In Part One of our series on examining solar rooftop leasing in an interview with Brent O’ Connor, IR/PR Director, and Tom Casagrande, Director of Business Development for Atlantic Wind & Solar Inc., we touched on the initial planning and consulting stages. Here, we explore the different options available and talk to AWS a bit more about planning out your rooftop solar project.
Higher Energy Outputs
Landlords should seek developers who have technological advantages in terms of higher energy outputs. Higher yields, equate to higher ROI’s for developers, which means higher returns paid to landlords for the lease of their rooftops. After all, more electricity means more money.
Atlantic utilizes a unique converter/inverter technology, which it helped bring to market.
Longevity of Materials
Look for companies who use high quality materials, which are manufactured by large, well known companies with big balance sheets. This will insure the equipment used is properly warranted in the event there is a problem 10 or even 15 years down the road. In other words, you want to make sure the manufacturer will still be around in 20 years time.
Also, just as important, make sure the company who is doing the install and maintenance isn’t compromising any of the factory warranties with their mounting systems or cleaning methods. Something as simple as an abrasive chemical used to clean the panels could potentially void a million dollar warranty, leaving the project inoperable.
Although this might not seem to be landlords problem, it could quickly become their problem if the project was not generating anticipated revenues. Landlords should be aware of these types of terms when signing contracts. The lease payments should not hinge on the performance of the system. If this is the case, perhaps a joint venture which could have a higher upside while paying more returns would be more suitable.
Basic Legal Considerations
While we’ve covered some of the higher legal areas in Lloyd Cornett’s excellent articles, we wanted to know what the legal basics are of such an arrangement? If the building is sold, what protections are in place for the solar installation? Tom had the following answers:
There are different scenarios.
1.) If it is a joint venture, the landlord could retain his ownership or may choose to transfer it to the new landlord.
2.) If the landlord purchased the system, again, ownership could be transferred, or he may choose to lease the rooftop from the new landlord and retain ownership throughout the twenty years.
3.) If he is leasing the rooftop, the lease would simply be transferred to the new landlord, adding value to the property based on the cap rate. However, In this scenario, if the landlord was paid 100% up front for the lease, the landlord would have to determine how he wanted to handle it.
AWS has formed partnerships with financial institutions, legal firms and other potential stakeholders in a rooftop solar lease agreement. This obviously makes everything easier for the landlord. Brent told us how he thought the partnership aspect of the offering streamlines the process.
“Our slow and steady method of establishing our strategic partnerships has provided us with the ability to secure all necessary financial backing. Securing the financial backing is one of the largest hurdles to overcome in the sector. A number of other large companies are coming to us asking for financial assistance as well as asking to use our model which works. This approach will prove to be the most successful.”
Types of Deals
Tom explained the various options available to the landlord and their relative benefits.
The landlord buys the system through cash purchase or financing (possibly using building as collateral).
Advantage: He generates all income from the OPA (bigger potential upside). Adds long term value to the building.
Disadvantage: He assumes risk and all liabilities. Has to incur costs of maintaining system over 20 years, included in the development fee. Has now assumed all responsibilities of a solar energy developer.
The landlord partners with the developer. (could be 50/50, 80/20, or whatever percentage of ownership is agreed)
Advantage: More potential upside. No responsibility or cost in maintaining system. Adds value to building.
Disadvantage: More potential downside if there is a system failure. Shares liabilities/risk. Other potential associated risks if using building as collateral. Needs to come up with financing.
AWS rents the rooftop from the landlord for a 20 year term.
Advantage: Landlord can depend on predetermined amount of funds, despite variables in weather etc. Secured income. Increases cap rate/value of building. While minimizing risk. No responsibilities re maintenance etc. No upfront financing necessary.
Disadvantage: No upside potential.
In Part Three, we’ll examine the cost and benefit to the landlord of a rooftop solar lease agreement, and offer some further general advice.
By Angela West, Editor, Monster Commercial. E-mail her at email@example.com with any tips, story ideas, or feedback.