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Presenting a live 90-minute webinar with interactive Q&A

Solar Leases: Deal Structures, Key

Provisions and Practical Considerations

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, DECEMBER 12, 2017

Stephen A. Kisker, Member, Chiesa Shahinian & Giantomasi, West Orange, N.J.

Gabriel Schnitzler, Member, Mintz Levin Cohn Ferris Glovsky & Popeo, San Francisco

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WEST ORANGE NEW JERSEY TRENTON NEW JERSEY NEW YORK NEW YORK CSGLAW.COM

Solar Leases: Deal Structures, Key Provisions and Practical

Considerations

Stephen A. Kisker, Esq. CHIESA SHAHINIAN & GIANTOMASI PC

ONE BOLAND DRIVE, WEST ORANGE, NJ 07052

SKISKER@CSGLAW.COM 973.530.2074

Types of Solar Projects

1. Grid Supply or Merchant Project Electricity generated for general consumption

A power plant that uses the sun to generate electricity

Majority of US installed solar capacity

2. Net Metered Distributed generation

Connected to the grid with a bi-directional meter

Commercial or residential

Majority of US installations

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Types of Solar Projects

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Types of Solar Projects

3. Battery Storage

Take the user off the grid

Adds $.20 to $.25 per kWh but prices are dropping

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State of the US Solar Industry

Technology has existed for some time

Installation became commercially viable on a large scale around 2005

Governmental incentives and significant reductions in installation costs resulting in market explosion starting in 2010

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State of US Solar Industry

Employs in excess of 250,000 people

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State of US Solar Industry Installations vary greatly by state depending on state

specific incentives and solar friendly policies

Fasting growing states are CA, NC and NV

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US Solar Industry Under Attack? 1. Impending reduction of Federal Investment Tax Credit

30% for projects that commence construction by 2019 26% for project that commence construction by 2020 22% for projects that commence construction by 2021 All projects must complete construction by 2024 The ITC current set to remain at 10% for commercial projects after 2021 and be eliminated for

residential projects after 2021. The continuing 10% ITC for commercial projects may be a casualty of the federal tax reform bill.

2. Reductions in state incentives Rebates Feed-in-Tariffs REC values 41 States and DC all took some kind of policy actions regarding solar in

the 3rd quarter of 2017 – not all of which were to support solar

3. Net metering caps 4. Closed circuits 5. Solar grid access charges – decoupling 6. Change in amount of net metering credit 7. Clean Power Plan and Global Climate Change Accord in doubt

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Project Locations

1. Ground Mounted

2. Roof Mounted

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The National Stadium Kaohsiung, Taiwan

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Project Locations

3. Carports

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Project Locations

4. Mixed

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Benefits of a Solar Project 1. Electric Savings Highest Rates

Hawaii, Alaska, Connecticut, New York, Massachusetts, New Hampshire and California

Lowest Rates Idaho, Kentucky, West Virginia, Washington and Nebraska

2. Federal Tax Benefits Investment Tax Credit equal to 30% of Qualified Project Costs –

reductions to begin in 2020 Roll back one year (amended return) and carry forward up to 20 years

15% basis bonus – 85% of Qualified Project Costs left to depreciate

3. Accelerated Depreciation 5 years MACRS depreciation

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Benefits of a Solar Project 4. Various State Incentives Sales tax exemptions (NJ, MA, MD)

Property tax exemptions (NJ, CA, NY, MA)

State income tax credits (NY) (NC & MD recently expired)

SRECS – Current pricing (per mWh) New Jersey $200

Massachusetts $250 - $340 (varies greatly depending on vintage)

Delaware $22

Maryland $18

Ohio $15

Pennsylvania $15

Washington DC $400

Class 1 RECs not tied to solar

Rebates and Feed-in-Tariffs

5. Society and Marketing Benefits of “Being Green” 18

Overview of Project Structures

1. Outright Purchase – First Party Ownership Requires significant capital outlay

Owner takes development and operational risk

Electric generated by system “free” after initial capital outlay

Owner receives tax benefits, REC revenue, grants and rebates

Requires a tax appetite

Generally does not involve a lease unless it is between related parties (i.e. real estate owner leases to operating affiliate) Used to allocate profits, losses, tax benefits and risk

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Overview of Project Structures

2. Power Purchase Agreement – Third Party System Ownership No up front capital outlay – OPM!

Tax benefits, REC revenues, grants and rebates belong to system owner

Purchaser must purchase all electricity generated by the system

Electricity is purchased at a discount for a period of 15 – 20 years Price can be fixed – with or without an escalator

Price can be variable – based on an index or then applicable retail rate

This allows some of the financial benefits referenced above to be passed to purchaser

Transfer of development and operational risk

No need for tax appetite Not for profit corporations – religious institutions, charities and private schools

Governmental entities – school boards

Foreign companies

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Specific Project Structures 1. Landlord Purchases System and Sells Electricity to Tenant(s)

Tax benefits, REC revenues, electric sale revenue, electric savings, grants and rebates go to landlord

Tenant gets discounted electricity and/or landlord can use for house meter or common areas

Usually requires a lease modification allowing landlord to supply electricity and addressing access and maintenance issues

Both parties can benefit from “green” aspects

Large up front capital outlay by landlord

No up front capital outlay by tenant

May require a change in the building electrical distribution

Adds value to landlord’s asset

Landlord needs a tax appetite

Does not have to involve a lease but may make sense for Landlord to form an SPE to own, finance and operate system -- which will require a lease with the owner of the building

