A Primer in Solar Rooftop Leasing
Solar rooftop leasing is one of the three basic ways you can make money from your rooftop with solar energy. The other two involve owning and operating solar panels on your own roof and joint venturing with a developer who will install the solar panels and share the income with you.
While a property owner might not have the resources to invest in a rooftop solar today … they still might be interested in realizing some income from solar energy through leasing their rooftop space to a developer – and make money while they learn more about the benefits of installing solar energy on their building.
In this section we will focus primarily on what you need to know if you are considering solar rooftop leasing.
Solar Energy is Creating a Demand for Rooftop Space
As the solar energy movement continues to grow in both size and stature, governments, property owners and power providers are all seeking ways to access and leverage solar energy resources to their best advantage.
Obviously, in order to produce electricity from the sun – you need someplace to install your solar panels. In Europe, the Feed in Tariffs are generally structured in such a way as to pay a higher amount per kWh of power produced. This not only encouraged homeowners to install solar panels on their roofs – but also the owners of large buildings, Churches, governments and even the military are installing solar panels on their property.
While a growing number of property owners are investing in the installation of solar panels on their roofs – a new group of small to independent developers began exploring the feasibility of leasing rooftops, attracting investors and raising the money to pay for the solar installations.
Because of this growing demand – property owners are seeing interest from developers willing to pay to lease the space.
Rooftops Can Generate Income
Many commercial, industrial and retail buildings can provide the real estate needed for these systems, and are subsequently viewed as excellent candidates for roof rental.
In our experience in Germany – the optimum size installation is 250 kWh and above. These large PV systems typically require large amounts of rooftop space – with the exact amount depending on the type of solar panels used (i.e., solar panels with higher kWp require less space.
A growing number of third-party solar power providers are looking to rent roof surfaces from building owners in a designated area, install PV systems and sell the power generated to the local utility companies through pre-negotiated agreements.
Building owners don’t have to get involved in marketing the power generated on their roofs, and the lease agreements frequently guarantee at least 20 years of dependable rental income.
In Germany – we are able to find roofs on large apartment complexes in East Germany for about €1.00 / sqm / year. However, by offering to prepay the full 20 year lease in advance we can usually negotiate an even lower lease cost.
Note: Roof lease rates are directly related to the prevailing FIT rates in Europe. As FIT rates drop … the amount a developer is willing to pay to lease the rooftop also declines roughly the same amount.
In the USA – the lease rate will depend on the price that the developer can realize from the sale of the electricity produced.
Is Your Structure Suitable for a PV Array?
Not every rooftop will be suitable for a rooftop installation … and some are more suitable than others. Your suitability will impact directly on what income you might be offered for your rooftop.
In addition to being flat or angled to get good sun exposure and relatively free of obstructions in order to permit PV installation, the ideal rooftop needs to be exposed to the sun (not shaded by mountains, trees, other structures or potential future structures on the building site or on neighboring properties) and physically capable of supporting the weight of a PV array.
Size also matters, with the ideal size for a solar PV rooftop installation being in the range of 30,000 to 100,000 square feet.
A new or recently rebuilt roof is preferred, because it is less likely to require additional structural support to accommodate the array, and because it will probably not require significant repair or replacement during the operating period of the solar project, which might necessitate the temporary removal or relocation of the solar array.
To see a typical "evaluation checklist" we use to evaluate potential roofs solar rooftop leasing application
Understanding Lease Agreements
Many rooftop rental agreements can look lucrative at first glance. There are, however, several important facts that building owners must be aware of before signing on the dotted line and making a multi-decade commitment. Ignoring these realities could turn a potential cash cow into a fire-breathing dragon that could do serious damage to the bottom line.
One of the first questions the solar developer will want to know is if the owner has full legal control over the rooftop ... and if these legal rights can be split off from the underlying property. That is, the rooftop must not be subject to existing liens, mortgages or other legal restrictions, which may prevent the landlord from being able to grant exclusive rights to the solar developer / operator.
Building owners need to be aware of is that most roof-mounted PV systems can easily last up to 40 years, while the commercial roofing systems they are attached to typically have life spans of between 10 and 13 years. With a 20-year roof rental in place for a PV system, it’s highly likely that roof repairs — or even replacement — will be needed at some point over the course of the rental period.
