The success of photovoltaic projects in the commonwealth can be attributed to factors such as a surviving market for the sale of solar renewable energy credits and a continuing commitment by the state to financially incentivize this growing market.
For many developers, leasing rooftop space for solar projects is preferred. Rooftop leasing has certain definable benefits. Existing buildings are often the product of extensive due diligence review, so solar developers will often start from a point of certainty. Developers are well aware of the cost of performing environmental and zoning review to ensure the viability of a project; so working with existing improvements ensures significant savings. The fact that most developed sites will already have existing utility infrastructure in place is an added bonus.
Once the parties have confirmed that a site is viable for the solar project (and the property owner does not need or has already obtained any necessary consents from mortgagees or existing tenants in the building), factors to consider when negotiating a solar lease include:
Structuring The Lease. Property owners will often lease large-scale rooftop space to a rent-paying solar company, which then undertakes to install and operate the equipment and sell the energy produced. Energy may be sold back to the grid, existing tenants in the building or landlords. A power purchase agreement will reflect the agreed upon rate for purchase of the energy, running concurrently with the lease term and any related financing.
Due Diligence. Property owners and tenants should perform a careful review of the installation site to ensure that photovoltaic panels are compatible with the characteristics of the roof. Adequate time should be incorporated into the lease to allow for review and to address other project considerations including the interconnection agreement, permitting, and tenant financing (if applicable). Parties should be prepared for due diligence periods ranging in time, sometimes over a year, and allow for termination of the lease in the event insurmountable concerns are identified.
Landlord Considerations. Landlords should ensure that the rent structure reflects the intended success of the project in the long term, as well as cover upfront and future costs. For example, a fluctuating rent structure may allow for increases based on revenue generated from the sale oaf the energy (often where the grid is the end-user). Regardless, a minimum rent will provide landlords with financial comfort, as will a careful review of the tenant’s financial stability. Further, landlords will want to characterize all costs related to the solar project as tenant costs, such as any increased insurance costs or real estate taxes incurred by landlords related to the solar project. Landlords should confirm that the installation would not invalidate its roof warranty, and maintain access rights to the roof for purposes of inspection.
Tenant Considerations. In addition to the rooftop space, tenants will need to include access rights to certain aspects of the building to reach the roof and building systems and allow for ongoing maintenance and operation. When installing the system, tenants will require a temporary staging area. Considering landlords will often require tenants to manage the proper disposal of the solar system at the end of the term, tenants are wise to understand any yield-up and related removal obligations. Finally, tenants should consider recording a notice of lease for leases with terms beyond seven years to protect their leasehold interest in the event of a foreclosure on the underlying real estate.
Casualty. A tricky concept to incorporate into a solar lease, tenants will want to confirm that they will be able to re-install the photovoltaic panels on a reconstructed building following a casualty event. This tenant interest will need to be balanced with a property owner’s desire to maintain control over the rebuild, and making its obligations contingent on the likelihood that it will receive adequate insurance proceeds to cover reconstruction.
Timing Is Everything. Solar lease terms are often tied to the life of the equipment, which should be considered when reviewing the age of the roof and any warranty in place. While a gray area, property owners should think through future expectations for the real estate and issues that may arise concerning assignment of its landlord interest in the event of a sale. While solar projects are one of the more uncomplicated methods of incorporating a “green” building concept, property owners will want to ensure that it does not needlessly drive the life of the real estate.
Ani E. Ajemian is an associate in the real estate section of the Boston office of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC