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Specific Project Structures

2. Tenant Executes Power Purchase Agreement (3rd party owner) Requires a roof lease Landlord can receive roof rent Negotiations can be very complicated – must avoid “the tail wagging the dog” Negotiations will include responsibility for roof maintenance There is only a finite amount of revenues so some of the savings that would otherwise go to

tenant under the power purchase agreement will need to go to landlord

Tax benefits, REC revenue, electric revenue and rebates go to 3rd party owner Tenant gets discounted electricity with no capital outlay Landlord can monetize its roof, parking lot or excess land while providing an

ancillary benefit to its tenant(s) Tenant can benefit from “green” aspects. Landlord’s connection to “green”

aspects are very limited Shift of development and operational risk Tenant must purchase all electricity generated for duration of PPA Lease term must match or exceed PPA term Neither landlord nor tenant need a tax appetite

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Specific Project Structures

3. Landlord Executes Power Purchase Agreement with 3rd Party Tax benefits, REC revenue, electric revenue, grants and rebates go to

3rd party system owner

Requires a roof lease with 3rd party system owner Landlord may be able to collect meaningful rent – but there is only so much

revenue to share

Landlord is obligated to purchase all electricity generated by the system – whether or not there are tenants in place to use it

Landlord can use electricity for house meter, common areas, or pass on to tenants at cost or at a profit

Landlord shifts construction and operational risk

Both landlord and tenant can benefit from “green” aspects

Neither landlord nor tenant need a tax appetite

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Specific Project Structures

4. Tenant Leases Roof and Buys System Large upfront capital outlay

Requires tenant to have tax appetite

Landlord will need something – usually roof rent

Tenant receives tax benefits, REC revenue, electric savings and rebates

Tenant has development and operational risk

Lease term much match investment

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Lease, License or Easement? Lease

Benefits An estate in land that provides the tenant with greater protection

(rent abatements, constructive eviction, etc.) and an alternative financing method (leasehold mortgage)

If properly perfected it can be binding on future property owners In some states it offers landlord protection from construction liens

filed by a tenant’s contactor

Detriments Frequently more difficult to terminate and regain possession

(some states do not allow landlord to take possession without court order)

Subject to state and municipal lease formalities and tenant protection measures such as a duty to mitigate damages and statute of frauds

Frequently requires lender approval

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Lease, License or Easement? License

Benefits Not an estate in land but rather a contractual right

Frequently easier to terminate and regain possession

Not subject to state and municipal lease formalities and tenant protection measures such as a duty to mitigate damages and the statue of frauds

Does not always require lender approval

Detriments May subject owner’s property to construction lien resulting for

licensee’s failure to pay for improvements to the licensed premises

May not be sufficient protection to get the deal done

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Lease, License or Easement? Easement

Benefits An interest in real estate that provides the holder with greater

protection

Not an executory contract subject to termination in bankruptcy

Runs with the land

Not subject to state and municipal lease formalities and tenant protection measures such as duty to mitigate damages

Detriments Difficult to terminate and regain possession

Not easily financeable

Unorthodox

May be subject to technical state formalities applicable to estates in land, such as the statute of frauds

Almost always requires lender approval

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THANK YOU!

Stephen A. Kisker, Esq. Chair, Renewable Energy and Sustainability Group Member, Real Estate Development & Land Use Group Chiesa Shahinian & Giantomasi PC 973.530.2074 SKisker@csglaw.com

Stephen Kisker, a member of the firm’s Real Estate, Development and Land Use Group, and chair of the firm’s Renewable Energy and Sustainability Group, advises on all facets of commercial and residential real estate acquisition, development, financing, redevelopment, management and disposition. Steve also assists end users, contractors, developers, investors and lenders in the sale, purchase, structuring and development of renewable energy projects.

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Photo

Practical Considerations in Structuring a Solar

Rooftop Lease

Gabriel Schnitzler

Mintz Levin Cohn Ferris Glovsky and Popeo

gschnitzler@mintz.com

1. Preliminary diligence. A. Confirm that space tenants don’t have any roof rights,

or that rights are limited to a designated area or an area selected by landlord. Same point for any telecom leases.

B. Does landlord need to reserve roof space or other areas on the property for future use (for example, for HVAC installation or future tenant roof rights, or for expansion)?

C. Engineering study to determine available roof load.

D. Title search.

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2. Roof A. Current condition.

B. Roof warranty.

C. Ballasted v. Attached System.

D. Roof repairs and system removal during repairs and replacement.

E. Snow Removal.

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3. Casualty and condemnation. A. Fee lender rights.

B. Owner perspective.

C. Solar tenant perspective.

4. Insolation. A. Tree removal.

B. Expansion rights.

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5. Permitting and Diligence Period. A. Includes time to receive interconnection approval.

B. Both owner and solar tenant will want exit rights if permits and interconnection approval can’t be obtained within a certain time period.

C. Outside dates for commencing and completing construction.

D. Both solar tenant and owner should make sure that permitting and diligence contingency periods and construction periods dovetail correctly with lease and rent commencement.

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6. Construction. A. Conditions to construction commencement.

B. Construction laydown area.

C. Location for interconnection.

D. Security for construction obligations and lien waivers.

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7. Lender Consent, Subordination and Nondisturbance Agreements. A. Lender Concerns.

i. Construction risk. ii. Property

B. Solar tenant perspective- SNDA is a must-have to ensure tenant’s rights won’t be terminated and to ensure solar system can be financed.

C. Owner perspective- Solar tenant obligation to execute an SNDA is also critical, as financing could be delayed or thwarted if the solar tenant refuses to execute an SNDA.

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8. Typical financing requirements for solar tenant. A. Disclaimer of lender lien rights in system; agreement

that system is separate personal property.

B. Right to leasehold mortgage.

C. Lender right to receive notices of default and lender cure rights.

D. Greater freedom to assign than in typical lease. Owner perspective on this will depend on whether the system has been built and is in operation.

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