Guest Commentary: Did Our City Council Just Agree to the Absolute Worst Deal in the City’s History ?

Over $121,000,000 may have been left on the table when Council approved a secretive, closed-door no-bid, 54-year land lease option and agreement for a photovoltaic system on 235-acres of City-owned land.

How many miles of Street and Bike Path repairs per year would $121 million pay for? What was Staff and Council thinking ??? 

by Alan Pryor

On Tuesday, March 24 at the City Council meeting, our City Council agreed to a sole-sourced, no-bid 5-year option agreement allowing for a low-cost 49-year land lease for 235 acres of unused City-owned land adjacent to the City’s Wastewater Treatment Plan. The site would be used for a privately-developed, very large 25-megawatt (MW) solar photovoltaic system.  The contract awardee was BrightNight Energy The electricity from the plant could be sold to the highest bidder and may not benefit Davis utility rate payers at all.

The 235 acres was previously used as an overflow field for the water discharged from the Wastewater Treatment Plant before release into Willow Slough. Because the Wastewater Treatment Plant recently underwent a major upgrade to release cleaner water, the land is no longer necessary for wastewater treatment operations.

According to the Staff Report to Council, Staff was approached by BrightNight early this year who offered, unsolicited, to lease the land from the City. Staff has not otherwise disclosed the nature of those closed-door early discussions that led to the determination that the land control would be acquired by BrightNight through a long term land lease rather that innumerable other possible options available to the City. Staff apparently otherwise never performed any other due diligence as to what options other than a land lease were available to the City that could maximize the returns for the City.  As a side note, we now know from City records that there were discussions back in 2019 between Staff and BrightNight of which Council was apparently informed in December and not in February as Staff has also otherwise indicated.

The payment terms negotiated between BrightNight and the City for the 54-year agreement (a 5-year option and a 49-year lease) were $5,000 per year for the first 5 years of the option period to lease the land. If the option were then exercised and a solar farm were installed, lease payments of about $78,000 per year will begin increasing at 2% per annum for the 49 year term of the lease (including extensions). The average lease option rate in the first 5 years of the contract is thus only about $21/acre ($5,000/235 acres) after which the lessee may cancel. If not canceled, the average lease rate beginning in year 5 is approximately $333/acre ($78,310/235 acres).

If one looked at the return to the City on a net present value basis (NPV) with a 3% discount rate over a 35 year useful lifetime of the solar system, the City would net about $1,736,955. Staff says that’s a good deal because that’s the most they could rent the land for farming purposes.

Mayor Brett Lee, Mayor Pro Tem Gloria Partida, and Councilmembers Will Arnold and Dan Carson all voted in favor of this ill-advised, secretive deal. Only Councilmember Lucas Frerichs cast a strong “No” vote, opposing the lease agreement. He objected on the grounds that it 1) failed to comply with the City’s standard open competitive bidding policy to avoid sole-source contracts, 2) the contract was not reviewed in a transparent open manner utilizing the expertise of the City’s Advisory Commissions, and 3) the process failed to guarantee that either Valley Clean Energy or the City would receive any of the solar energy output at a fair price.

These concerns were echoed by various members of the Utility Commission and Natural Resources Commission (NRC) about this project that were not adequately addressed in either the Staff Report or at the March 24 Council meeting in which Council approved the land lease option and lease contract. These concerns fall into the following categories:

1) Staff never sought competitive bids from other solar developers on the land lease itself.

2) Staff did not investigate any other ways to have a solar system installed that could produce a much higher value return compared to a simple, low-return solar land lease.

3) The land lease agreed to by the City for the solar system had no guaranteed energy sales to the City or to Valley Clean Energy.

4) Staff never considered any more suitable alternate sites for a solar land lease.