For example … one property owner we were approached by needed a new roof but didn't have the money to pay for it. His existing roof also contained asbestos (common in Italy and other countries). So what he decided to do was to find somebody willing to sign a solar rooftop leasing agreement – and then pledged that to his bank to get the money to repair his roofs – in essence getting a new roof for free.
While a roof lease can provide secondary monthly income from space that previously generated no income or was even classified as a liability, the attractiveness of the deal can disappear quickly if roof maintenance is not factored into the lease agreement.
Any failure in the roof surface that causes leaks can disrupt day-to-day operations, drive away customers and do serious damage to the financial stability of a business. Fixing the problems with the roof surface once a PV system is in place will also take much longer and cost much more than a typical roof repair.
If it takes days or weeks to fix a leaking roof surface, any financial benefits generated by the roof rental can quickly be replaced with enormous losses that could potentially eliminate several years of rental income. As a result, in any rooftop lease agreement, you need to know who is going to pay if roof repairs are needed, especially if PV system removal is required.
In simple terms, if maintenance is not an integral part of the lease agreement, roof rental is not likely to be a lucrative deal in the long run.
NOTEIn Italy they came up with a concept called "Innovative Roof". Basically, instead of mounting PV panels attached to the roof the developer removes the old rooftop and uses special mounting brackets to create a brand new roof made up of solar panels. To compensate for the added costs - the Italian government offers a much higher feed-in-tarriff for these type of solar installations. But there is also the advantage of a longer lease for the owner / operator of the PV installation as well as the property because new roof has a much longer life span ... and makes money over that time period. I would expect this idea to become more and more popular in the future.
Before you become involved in a rooftop rental agreement for a solar PV system, keep the following four facts in mind:
• Rooftop rental can provide you with extra income each month, but can also open you up to significant liabilities.
• Your building, your roofing systems and the operations conducted in your facility are your primary concerns, not the PV system.
• Maintenance and troubleshooting must be part of any comprehensive rooftop lease agreement.
• Know who is financially responsible for repairs and lost production so you don’t end up holding the bag for costs and penalties.
Without a doubt, an FIT can be an excellent way to put your unused roof space to good use and to collect rent at the same time. By doing your homework and reviewing lease agreements carefully, you can benefit from green solar power generation while knowing that all your financial bases are covered.
The following are some of the typical clauses you might see in a solar rooftop leasing agreement – and the issues you might want to consider.
Given the nature of such leases we recommend asking your solar consultant or a real estate lawyer (with solar leasing experience) to review the agreement before signing.
Most rooftop solar developers require an option to lease the rooftop.
The option will permit the operator to have access to inspect and test the rooftop and do such other investigations as it deems necessary to satisfy itself that the location is suitable for a solar PV array and that the building owner is in a position to grant a lease to it.
The option will be open for exercise by the operator for a period sufficient to enable the operator to conduct such inspections and investigations and to apply for and obtain a Feed in Tariff (“FIT”) program approval or enter into a power purchase agreement (“PPA”) with the local electrical utility.
The option agreement will provide that if the developer exercises its option, the parties will enter into a lease of the rooftop area on the terms set out in the option agreement.
As with any lease, it is advisable for the landlord to consider the financial strength and “track record” of the tenant, and to determine whether a deposit or other form of financial security should be sought to protect the landlord from the consequences of a tenant default.
Term and Rent
The term of the lease must be at least 20 years (to match the term of the FIT or PPA ) and the tenant will most likely ask for the exclusive option to renew the lease.
Renewal rights are potentially important, as it is anticipated that the productive life of the solar photovoltaic (“PV”) array equipment may be substantially longer than 20 years.
Rent can be structured in several ways. Usually, it will be a fixed, all-inclusive “gross” rent, but it may be calculated based on the size of the roof area or the portion of the rooftop utilized, the wattage produced by the facility, a percentage of the revenues received by the tenant, or on some other basis.
In addition, the lease may provide for the tenant to pay for its electricity consumption and for any realty taxes associated with the solar PV array.
