solar leases: legal considerations for property...

Solar Leases: Legal Considerations

for Property Owners Analyzing Lease Sites and Deal Structures and Addressing Key Document Provisions

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WEDNESDAY, SEPTEMBER 12, 2012

Presenting a live 90-minute webinar with interactive Q&A

Stephen A. Kisker, Member and Chair of the Renewable Energy and Sustainability Group,

Wolff & Samson, West Orange, N.J.

Clay A. Butler, Partner, The Butler Firm, Austin, Texas

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www.wolffsamson.com 5

STRUCTURING SOLAR

ENERGY PROJECTS

Presented by

Stephen A. Kisker


Benefits of Solar Energy System

Electric Savings – Fixed cost (with or without escalator) or

percentage savings below retail

A. Highest Rates – Hawaii, Alaska, Connecticut, New York,

Massachusetts, New Jersey, New Hampshire, California

B. Lowest Rates – Idaho, Kentucky, West Virginia, Washington,

Nebraska


Benefits of Solar Energy System (cont.)

Tax Benefits

A. ITC equal to 30% of Qualified Project Costs

i. roll back one year (amended return) and carry forward up to 20 years.

ii. generally passive income.

iii 15% basis bonus – 85% of project costs left to depreciate after ITC.

B. Accelerated Depreciation – 5 years MACRS for entire project.

C. Bonus Depreciation – 50% of entire project in first year if project is placed in service in 2012.

D. Various State Based Incentives:

i. Sales tax exemptions (NJ, MA, MD)

ii. Property tax exemptions (NJ, CA, NY, MA)

iii. State income tax credits (NC, MD)



SRECs – Current pricing (per mWh)

i. New Jersey ($90)

ii. Massachusetts ($210)

iii. Delaware ($45)

iv. Maryland ($195)

v. Ohio ($140)

vi. Pennsylvania ($20)

vii. Washington DC ($295)

viii. Connecticut -- auctions currently occurring

Coming soon ….

i. Puerto Rico (1/1/15)

ii. New York (??????)

Other states have REC programs not tied specifically to solar energy.



Rebates - State (frequently utility and area specific) (see dsireusa.org)

Grants - State (frequently utility and areas specific) (see dsireusa.org)

Societal / Marketing Benefits – “Being Green”


Project Structures

Outright Purchase – First Party Ownership

A. Requires significant capital outlay.

B. Electric generated by system “free” after initial capital outlay.

C. Owner benefits from tax benefits, SREC revenue, grants and rebates.


Project Structures (cont.)

Power Purchase Agreement – Third Party Ownership of

System

A. No capital outlay.

B. Tax benefits, SREC revenue, grants and rebates belong to system owner.

C. Purchaser must purchase electricity generated by the system, whether or not it uses the electricity.

D. Electricity is purchased at a reduced price for a period of 15 – 20 years (or longer). Price can be fixed (with or without escalator) or variable (based on index or “going rate”). The financial benefits are passed through to the purchaser through the reduced price of electricity.


Project Structures (cont.)

Capital Lease

A. No up front capital outlay.

B. Monthly rental payments required. Only interest portion of

monthly payment can be expensed.

C. Tax benefits, SREC revenue, grants and rebates can be

passed through to the “lessee”.

D. Electric is “free” after lease payments.


Ways to Structure a Solar Project

Landlord purchases system and sells electricity to tenants:

A. Tax benefits, SREC revenue, electric sale revenue, grants and rebates go to landlord.

B. Tenant gets reduced electricity rate.

C. Usually requires a lease modification requiring landlord to supply electricity and addressing with roof access and maintenance issues.

D. Both parties can advertise they are using “green” energy.

E. Large up front capital outlay by landlord.

F. No capital outlay by tenant.

G. May require change in building electric distribution.


Ways to Structure a Solar Project (cont.)

Tenant purchases system for its own use:

A. Requires a roof lease wherein landlord will receive roof rent.

Negotiation will include responsibility for roof maintenance

and roof access going forward.