5) The land lease agreed to was rushed through an extremely abbreviated, closed-door negotiation and approval process without ever being reviewed by a single City Advisory Commission

6) Staff intentionally presented information to Council that was knowingly false and/or misleading

7) BrightNight Energy is NOT a leading solar development company as staff represented to Council and was formed only a little over a year ago and has no operational experience whatsoever. Detailed information about the complete lack of corporate experience of BrightNight Energy was previously discussed in a letter submitted by the author to Council on April 7 which requested a reconsideration of the awarded contract (see here or https://www.davisvanguard.org/2020/04/letter-failure-of-city-to-perform-due-diligence-on-bright-night-energy/). This request was ignored.

8)  Additional detailed comments on the shortcomings of the Lease itself were submitted to Council in a letter collectively authored by 3 Commissioners of the Utilities Commission and one NRC Commissioner which also requested reconsideration (see here or https://www.davisvanguard.org/2020/04/letter-reconsideration-of-lease-option-agreement-and-term-sheet-with-brightnight/). This request for reconsideration was also ignored by Council.

This article specifically addresses the complete failure of Staff and Council to obtain bids from other companies for a solar land lease (Concern No. 1 above) and to do an adequate comparison of alternative ways to have a solar system installed (Concern No. 1 above) and the resulting potential loss of revenues to the City due to such failures.

Future articles will address the other Concerns 3-6 and also the legal requirements for competitive bidding by municipalities for this type of transaction which were ignored by Staff and Council.

COMPARATIVE FINANCIAL ANALYSIS

Comparative Financial Analysis of Returns to the City from the BrightNight Land Lease Agreement Compared if the Land were Leased at Prevailing Industry Rates

The land lease contract which was was negotiated by Staff with BrightNight was a sole, source, no-bid contract. No other bids were ever solicited as is always performed by the City for a project of this magnitude and apparently no competitive analysis of average solar land lease prices was ever even performed.

Even once the unexplained decision was made by Staff to pursue a simple no-bid lease of land to Bright Night instead of pursuing other much more profitable opportunities as discussed below, it appears that Staff simply assumed the lease rate should be at conventional agricultural prices (or even less for the 100 acres non-agricultural land). Apparently Staff never performed any due diligence on what are comparable land lease rates for solar systems in California nor did they provide any information in the Staff Report to justify their decision to only look at agricultural land lease rates.

Staff did indicate, though, that they did a survey of local farm land lease rates and determined average farm lease rates for comparable land produced a fair market value of $425/acre for 155 acres of farmable land at the wastewater treatment plant but they did not provide the specifics of this survey in their report as to the number of leases surveyed nor the size or usage of each lease nor proximity to the wastewater treatment plant.

My own research produced one other long-term local lease rate for 160 acres of land used for alfalfa production of $525/acre. Staff otherwise justified their lower proposed lease rate for the farm land stating it was a rate for long-term leasing of the land at an “orchard” rate rather than at a higher “row crop” rate but did not provide any documentation to substantiate that claim.

Nor did Staff disclose the specifics of how they determined the fair market lease rate of $100/acre for the 80 acres of non-agricultural. The average lease rate for the entire 235 acre site is $333/acre.  Land leased for solar system installations (which produces substantially more revenue per acre through electrical sales compared to any agricultural commodity) would presumably have a higher valuation.

I did a simple Google search for “solar land lease rates” and was instantly provided with a number of resources providing further information of solar land lease rates in the industry. For instance, the highest rated link from the above indicated Google search was to a web page (https://strategicsolargroup.com/what-is-the-average-solar-farm-lease-rate/) on a website maintained by Strategic Solar Group. The web page was entitled “What is the average solar farm lease rate?” According to the article, there are many factors influencing the market rate for solar land lease rates including 1) Project Size, 2) Land Costs and Alternative Uses, and 3) Regional Supply and Demand of Solar Sites. The article further indicated,

In the right locations, solar is one of the most profitable uses of rural land…

Rates should be near estimates of future inflation with average figures between 1.5% to 2.5% annually…

High priced, large tracts in California’s Central Valley often go for $1,000 per acre”.

