What’s Behind the Growing Interest in Prepaid Solar Financing?
Prepaid Solar Financing is growing in popularity with customers and investors alike and here are the main two reasons:
Customers are able to decrease their energy costs by having a solar array installed on their property and utilizing the energy generated resulting in greatly reducing their power bills.
Investor’s benefit due to the elimination of credit underwriting and risk of payment default by the non-profit or property owner while reaping the tax benefits affiliated with the solar project.
Payments and Risk of Prepay Solar
Who pays what when entering into a Prepay Solar Agreement? When a Prepay Solar Agreement is signed, the customer pays a deposit equivalent to a discounted sum of all payments required for the Prepay Solar Agreement upfront.
The up-front payment is applied to the construction costs first before investor equity is applied to the project. The up-front prepayment is held as a loan or debt obligation in favor of the customer. The servicing of the debt, including interest payments, is made through energy delivery under the terms of the Solar Financing Agreement. The customer does not pay anything for the duration of the agreement; however, the customer is incentivized to exercise their option to buy out the Agreement at the end of year 6, which retires the remaining loan balance.
Because of the Prepay, the investor assumes no default risk of the monthly payments, and construction risk is substantially reduced; however, operational and time risks associated with the performance of the solar installation are retained.
Capturing Tax Benefits
Prepaid Solar Financing has been utilized in the traditional commercial real estate market for many years to allow investors to capture historical and other tax credits. Non-profits don’t have a tax bill, so they cannot take advantage of these federal tax benefits. Marrying the third-party investor and the non-profit with a Solar Agreement enables the investor to be compensated through tax benefits, which the non-profit cannot use. This type of investment is attractive to those who have large tax bills and are looking for opportunities to offset those quarterly tax payments.
It is important to note that while the investor can significantly reduce their current year's overall tax bill, proper tax planning must be done to recognize the additional revenue, as the Prepay deposit is booked as income, particularly the year for which the customer exercises the buyout and the remaining deposit balance is recognized as taxable income.
Funding a Prepaid Solar Project
While the customer that enters into a Prepaid Solar Agreement will benefit when it realizes the reduction in energy costs from the energy generated by the solar array, the customer will still need to come up with the deposit at signing. The customer can fund the Prepay deposit with available cash, a line of credit from their bank or private loan.
With the emergence of more commercial PACE funding, normal bank lending and solar loans, customers can finance their solar project over longer amortization periods but control the destiny of the equipment ownership. These factors make Prepay Solar an attractive opportunity for any customer.
State and Federal Programs
Take a look at some of the state and federal programs that are not only helping fuel Prepay Solar, but also are geared to increase green energy generation, spur economic development in low-income areas, and offer tax benefits and energy savings:
Commercial Property Assessed Clean Energy financing, more commonly referred to as C-PACE. With this program, building owners can enjoy the advantages of energy upgrades immediately and pay for them over time through a voluntary benefit assessment lien, levied and recorded against the benefiting property, to be repaid along with real property taxes.
The Solar on Multifamily Affordable Housing (SOMAH) program is a California state incentive for low-income apartment property owners and tenants to directly benefit from the solar savings along with the property owners. The low-income tenants in the building will receive at least 51% of virtual net metering (VNEM) tariffs, which will be realized in credits on their utility bills. The property owner receives 49% of VNEM tariffs for common areas. Solar system owners will still be eligible to receive the 30% Federal Incentive Tax Credit when the owners purchase the system.
In December 2017, the Tax Cuts and Jobs Act, to spur economic development by encouraging long-term investments in low-income urban and rural communities nationwide, added Qualified Opportunity Zones. Opportunity Zones motivate economic development by providing temporary and permanent tax deferrals and incentives to eligible investors looking to reinvest current unrealized gains as long as the gain is reinvested in a Qualified Opportunity Fund. To become a Qualified Opportunity Fund, an eligible taxpayer self-certifies by completing a form and attaching it to the taxpayer’s federal income tax return for the taxable year.
GEM$ Financing Program in Hawaii is short for the Green Energy Money $aver On-Bill Program. This innovative financing program for non-profits, small businesses, and commercial tenants is offered exclusively by the Hawaii Green Infrastructure Authority to make clean energy investments accessible and affordable. There are no upfront costs to this program, which offers immediate savings on the electric bill. It eliminates credit barriers, the obligation is tied to the utility meter, and payments are conveniently made on the monthly electric utility bill.