B. Tax benefits, SREC revenue, grants and rebates go to tenant.

C. Tenant gets “free” electricity after initial capital outlay.

D. Tenant can advertise “green” benefits – landlord’s connection

to “green” benefits are very limited.

E. Large up front capital outlay by tenant.

F. Not practical for small, in-line tenants.



Tenant executes Power Purchase Agreement:

A. Requires a roof lease wherein landlord will receive roof rent.

Negotiation will include responsibility for roof maintenance

going forward.

B. Tax benefits, SREC revenue, electric revenue and rebates go

to third party system owner.

C. Tenant obtains reduced rate electricity with no capital outlay.

D. Tenant can advertise “green” benefits – landlord’s connection

to “green” benefits are very limited.



Landlord executes Power Purchase Agreement:

A. Tax benefits, SREC revenue, electric revenue, grants and

rebates go to third party system owner.

B. Requires a roof lease with third party system owner in which

landlord may or may not collect meaningful revenue.

C. Landlord obligated to purchase electricity from system.

D. Landlord passes electricity to tenant either at cost or at a profit

E. Landlord and tenant can advertise “green” benefits.


Practical Considerations in

Structuring a Solar Deal

A. Who maintains the roof?

i. Roof warranty.

ii. Roof leaks.

iii. Rooftop equipment.

iv. Roof repairs and resurfacing that require removal of system.

v. Casualty.

B. Where to put array? i. Roof.

ii. Vacant land.

iii. Parking lot and walkway canopies.

iv. Parking garages.

v. Storm water basins.

C. Building Electrical System i. Does each tenant have its own meter?

ii. How difficult to modify system for single service with submeters?


What’s in it for me? A. Landlord i. Revenue and tax benefits.

ii. Being “green”.

iii. Ability to reduce tenant occupancy costs which can result in higher rents, a competitive advantage in leasing, or both. iv. Many tenants require spaces directly leased by them, or in some instances leased by their suppliers, to be “green”.

B. Tenant i. Revenue and tax benefits.

ii. Being “green”.

iii. Many customers require or strongly encourage their

suppliers to be “green”.

iv. Competitive advantage in contracting.

v. Reduce operating costs.

vi. Fixed or predictable operating costs.


For more information, please contact:

Stephen A. Kisker Chair, Renewable Energy and Sustainability Group

Wolff & Samson PC

One Boland Drive

West Orange, New Jersey 07052

Tel: 973-530-2074

Fax: 973-530-2274

E-mail: [email protected]

Utility-Sponsored leasing Provisions

September 2012

Clay A. Butler

[email protected]

512-992-0794

THE BUTLER FIRM

This presentation, furnished on a confidential basis to the recipient. It is intended exclusively for the use of the client to whom it has been

delivered by The Butler Firm and it is not to be reproduced or redistributed to any other person without the prior consent of The Butler Firm.

Confidential

LEASE TERM

Standard lease term is 15 to 25 years.

DEPOSIT

Depending on amount of local incentives available, a non-refundable deposit may be required. If required, standard deposit is 1% to 10%.

PROPERTY EASEMENT

Lessor and its agents, employees and contractors have the right to cross or otherwise use sub-lessee’s land in order to install, inspect, operate, maintain, repair, remove, and replace the system and any inverter and wires for interconnect during the life of the lease.

INCENTIVES

Stipulates that the sub-lessee agrees to forfeit any and all claim to tax credits, rebates, and other benefits to the lessor. Sub-lessee must also reasonably cooperate with lessor so that lessor may claim these benefits.

1

Standard Provisions

Confidential

2

Liability Provisions

INDEMNITY Lessee usually indemnifies and holds harmless the lessor and its affiliates from all third party claims, actions, costs, expenses, damages, liabilities, penalties, losses, obligations, injuries, demands and liens of any kind or nature arising out of, connected with, relating to or resulting from Lessee’s negligence or willful misconduct LOSS OR DAMAGE For most residential leases, if system is destroyed, damaged, or stolen Lessee is still liable under the lease. For commercial leases, loss or damage is negotiable between the parties. FORCE MAJEURE Pay close attention to the Force Majeure clauses. INSURANCE Some leases require Lessee to carry insurance to cover damage or loss of System and name Lessor as loss-payee.