If the land were otherwise leased by the City at $1,000 per acre instead of $333 per acre, it would produce a 3-fold increase in reveue to the City. Amazingly, even though the top four highest rated Google Search links indicated a free no-cost consultation would be provided to interested prospective landowners, Staff acknowledges they did NOT solicit any competitive land lease bids from any other solar companies whatsoever

The net present value (NPV) of leasing the land to BrightNight for a period of 30-years beyond the initial 5-year option period (30 years is the estimated useful lifetime of commercial solar systems) as shown below

If a $1,000 per acre solar land lease at a 2.5% annual escalation rate was otherwise obtained through negotiations by Staff, the NPV of such an increased lease rate over a 35 year term of the lease (with the same initial $5,000 per year option rate for 5 years) was $5,529,799 as shown below.

As shorn below, this compares to the NPV of only $1,796,955 otherwise received if the rate were only $333 per acre with a 2% annual escalator as negotiated by Staff with BrightNight. Thus, the lower land lease rate given to BrightNight compared to apparent industry solar land lease rates potentially cost the City $3,792,844 in NPV income!

Comparative Financial Analysis of Returns to the City from the BrightNight Land Lease Agreement Compared if a Solar System were Otherwise Acquired through a No-Capital Outlay Purchase Program

A simple land lease provides the least return to the City compared to other alternatives to having a solar system installed. In addition to not seeking competitive bids if the only option were to lease the land to a solar developer, Staff also did not solicit any other bids to install a solar system under any other types of transactions that could have returned substantially more money to the City.

An example of one such transaction was completed in 2013 by the Yolo County when they purchased, with no capital outlay, a 5 MW solar system installed on 30 acres of County land at Grassland Parks south of Davis. This solar system provided approximately 70 times as much in NPV returns on a per MW basis as the City will realize from leasing land at the Wastewater Treatment Plant for an initial $333/acre. According to an analysis by County Staff presented to the Board of Supervisors, the 5 MW solar system at Grasslands Park would produce a NPV return to the County (electrical savings in excess of amortization and maintenance costs) of $24,595,717 (see Appendix 1).

Extrapolated to 30 MW (the size of the solar system to be installed on 235 acres at the Wastewater Treatment Plant), net NPV revenues of  $122,978,585 would be realized by the City over a 35 year period.  As shown below, this return to the City would in excess of 70 times that realized by the City of Davis for the land-lease they negotiated with BrightNight.

So had the City of Davis instead negotiated to have a 25 MW system installed under a similar no-capital outlay purchase program as Yolo County had done for a 5 MW solar system at Grasslands Park, the City would have received an additional $121,241,630 in net present value revenues.

Summary of Comparative Financial Analysis

If the same 235 acres at the Wastewater Treatment Plan were leased by the City at $1,000/acre instead of only $333/acre as agreed o with BrightNight, the City would receive 3 times in initial annual lease payments ($235,000) compared to the lesser initial amount ($78,310) they would get under the sole-source, no bid contract they just signed. Or put another way, if the City were otherwise able to obtain the higher $1,000 per acre lease rate increasing at 2½ % per year, the Net Present Value (NPV) of the stream of lease payments over an initial 35-year period would total $5,529,799 vs. $1,736,955 the City will get if the average lease rate were only $333 per acre increasing at 2% per year. The difference of $3,792,844 represents the potential NPV loss of income realized by the City because Staff did not even bother to do market research or obtain competitive bids to get a better lease rate.

Executing such a large, long land lease without performing proper due diligence on prevailing solar land lease rates and obtaining competitive bids is incomprehensibly irresponsible and negligent on the part of City Staff and Council.

But if giving an inexperienced solar developer a 66% discount in the land lease rate were not a bad enough deal for the City, there is potentially an even substantially greater loss of revenue compared to if the City otherwise purchased the solar system itself under a no-capital outlay purchase program. Staff acknowledges they did not investigate such a possible no-capital outlay solar system purchase opportunities to acquire a solar system under which the City would retain the entire net revenue stream themselves.

Such an outright system purchase was used several years ago by Yolo County when they acquired a 5 MW solar system installed on 30-acres at Grasslands Park on Mace Blvd south of Putah Creek. This 5 MW solar system returned as much as 70 times the net revenue on a per MW basis compared to what the City of Davis would receive from the agreed upon land lease for the solar system installed at the Wastewater Treatment Plant.

