Many property owners in Westchester have unfortunately found their rental income streams negatively impacted by the COVID-19 pandemic. In the face of such unpredictability in the market, many landlords are looking at alternatives to traditional tenancies, and rooftop solar leasing is one such attractive source. But prior to entering into any rooftop solar lease, landlords should be aware of certain issues common to the solar industry.
First, solar leases tend to run for longer terms than typical office or retail leases. Most have terms of 20-25 years with options for one or more additional five-year terms. As a result, lease provisions related to the condition of the property and, more specifically, the roof, are especially important. A main point of negotiation is what happens if the roof needs to be repaired or replaced during the term of the lease, which is probable given the lengthy term. Solar tenants, of course, will try to pass the cost of removing/re-installing the solar facility, and any lost revenue thereof, upon the landlord, but there are many ways to reach a compromise on the issue.
Generally, most solar tenants request a certain period of time for due diligence, approvals and construction prior to commencing rent payments under the lease. This period can range from as short as six months to as long as 36 months. During this period, the tenant typically has the right to terminate the lease if it determines that the solar project is not feasible. If the period of time is considerable, a landlord could request compensation in consideration for reserving the roof for the tenant.
Many solar tenants obtain financing to pay for the cost of constructing the solar facility, likely secured by the tenant’s interest in the lease. Therefore, the tenant will request that the lease contain various lender-friendly provisions. Landlords should review these provisions carefully, as they may restrict the landlord’s ability to exercise its rights under the lease after a tenant default.
Other typical issues include:
- Assignment provisions: solar tenants typically seek to assign their interest in the lease to an operator of solar facilities
- Access to light: solar tenants typically restrict the landlord from constructing any improvements on the roof that may impede access to sunlight (i.e., satellite dishes, wireless towers, etc.)
- Guaranty of lease: landlords should consider whether or not to request a guaranty of the lease, either during the construction period or throughout the term
- Insurance and roof warranties: the landlord should ensure that the solar installation does not increase the lender’s insurance premiums or void any roof warranties (some solar installations will penetrate the roof and others will not)
- Taxes/PILOT: in New York, real property improved by a solar facility is exempt from re-assessment as a result of the solar facility for a period of 15 years, but the applicable municipality may nevertheless impose on the property a Payment In Lieu of Taxes Agreement, which, if not paid, will result in a lien on the real property
The Real Estate and Transactional Department at Cuddy & Feder is available to address all your solar leasing concerns.