Every year, more homeowners install solar panels for their home's energy. Harnessing the sun's energy to help power your home certainly seems like a positive thing. But having a leased solar panel system or Power Purchase Agreement (PPA) could hamper or defeat the sale of your property.
How Solar Leases Work
Solar leases and solar PPAs are similar to renting a solar panel system for the home. The owner enters into an agreement with the solar leasing company that entitles the owner to the benefits of the system (the energy that the solar panels generate) for the term of the contract, which is generally around 20 years. Under these arrangements, the solar leasing company owns and maintains your solar panel system so it, not the homeowner, is entitled to all the rebates, tax breaks, and financial incentives that are available for the solar panel system. Consumers may indirectly benefit from those savings through lower electricity rates.
While the terms “solar lease” and “solar PPA” are often used interchangeably, there is a difference between the two arrangements. With a solar lease, the lessee agrees to pay a fixed monthly lease payment, which is calculated using the estimated amount of electricity the system will produce, in exchange for the right to use the solar energy system. With a solar PPA, instead of paying to rent the solar panel system, the lessee agrees to purchase the power generated by the system at a set per-kWh price. Many of these agreements call for zero money down, with an expected average savings of 10-30% on utility bills. In most cases, the rate will increase by 1%-3% every year. All of this is fine if an owner is planning on staying in the home until the end of the lease term in 20-25 years, but what if the owner wishes to sell the home?
Issues for Buyers
Despite the advertised benefits, many buyers will want the seller to buy out the remaining lease for them. This could cost $20,000 or more, depending on the contract. When the solar panels are leased and not purchased by the homeowner, many buyers will view this as a negative feature rather than a positive one. Like any leasehold, the solar panels are the property of the lessor and not the lessee, so the buyer must now assume the lease payments for the remainder of the term. Buyers are often worried that the equipment will have maintenance costs or will become obsolete over time, or simply believe that the leases are really bad deals.
If an assumption is agreed upon, the buyers need to qualify for their own lease, meaning having a high enough credit score to do so. Many buyers with credit scores in the 600’s won’t qualify to assume the lease, regardless of their desire to.
If you are listing your house, it is important to contact the leasing company ahead of time to learn about the transfer and/or buyout options. This way, you can be ready with a copy of the agreement and the options, rather than being caught off-guard later.
Given the significant difference in seller cost between buyers assuming the lease and the seller having to pay it off at closing, it is important for the listing agent to note the existence of the solar panel system and whether it is leased or owned, in order to avoid misunderstandings later. The obligations of the parties regarding the solar panels should be addressed in the offer or purchase and sale agreement. If the buyer is assuming the lease, the mortgage lender will typically include the monthly payment for the system in the buyer’s qualifying ratios for the mortgage. This is because, even though the property does not belong to the homeowner after closing, it is an ongoing obligation. However, the value that the bank would loan on is not increased because the leased panels are personal property owned by someone other than the homeowner, so they are not included in the appraised value.
Issues for Lenders
In 2016, Fannie Mae came out with new requirements for its mortgages when solar panels are on the property. If the owner of the property is the owner of the solar panels, standard eligibility requirements apply for the appraisal and the insurance coverage etc. If, however, the solar panels are leased from or owned by a third-party under a power purchase agreement (PPA), the requirements are:
- The solar panels may not be included in the appraised value of the property;
- The property must maintain access to an alternate source of electric power that meets community standards;
- The monthly lease payment must be included in the debt-to-income (DTI) ratio calculation unless the lease is structured to (a) provide delivery of a specific amount of energy at a fixed payment during a given period, and (b) have a production guarantee that compensates the borrower on a prorated basis in the event the solar panels fail to meet the energy output required for in the lease for that period. Payments under power purchase agreements where the payment is calculated solely based on the energy produced may be excluded from the DTI ratio;
- The lease or PPA must indicate that any damage that occurs as a result of installation, malfunction, manufacturing defect, or the removal of the panels is the responsibility of the equipment owner and the owner must be obligated to repair the damage and return the improvements to their original or prior condition (for example, sound and watertight conditions that are architecturally consistent with the home);
- The owner of the solar panels agrees not to be named loss payee (or named insured) on the property owner’s property insurance policy covering the residential structure on which the panels are attached. As an alternative to this requirement, the lender may verify that the owner of the solar panels is not a named loss payee (or named insured) on the property owner’s property insurance policy; and
- In the event of a foreclosure, the lease must state that the lender or its assignee has the discretion to either terminate the lease agreement and require the third-party owner to remove the equipment, become without payment of any transfer or similar fee the beneficiary of the borrower's lease agreement with a third-party, or enter into a new lease agreement with the third party under terms no less favorable than the prior owner.
Given these underwriting requirements, it important that the lender obtain a copy of the lease or PPA agreement for the underwriter to review during the mortgage approval process. The good news is that, while most solar lease agreements written before 2016 did not meet all of the above requirements, the solar companies we have dealt with have been receptive to amending their agreements. In every instance where we have asked, they have sent lease amendments within a day or two.
Bottom line is, if you have an existing solar lease or are considering one, it is very important that you understand the long-term obligations involved. Many homeowners are being convinced that leasing solar panels is a great deal because they don't have to put any money down. The problem is the long-term effect of the leases on the ability to sell the property. It is very important to read all of the details of the contract. And if you don't understand them, have someone explain them to you. Given the various plans that are available, taking the time to compare your options is crucial.
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