If a 25 MW solar system were obtained by the City for the Wastewater Treatment Plant site on the same terms as the County’s 5 MW solar system purchase at Grasslands Park, the NPV of the stream of revenues (less the amortization of the purchase price and prepaid maintenance) would be $121,241,630 greater than that received by leasing the land to BrightNight.  In other words, by leasing the land starting at only $333 per acre instead of purchasing a solar system outright with no capital outlay, the City potentially left over $121 MILLION on the table!

CONCLUSIONS

To put that potential lost revenue ($121 Million) into perspective, on January 14, 2020 the City released their 2019 Street and Bike Path Pavement Management Report. That report estimated that the City would need to spend $183.9 Million over the next 10 years to bring City streets and bike paths up to acceptable standards. That is an increase over 10-years of $133.83 Million over and above the current annual amount budgeted for such street repairs ($5.07 Million/year or $50.07 Million over ten years). By purchasing a 25 MW solar system with no capital outlay instead of just leasing the land, the additional savings would pay for almost all necessary additional street repairs needed to bring our roads and bike paths up to standard over the next 10 years.

There was also the option for the City to have the system installed under a joint venture agreement with Valley Clean Energy under a guaranteed long-term power purchase agreement. Under this type of contract, all of the power required by the Wastewater Treatment Plant could be guaranteed to be delivered to the City at no or very low-cost and all additional energy sold to VCE at a discounted rate compared to what they otherwise would have to pay. A similar contract was recently signed by LA Department of Water and Power (LADWP) under which LADWP received guaranteed long low-cost solar energy at less than $0.02/kWh which is far cheaper than any other fuel source. City and Staff inexplicably also did NOT pursue this type of arrangement either. Instead the developer can sell all the electrical output from the solar system on City land to whomever they choose at the highest possible price.

So with one stroke of a pen, the City gave up the opportunity to potentially get almost ALL of the net income from the solar system and still get 25 MW of solar electricity installed for the benefit of Valley Clean Energy and the City of Davis AND eliminate risk of the electricity produced from a solar system on our land being shipped to Southern California or out-of-state.

This land lease contract may well be remembered in history as the very worst worst deal ever entered into by our City leaders. And Council wonders why voters don’t trust the City’s judgment when they try to come back to the parcel tax feeding trough to try to get more money to run the City.

Much of the problem here can be attributed to the fact that nobody on Council or Staff has any experience with solar energy systems and this land lease was negotiated without the benefit of input and consultation with any of the advisory Commissions in the City..

Amazing as it may seem, our City Council approved this land lease deal over the highly unusual written objections from members of the following Commissions that would normally review all decisions of this magnitude before presentation to the Council:

1) The Chair and three additional members of the Utility Commission (constituting a majority of the Utilities Commission), and

2) The Chair and two additional members of the Natural Resource Commission members, and

3) The Chair of the Open Space and Habitat Commission.

These Commissioners, without even the benefit of a full Commission meetings to collectively review the contract and based solely on their first review of the Staff Report submitted to Council only 4 days prior to the Council meeting, all strenuously objected in writing to proceeding with the proposed land lease.

All of the above objections were raised to the Council either vocally or in numerous email communications sent before the March 24 Council tele-conferenced meeting or submitted as written Public Comments that night by a total of 8 current City Commissioners from 3 different Commissions. All of the complaints and objections fell on deaf ears and the Staff Report was accepted and the Land Lease Contract was approved by a 4-1 vote with only Councilmember Frerichs voting “NO”.

