In our last financial blog we covered Power Purchase Agreements aka PPAs. PPAs are a good option for companies looking to go solar when they wish to avoid taking out a loan or can’t make use of solar’s Federal Investment Tax Credit or depreciation tax benefit. But there are other options and depending on your circumstances, they may be even better.
So this go-around we’ll talk about an operating lease. Solar operating leases are similar to PPAs in that they can make your financial life simpler, but for many companies – particular for-profit companies – the operating lease may offer a better overall return on investment.
The reason for that is instead of paying for the system based on the kW hours it produces over 20 to 25 years, you instead pay for an operating lease over the first 6 or 7 years and then “buy the system out” from the lessor at the end. That means that after making 72 to 84 lease payments (as well as the final “buyout payment”), you can own the system outright for the rest of its useful life going forward. In short, the payments stop.
How does that work out as better? Well, with an operating lease, while you are in fact making monthly payments to the lease company, the payments don’t add up to the full price of the system. Instead, they reflect the fact that the lease company owns the system during those first years and so they can take the Federal Investment Tax Credit as well as the accelerated depreciation tax benefits. So they reduce your monthly payment to reflect that fact. Yes, you don’t get quite the same if you took those tax benefits yourself, but you also don’t have to come up with a big down payment or carry a big loan on your balance sheet. Further, those monthly payments you are making are a 100% tax deductible expense. And once you buy out the system, you can take a tax depreciation on that yourself – because remember you didn’t own it until the end of the lease’s term. Think of as being the same as buying a used truck for your business. It’s still a depreciable asset.
That all sounds great, but many people eliminate the operating lease from consideration because, as required by the IRS, the buyout price you must pay to own the system after the 6 or 7 year term can’t necessarily be “fixed”. The lease language often reads something like “15% or the then fair market value”. So any logical person would read that clause, “or the then fair market value”, and have alarm bells go off in their head. After all, what if the said fair value was way higher than 15%?
But one company we highly recommend, CleanView Capital, structures their agreements so you can eliminate that concern. Plus, they can finance any solar system for a “for profit” organization with a price point anywhere from $50,000 to upwards of $10 million.
For many companies this is an excellent option. As CleanView Capital says in their materials “By trading the federal tax credit and initial depreciation in return for subsidized 100% tax deductible lease payments and later depreciation (after a purchase option is exercised), companies achieve a similar or lower after-tax cost of ownership with our lease versus a traditional loan.”
But whatever your situation, New England Clean Energy is here to help your company understand your financing options and ultimately make the right choice when it comes to financing your solar system. The solar part of the process is, in many ways, relatively simple.