The rise in demand for clean and renewable energy is driving the need for available rooftop space to employ solar energy systems. Because development costs have drastically decreased and the regulatory climate has become even more favorable over the last few years, we have seen a significant increase in commercial building owners and energy developers seeking ways to access and utilize solar energy resources.

This can be accomplished in a variety of ways. The most traditional model is for property owners to own a rooftop solar photovoltaic (“PV”) system, pay for the installation, and use the energy produced to offset its utility costs. This method, though, requires a significant upfront investment.

Thus, the rooftop leasing model has become increasing popular. Under this model, a third-party solar energy developer will lease the roof from the commercial building owner, install the PV systems, pay rent for use of the roof, and sell the energy generated locally to an off-taker, usually a public utility company. In addition to the benefits of being better environmental stewards and greater corporate social responsibility, there is little to no upfront cost to the property owner, and leasing creates additional revenue streams for 20+ years using underutilized roof space. Many developers can also provide commercial buildings with discounted electricity through a community program or a direct power purchase agreement or PPA, thus helping to reduce energy costs.

If both parties weigh the advantages and disadvantages and commit to a long-term partnership, rooftop solar leasing can potentially be a win-win-win for commercial building owners, energy developers, and the environment. But before you sign up, there are many factors to consider with this type of lease. Below is a list of just some of those considerations for commercial building owners and developers in addition to traditional lease provisions. And not just rooftop leases, many of these factors also apply to leasing underutilized open spaces, large parking lots, and carports.

Roof Suitability

• Is the roof suitable for a PV System? Some considerations include roof age, size, whether the roof is crowded with HVAC or other equipment, and whether the roof is shaded.
• How long is the roof inspection and feasibility period?
• How do you prevent voiding the building’s roof warranty?

Lease Term and Rent

• How long is the initial lease term? Terms can be 15-25 years.
• After the initial term, what are the lease renewal options?
• What does the rent payment look like? Is it fixed? Is it calculated based on: (i) the size of the rooftop utilized; (ii) the wattage produced; (iii) a percentage of the revenues received by the tenant; or (iv) another basis? Is there a year-to-year escalator?

Construction, Operation, and Maintenance of the PV System

• What licenses are required? License examples include construction, ground, and ladder.
• Does the building owner have to approve the plans and specifications and sign off on any subsequent alterations, repairs and replacements?
• How and when does the developer access the roof to install, clean, maintain, repair and replace the PV system?
• Is building and roof security an issue?
• How can the parties use the roof as not to interfere with the PV system operation?
• What are building owner’s obligations regarding interference with availability of sunlight?
• What happens if the roof requires repair and/or replacement?
• What happens if the building needs repair?
• Who owns the PV system during the lease?
• What types of liability insurance must be maintained? Who pays for increases in insurance premiums?
• Who pays for increases in real estate taxes?
• How do you handle hazardous materials and environmental compliance?
• Who owns the environmental attributes, including carbon trading credits, renewable credits, tax credits, accelerated depreciation, etc.?

Lease Termination

• Can the building owner purchase the PV system after the lease terminates?
• How do you address decommissioning and removal of the PV system from the roof and decommissioning assurances?

Not every rooftop lease is the same. Instead, these leases can and should be tailored to address and fit the particular situation. Addressing these issues specifically in the lease and working with an experienced attorney will enable each party to best position the project for success.

If you are a commercial building owner, land owner, or an energy developer coming to market, you should ensure that your interests are adequately protected and that the project is setup for success.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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