Confidential

TYPICAL LESSEE OBLIGATIONS IN LEASE - Notify within ___ days system is not working - Notify immediately of emergency situation - System repaired pursuant to Warranty - Keep trees hedged. Receives as much sunlight as when first installed. - Permit inspection upon notice. - Keep panels clean. - Work with Lessee to claim tax credits, rebates etc.

3

Obligation Provisions - Lessee

Confidential

PERFORMANCE GUARANTY - Guarantee the system will generate a guaranteed annual amount of kilowatt-hours of

energy. - Excess energy over guaranteed amount paid for at agreed reduced price or at no cost. - Some leases allow excess energy to “carry-over” to satisfy any deficits that may occur

in the future. - If Lessor does not satisfy performance guaranty than liable for shortfall damages.

Usually, liquidated and based on the difference of guaranteed output and actual produced energy multiplied by a specified energy price per kWh.

- Monitoring service usually provided at Lessor’s cost. - May include Output Warranty. Example: The System’s electrical output during the first

ten (10) years of the Warranty Period shall not decrease by more than fifteen percent (15%).

4

Obligation Provisions - Lessor

Confidential

LEASE RENEWAL OPTION Typically Lessee has option to renew at the end of the lease. Example renewal term is: “up to [15] years in [3] [5]-year renewal periods. The lessor will send lessee the renewal forms [3] months prior to the expiration of the lease term.” SYSTEM PURCHASE OPTION Not every lease has purchase option. If inserted, care must be taken to follow NASB rules on Operating and Capital Leases. In most scenarios an Operating Lease is preferred. For Operating Leases care must be exercised to make purchase of system at Fair Market Value determined at time option is exercised and determined by a certified appraiser. Lessor can give estimates but not set forth actual purchase prices. REMOVAL Typical lease provides when renewal or purchase option is not exercised at end of lease the Lessor may remove the system if it chooses to do so and the Lessor will pay for the removal. If Lessor decides not to remove the system then the Lessee may request the system to be removed and Lessor shall be responsible for all costs of removal.

5

Expiration Provisions

Confidential

SALE OF PROPERTY BY LESSEE - If buyer meets credit requirements of Lessee, the Lessee may transfer the lease to the

buyer. (Note: Some Leases require Lessee to pay transfer fee.) - Prepay lease or pay specified amount and Transfer only the Use of System. (Applies in

situations where buyer does not meet credit requirements or will not agree to pay and Lessor does not want to move system or unable to move system to physical or legal constraints.)

- Prepay lease or pay specified amount and remove system after six years. (Buyer may not

want system. Six year limitation is because Third party wants to capture accelerated depreciation. Usually, removal of system under this option is covered by warranty.)

- Move the system to Lessor’s new location. (Usually Lessor bears cost and risk of moving

system.)

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Expiration Provisions – Cont.

Confidential

PROPERTY TAXES Generally property owner liable for property taxes. Some states like Texas specifically exempt distributed solar from property value calculations by tax assessor. TRANSFER BY LESSOR Lessor generally retains right to transfer lease to third-party. RENEWABLE ENERGY CERTIFICATES AND OTHER ATTRIBUTES Negotiated by parties but traditionally Lessee takes ownership of all environmental attributes including RECs and SRECs. LIMITED WARRANTY BY LESSOR Generally the lessor makes limited warranties as to installation (good and workman-like manner) and roof damage.

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Other Provisions

Confidential

First Quarter - 2012

28

Source: SEIA U.S. Solar Market Insight Report

Confidential

Case Study: California

29

Source: State of California, California Energy Commission & California Public Utilities Commission

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