of the land but were suddenly cut completely out the process and kept completely in the dark.
4) The energy from the system would be sold to the highest bidder rather than guaranteeing it be sold at a fair price to Davis customers or our local energy provider, Valley Clean Energy.
The public rebuke at the Council meeting generated such a high profile discord that the Staff agreed to post a list of questions and answers in a belated attempt to to defend its decision. This Q&A can be found at “Q & A City of Davis Solar Lease 4/15/20”. Unfortunately, the responses by the City to the questions they themselves posed continued their process of providing misleading and self-serving information designed solely to exonerate Staff's and Council's misguided and ill-advised decision.
The authors are attempting to correct this misinformation by submitting honest and correct responses to the questions in the following article(s). The questions are answered one-by-one in the same order as they were presented and provide truthful, unvarnished responses. Because answering these questions completely is a lengthy endeavor, we have divided this article into multiple parts for ease of reading. Following is Part 1.
Questions and Answers
Q. Did the City enter into a lease for a solar farm?
Staff claimed they only entered into a lease option agreement giving the parties the opportunity to execute a formal lease later subject to future negotiations. Their answer is intentionally misleading, however. The lease option agreement gives BrightNight the option to lease the land--the City does NOT have the option to NOT lease the land if BrightNight affirmatively exercises its option. Further, the option agreement expressly says, "...within thirty (30) days following the delivery by Optionee to City of the Exercise Notice, City and Optionee shall execute the following: (a) a Lease with respect to the Property, to be negotiated between the Parties during the Term, and approved by the City Council after compliance with all requirements set forth herein, based on the Term Sheet attached... hereto as Exhibit "C" (the "Lease")" (Emphasis added).
This functionally means the 'terms" of the lease have already been negotiated. Staff has otherwise stated the lease still needs to be negotiated and they can get a better deal then. It is true that the Option Agreement does state "Both Parties acknowledge that the Term Sheet represents a preliminary agreement and that the Solar Development details will be determined based on the findings of the Parties during the Term." However, this means only the "Solar Development details" will be finalized later which only pertain to the size and/or the type of the solar system. This does not at all indicate that lease term, pricing, and/or other contractual problems with the lease can be renegotiated. In other words, the City is stuck with the low lease rate and 49-year term unless BrightNight inexplicably agrees to a higher rate or shorter term – but they do not have to do so..
Further, the Option Agreement expressly states that only 30 days are allowed for negotiation of the lease after the option is affirmatively exercised. That is hardly a sufficient period of time for a complex document to be finalized. Additionally, the Option Agreement stipulates that "Notwithstanding the above, in the event that the Lease is not able to be placed on the agenda of a regularly scheduled City Council meeting within thirty (30) days following the delivery by Optionee to City of the Exercise Notice, the Lease will be placed on the agenda of the next available City Council meeting." This puts further pressure on the Council to accept the deal "as is" rather than have more time available to negotiate terms more favorable to the City.
What if the City and BrightNight don’t agree on more stringent terms desired by the City and BrightNight refuses to accept our desired terms. Well BrightNight could just walk away from the deal but in all likelihood they would also sue the City for breach of contract. In addition to having to defend itself (likely unsuccessfully) the City has also just given up five years of value and lost opportunity on the land by waiting around when another solar developer might have stepped in and made a more substantial offer.
Q. Is the lease rate at market value? Were all uses considered?
Staff has not provided any information to substantiate their claim that it considered other uses with higher value. It simply only looked at the alternative use as agricultural land and completely disregarded all of the higher value uses being considered by the other Commissions. The detailed status of these deliberations was apparently not presented to Council by Staff for consideration.