In opposing the award of the contract, Mr. Frerichs stated, “I personally thinks this was not a good process and think this is in part about trust and the process of engagement by the community and the process matters. I think there absolutely was the ability for this to go before the Utilities Commission for a decision and still allow for BrightNight to submit their application in a timely manner to the State…I still have major concerns why we are not following a typical RFP proposal process which is a typical process that all municipal governments employ including the City of Davis on contract after contract after contract on project after project after project. I asked why we chose this sole source process and the response was we had an unsolicited proposal brought to the Council that we had to respond to…That was the full extent of the response why we did not choose the normal RFP process and why an RFP was not issued….I am not saying that just to delay the project but this is absolutely a process that we typically employ…

I also don’t think there is any guarantees that this will result in a Power Purchase Agreement with Valley Clean Energy. That’s pure speculation at this point. In fact, Valley Clean Energy is getting ready to issue a local power procurement RFP for the exact type of project like this. But these projects are not aligned at all in terms of the key agencies coordinating what is happening. In fact, we are simply sort of responding to someone who just came through the door and I think we are doing ourselves a disservice, if this is such a good deal, by not comparing it to other types of proposals that may exist….I don’t understand why we feel this needs to go through a sole-source process.”

This concern for following process and adhering to the proven RFP solicitation model was not shared by the other Councilmembers, however. They all voiced support for the contract not based on the terms of the agreement or the return to the City. Rather they couched their support and the unprecedented haste to execute this agreement because of either the Covid-19 crisis or the economic collapse or the climate emergency.

Said Councilmember Will Arnold, “All of these requests like we have heard from tonight or previously to forego the project entirely and start from scratch with an RFP are predicated on the belief that something better will come along and I think there is danger in that if something better does not come along. And that was my belief before the economy started crashing around us and I think a bird in the hand is maybe better that two in the bush. So I am excited about this project and I don’t want my excitement for this big renewable energy project muted by other people saying there may be another better deal out there. I am excited about this project. I am excited to be a part of it.

Unfortunately, as explained above, Mr. Arnold’s analogy in this case is misapplied as the “bird in the hand” (i.e. the BrightNight contract) referred to by Mr. Arnold appears to be rather listless and sickly in terms of the benefits to the City while there otherwise appears to be a flock of other healthy birds (i.e. alternative contracts) in nearby bushes that could perhaps provide a substantially better return to the City.

Said Councilmember Brett Lee, “It’s slightly controversial at some level how we value the advice of the URAC (sic Utilities Commission). Based on what has happened with the Covid situation pretty much all of our Commission meeting were canceled last month and ideally this would have gone before the URAC last month to get their input and advice absolutely in a normal situation…I think what is lost here is that this is a very exciting opportunity so in spite of the Covid-19 issue the reality is we face a long term issue with greenhouse gas emissions…This is exciting.

However, this argument by Mr. Lee is disingenuous because, as reported above, conversations with BrightNight actually started last year and not after the first of the year as stated by Staff. This would have provided ample opportunity for Staff to inform the Commissions and receive input on the advisability of the contract and terms.

Councilmember Dan Carson stated, “So since we declared our climate emergency last year, I have not been hearing from people saying we should slow down and delay our responses. Instead I have heard again and again from citizens saying we need to accelerate our efforts…In this case, I agree it is not a perfect process…but we on the City Council have a fiduciary responsibility to handle negotiations on a sale or sale or lease of City property. We just cannot properly delegate those sorts of decisions to Commissions…When we are dealing with climate change, we are just going to have to make uncomfortable decisions from time to time.” (Emphasis added)

I agree that uncomfortable decisions have to be made in crisis situations but add, “That doesn’t mean they have to be stupid decisions!” There are at least some people on the Utilities, Natural Resources, and Open Space and Habitat Commissions who feel the same way.

History will likely prove this solar system lease approval to be one of, if not the worst and most uninformed financial decisions ever made and/or business contracts ever awarded by our City Council. It appears to have been decided by Council without any comparative economic analysis by Staff of other opportunities provided by other larger and more experienced solar energy companies and virtually no due diligence was performed by Staff to verify the claimed capabilities of BrightNight Energy.

This project alternatively could probably have generated many more millions of dollars (maybe even tens of millions of dollars more) in revenue for the City at a time when our streets and infrastructure are crumbling. Further, shortfalls in City revenue are only expected to get worse as City tax revenue plummets as a result of the Covid-19 crisis. The worst aspect of this potentially economically catastrophic Staff and Council blunder was that it was entirely avoidable had the Council only heeded the words of the City’s informed Commissioners.

