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Financing a Solar Self-Storage Project: Options and Opportunities

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Solar Leases

Solar leases are similar to PPAs in that they fully eliminate any up-front capital costs. Under this structure, the property owner leases the solar installation from the lessor at a fixed monthly cost, and subsequently collects all the offset electricity benefits. The major difference under this structure is the owner is now liable for the electricity production of the solar system.

More important, if the system doesn’t perform as well as was anticipated, or if it is particularly cloudy in a given month and the system doesn’t generate the energy expected, the offset electricity costs may not be sufficient to make up for the monthly lease payment in that month. On the flip side, in months when production exceeds expectations, the benefits should more than offset the monthly lease expense.

There are two distinct types of operating leases prevalent in the market, both of which create different tax implications for the owner. A capital lease is structured such that the property owner (lessee) is effectively considered the owner of the system. Under this lease structure, the owner collects all the federal and state tax incentives, however, he must also list the solar array as an asset and the lease payments as a liability on his balance sheet.

The second and more common type of lease is an operating lease. Under this structure, the lessor owns the system, therefore, the property owner doesn’t book the installation on his balance sheet, but rather treats the lease payments as an operating expense. It’s critical to understand the tax consequences when deciding which lease is best for your facility. It’s recommended you seek the counsel of a qualified CPA when contemplating between these two lease structures.

Traditional Balance Sheet Financing

For self-storage owners with adequate cash on hand, financing the installation with equity would certainly be an option. However, given most self-storage owners may not have that kind of equity ready to be deployed at a moment’s notice, it’s also possible to use traditional debt financing to fund the installation.

Yves Bienvenu of Global Infrastructure Asset Management LLC is an intermediary who specializes in arranging capital structures to finance large-scale renewable energy projects. He suggests that “If your local bank is your current lender, they are likely the best option for solar financing as they are already familiar with the property. Having a single lender finance both your real estate and your solar project avoids any priority lien situations on your solar installation.”

Financing a solar installation is similar to financing traditional real estate as lenders will want to perform a credit analysis to determine the financeability and structure the rate and terms accordingly. If the lender is comfortable with the project, leverage can reach as high as 80 percent of cost.

Unfortunately, however, many local lenders are not familiar with renewable-energy projects, neither from an investment nor technology perspective. Because of the general lack of knowledge about renewable projects, debt financing at the commercial scale is sometimes difficult to achieve, often making PPAs and solar leases a more attractive option.

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