Q. How was the lease rate determined?
Staff’s method of calculating comparable income relied solely on average almond orchard income in Yolo County which grossly underestimates average productive high quality almond ranch income. This is because the majority of almond orchards in the County are either older (20-25+ years) with declining yield or newly planted orchards(<5 years) that are just starting to dramatically increase yields. Modern productive almond orchards on close spacing with micro-sprinklers can easily produce average yields of 3,000 lbs of good almond meats per acre. Last year's average price from the Blue Diamond growers' coop was about $2.25 to 2.50/lb for good meats, depending on the quality and variety. Thus, a modern productive almond orchard should generate between $6,750 and $7,500/year in gross income. Alan Pryor has personally leased an almond orchard for over a decade for 25% of revenue and know of others who have paid and/or received 30% of revenue for leasing high quality orchards in their peak. At 25% of $6,750 per acre/year to 30% of $7,500 per acre/year, this would produce an average per acre return of $1,687.50 to $2,250 or just about 4-5 times what the City is receiving for their leased acreage. That the Staff did not have sufficient information to develop this analysis reflects how thoroughly this process was hidden from the City Commissions that would have better informed this negotiation.
Q. The City did not utilize the RFP process for this solar deal. Why?
The short answer here from the City is that the City did not seek an RFP because it did not think it had to do so. It was not because it was a good idea not to issue an RFP. The overall lack of Staff’s effort and diligence in maximizing City values and meeting its objectives is stunning. For instance, a quick Internet search yielded more than a dozen other large scale solar development companies with "infinitely" more solar development experience than BrightNight (who actually has no completed projects as a company.) A few quick phone calls could have easily yielded a measure of interest from all of them. Why did Staff not call any of them? The same internet search turned up four different solar consulting firms that would have provided a free initial consultation to get an idea of prevailing rates. Why did Staff not call any of them?
Q. Is a sole-source procurement process consistent with the City's procurement policy?
The City claims that such leases without competitive bidding are common for the City but the fact remains they have never ever negotiated a lease of this magnitude before. And there is nothing to preclude the City from using an RFP process to lease this site which would have almost certainly produced a far greater economic return to the City. Essentially since Staff did such an inadequate market research and their efforts to otherwise determine fair market value were so minimal, it only stands to reason that they should have used an RFP process to validate their estimates of fair market value.
Further, the City also claims that a lease of City land is exempt from the sole source contracting requirement and is therefore not required.. Although State law does clearly say that municipalities may lease property up to 55 years, it is silent on whether it has to use an RFP process or not. Given that the City is now claiming such leases can be negotiated in secretive closed sessions, that functionally means that the City can lease City property to friends and associates or anybody they choose at whatever rate suits them with no outside review or oversight. This produces the very unfortunate results we see with the BrightNight solar land lease.
Upcoming Parts 2 and 3 will delve into the following questions to further expose the City's misguided efforts surrounding this lease and lease option agreement:
Q. What are the allowable uses for this land under Yolo County zoning?
Q. Were there other land uses that were considered?
Q. Why is the City using a fixed-rate rental rate escalator?
Q. What is the Term Sheet in the Lease Option Agreement?
Q. Were there any other solar leases to comparable to the City's deal with BrightNight?
Q. Did Staff not look at other solar land lease rates in the Central Valley? If so, what were they? If not, why not?
Q.How does the City solar deal compare to the County's project at the Grasslands
Q. The option period and lease period seem long. Are they typical for this industry?
Q. What if the lessee defaults on the project?
Q. Why doesn't the agreement stipulate that Davis residents will benefit from the solar power generated at the site? Can the lessee sell power to Valley Clean Energy?
Q. What will happen to the deal if the lessee goes out of business?
Q. It appears that the term sheet attached to the lease option agreement contains two conflicting assignment clauses. Can you clarify this?
Q. How is the City protected from any future claims made against this project?
Q. What was the hurry to apply for connection to the California Independent System Operation (Cal ISO)?
Q. What is BrightNight's track record? Isn't it a new company?
Q. The negotiating party identified on the February 11, 2020, City Council closed session agenda is listed as Davis Energy Technology Center. What is that?
Q. Are there potential conflicts of interest between BrightNight and its affiliates and PVEL and its affiliates?
Q. What about CEQA concerns?