APPENDIX I – Financial Analysis of 5MW Solar System Installed by Yolo County at Grasslands Park (http://docs.yolocounty.org/publicaccess-BOS/PublicAccessProvider.ashx?action=ViewDocument&overrideFormat=PDF)


Enter the maximum amount you want to pay each month
$USD
Sign up for

About The Author

Disclaimer: the views expressed by guest writers are strictly those of the author and may not reflect the views of the Vanguard, its editor, or its editorial board.

Related posts

11 Comments

  1. Ron Glick

    One of the arguments against building housing on the periphery has been the need to preserve farmland. Yet here we are taking farmland and covering it with solar panels. If we are going to convert farmland into solar farms wouldn’t it be better to sandwich houses between the farmland taken out of production and the solar panels that could be put on the rooftops of the houses.

      1. Alan Miller

        I want Tom Cruise to play me!

        This got me thinking who could play various Citycouncilmembers, “usual suspects”, Vanguard staff, specific Davis project developers.  This became a dangerous hot potato very fast that I dared not share, potentially more hazardous than discussing race or immigration policy in Vanguard comments.  Enjoy going through your own cast of Davis characters in your own minds.  Happy Friday!

      2. Scott Ragsdale

        The solar industry is rife with “urgency” high-pressure tactics and it looks as though our City staff and council have fallen victim.

        Perhaps there is a lemon law in the contract and if so – I’d urge the city attorney to take it.  This process will invite a CEQA suit  even with solar exemption.
        Brightnight might be a great company.  There are many other qualifications that I would want to check prior to entering into a long term agreement.  Bill Tourney’s letter to the editor is correct in asking for more daylight and not making a snap judgements where none is necessary.

        The rational for putting Davis into a long-term solar lease agreement in a rush does not make sense.

        It’s terrific that there is open land available for a large commercial scale solar project.  I would like to know if the project will employ local workers? Where is the sales tax for the product purchases captured? What is Brightnight’s fiduciary track record, bonding.

        I would also like to have the benefit of advice from Valley Clean Energy.  There is no obligation, that I’m aware of, that VCE purchase power built/leased by Davis. Wouldn’t it be a shame if the cost of power produced was not competitive and we could not include the solar electricity made in our own backyard in our own CCA?

        I would also like to know how the solar architecture could be modified so that the array field is not entirely bereft of wildlife.  There have been advancements in the realm of solar arrays where ranching can be part of a solar landscape.

        All of this is worth a look.  Once a consolidated vision is ready – issue the RFP – there will be plenty of companies wanting to work on a municipal project.  It has been my experience that in tough economic times those that serviced municipal projects pulled through a lot better than the rest.
        There is something very wrong with this and Davis should ask for a reprieve – if it’s still a good deal after some daylight great.  There is almost no downside if Brightnight walks.

    1. Alan Miller

      Good self-casting, Ron.  There is an exemption to my ‘danger’ buzzer if we make castings for ourselves. 

      I’m hoping each of the City Council-members will weigh in with their choices for themselves.  I also may have a long wait.

      Me, I’m going for a bearded Jason Bateman to play the part of Alan Miller.

      1. Todd Edelman

        If the

        excited excitement excited excited exciting exciting*

        proposal had been brought to the mentioned Commissions or – much better – if the City had issued an RFP as suggested, or – going further – this RFP had included a possibility for producing solar on City-owned or even privately-owned rooftops – and had included the example of how this income could be used for road repairs, at the very least I would speak out a Council meeting on my own behalf.

        For the film version, due diligence suggests that I should played by William Shatner or Larry David (based on lowest fee and estimated variable in draw /ticket sales).

        *Yes, quoted from above.

Leave a Reply

X Close

Newsletter Sign-Up

X Close

Monthly Subscriber Sign-Up

Enter the maximum amount you want to pay each month
$ USD
Sign up for