Solar Financing You May Not Know About

Over the last few months we’ve heard from several large-scale energy users in both the private and public sectors that there is a lack of information available on the less publicized solar financing options.

“Everyone’s always pushing the power purchase agreement (PPA),” one CFO said, “and without a AAA credit rating, that won’t work.”

In response, our team compiled a high-level overview of the most popular—less publicized—solar financing options for businesses and local governments to consider when they don’t want to go the PPA route.

Property Assessed Clean Energy

Property Assessed Clean Energy (PACE) is a tax instrument that allows property owners to invest in solar without affecting their balance sheets or access to future capital. PACE customers—like PPA customers—get a PV system that is cash flow positive in year one, but pay for the system over 20 years via their property taxes.

The good:

  • Cash flow- positive in year one.
  • Keeps the solar investment off the balance sheet. PACE agreements are tax obligations and not debt, so it does not impact the owner’s available credit nor does it dip into available capital expenditure funds.
  • Not subject to credit review. PPAs are limited to entities with investment-grade credit. PACE is tied to the property and access to PACE is not dependent on the applicant’s credit rating.
  • There are “pre-paid” options that allow third-parties to capture the tax benefits if the customer does not have enough tax appetite.
  • You own the solar installation and receive all the tax benefits—30% Federal Investment Tax Credit (ITC) and depreciation.

The bad:

  • PACE financing is only available in states where PACE lenders have received approval to offer financing linked to property tax payments.
  • The size of the installation is limited by the property value of the site that will host the solar project. Any outstanding mortgage plus the amount of PACE funds issued cannot exceed 80% of the total property value.

Tax-Exempt Municipal Leases

Assuming credit approval, tax-exempt municipal leases are available for local government borrowers and some non-profit entities. Because the interest on these loans is tax exempt, lenders can offer very low lease rates. And borrowers automatically own the system outright at the end of the lease, which makes the transaction simpler than a typical lease or PPA. Though you are not capturing the ITC and depreciation with a municipal lease, the low rates combined with extended lease terms (20-25 years) can make the project cash flow positive in year one, and over the life of the agreement tax-exempt municipal leases are often far cheaper than PPAs.

The good:

  • Cash flow positive in year one.
  • Customer owns the system outright at the close of the lease term and will receive greater energy savings for the life of the equipment.
  • Lower lease rates because interest is tax exempt.
  • Transaction costs are reduced and financing timelines are quicker.

The bad:

  • Credit approval from lender is required.
  • ITC and depreciation are not captured within the deal.
  • Typically, but not always, lenders offering these leases want to use this product for larger solar installations.

Operating Leases

Similar to PPAs, operating leases allow a third-party owner to capture ITC and depreciation tax benefits and pass on the subsequent savings to the energy off-taker in the form of reduced energy costs. However, operating lease terms are typically much shorter than PPAs or municipal leases (5-10 years vs. 20-25 years), resulting in larger annual payments. At the end of the solar lease term, customers have three options: buy the system outright at fair market value, renew the lease for another multi-year term or have the system removed all together.

Operating leases are subject to credit approval and do require a review of the customer’s finances.

The good:

  • Cash flow positive in year one.
  • ITC and depreciation are captured by the deal.
  • You can ultimately own the solar installation, which will deliver greater lifetime savings relative to a PPA.

The bad:

  • Credit approval from lender is required.
  • Lump sum capital expenditure required at the close of the lease term to own the installation outright.
  • Some providers require lessees to become banking customers as well.
  • Unavailable to private non-profit organizations.

Identifying the right solar financing options for your organization can be complicated without the help of a consultant or experienced solar integrator that has developed strong relationships with the various lenders, banks and financiers offering these solar financing products. It’s best to identify your primary goals for savings and cash flow, and let a consultant or experienced solar installer help you navigate the specific options available to your organization.

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