As mentioned above – how you receive your payment can also affect the rate, which is why we prefer to prepare the lease and capitalize it – this way it qualifies for bank financing (at least in Germany).
The tenant will require access 24/7 to install, clean, maintain, repair and replace its equipment – and issues of security access may need to be addressed in the lease depending if the access has to be from within the building or not.
The lease will need to address the necessity for installation, roof repairs and replacement. Issues such as notice to the tenant, the period to do the work, relocation of the solar PV equipment while the repairs or replacement are undertaken, and compensation to the tenant for lost revenue during repair/replacement will be of concern.
Plans and Specifications
The landlord will want approval rights over the tenant’s plans and specification for the original installation and for any subsequent alterations, repairs and replacements. The tenant will want to ensure that such approval is not unreasonably withheld or delayed.
It will be critically important to the tenant, for financing purposes, that its facilities are never treated as building fixtures (i.e. they will not be part of the building and therefore will not be the landlord’s property) but instead are always the sole property of the tenant.
The tenant will also require that the landlord waive any rights of distress or other rights to claim a lien or other interest in the tenant’s equipment, in order to facilitate such tenant financing.
The issue of ownership and transfer of title to the installation (e.g., at the termination of the lease if not renewed) is also important at the term of the lease … specifically, if the installation is no longer economically viable or if there are materials containing toxic materials (such as solar panels that contain cadmium or other materials that or might be deemed toxic materials in certain locations).
In order to obtain financing for its equipment, the tenant may need to assign the lease as collateral security to its lender, and will need the landlord to agree to enter into an agreement with the tenant’s lender enabling the lender to cure any default by the tenant under the lease and to obtain a new lease on the same terms if the lease is terminated without the lender’s consent (e.g. as a result of the bankruptcy of the tenant). The landlord will want the lender to agree that any monetary or other curable default must be cured prior to the new lease being granted.
The landlord will want the tenant to obtain and maintain insurance on its facilities, and adequate liability insurance, and the tenant will similarly want the landlord to obtain and maintain insurance on its building as well as public liability insurance. Appropriate releases, waivers and indemnities will also be important to both parties.
As noted above, it will be extremely important to the tenant that nothing happens that blocks or otherwise interferes with sunlight reaching its solar PV array. Consequently, it will require covenants from the landlord that it will not take or permit any action, which would have such effect.
In addition to the normal termination for damage and destruction provisions found in a typical lease, if at some point something happens (such as the construction of a building in the vicinity) that impairs the availability of sunlight or otherwise prevents the tenant from operating its facility, the lease will need to address the tenant’s rights to terminate the lease in such circumstances.
As would be the case for any lease, the tenant may require that the landlord obtain agreements from each of its mortgage lenders to the effect that the lender will permit the tenant to remain in possession of the leased rooftop, etc. notwithstanding any default by the landlord under the mortgage, and will agree to recognize the lease and the tenant’s rights.
Repair and Maintenance
Each party will want to ensure that proper repair and maintenance obligations are included in the lease.
The landlord will want the tenant to properly maintain and repair its equipment to ensure it is kept safe and in compliance with laws and regulations, and the tenant will want the landlord to take adequate care of the building, especially the roof, to avoid any impairment of the tenant’s ability to properly operate its solar facility.
Regular cleaning of the panels including snow removal, and disposal may also need to be addressed depending on the location of the building and normal weather patterns.
Registration on Title
In order to obtain financing and to protect its interest in the event of a subsequent sale, mortgage or other disposition of the landlord’s interest in the building, the tenant will want the right to be able to register a notice of its lease on title to the landlord’s property.
The landlord will want the tenant to agree that it will “attorn to” (recognize as the landlord under the lease) its mortgagee (if it goes into possession due to a mortgage default) and any purchaser of the property.
Rooftop solar PV arrays are soon going to become very common, and while not all rooftops will be suitable and not all building owners will be willing to commit to lease their roofs for a twenty year period, with a little forethought and careful attention, rooftop solar leasing can potentially be a win-win for both building owners and solar project developers.
If You Have a Rooftop You Want to Lease
If you have a rooftop you are interested in leasing – please download our solar rooftop leasing application and send us a note and will add a section to this website posting information about available rooftops.
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