As the world's economy suffers through what feels like a long, cold, lonely winter, landowners are turning to solar power to generate revenue and offset costs. Technology and financing mechanisms make solar projects particularly attractive when other planned projects have stalled. Solar projects can (i) be installed at improved properties and on vacant land, (ii) utilize tax credits to offset infrastructure installation costs, and (iii) make real estate developments more marketable and sustainable. Landowners need to understand certain basic principles to properly evaluate which properties realistically can take advantage of these benefits.
Land Of Opportunity
Solar panels can be installed in areas of existing developments that can support the heavy panels or on vacant land. Owners of existing developments of all asset classes, from shopping center developers to residential developers, are implementing solar panels primarily on rooftops and in unused parking areas with great success — as little as one acre of rooftop space can generate enough energy to reduce the overall load of a large office building by 10% to 15%. At the Class A MGM Tower in Los Angeles, for example, a solar photovoltaic system recently installed on unused portions of its adjacent parking structure is projected to offset more than 12% of the building's annual energy use.
There currently is no shortage of vacant land owned by master-planned community landowners and residential builders. Much of this land is in the "sunbelt," extending from California to Texas, where concentration of solar radiation is highest. Ten acres of vacant land can house approximately 7,400 tilting photovoltaic panels, which can power 750 to 1,000 average-sized homes. Unlike many other generation sources, solar panels can be installed on portions of a planned development without abandoning the originally contemplated residential or commercial development. In addition to the revenue created by a solar project, landowners might have a more attractive development that can be touted as "sustainable" or reducing its residents' carbon footprint.
Initial Considerations
Vacant space is not the only requirement for solar projects. A site's viability depends on its size, proximity to large users and interconnection facilities, and various other factors. For landowners with little energy experience, there is no substitute for an energy consultant with solar industry expertise to conduct a feasibility study. Nonetheless, answering the following threshold questions can provide preliminary indications of which solar projects may be suitable for landowners and their sites:
Is the landowner willing to commit to the installation of solar technology on a long-term basis? Solar developers and utility companies need the technology in place for a number of years (at least 10 years) to create a meaningful asset.
What is the electric load profile of the property (if any)? Are there heavy power users adjacent to the site that can buy the power directly from the developer?
What are the other site characteristics? Is the site unshaded and sturdy? Full access to south- or southwest-facing sunlight is preferred. For rooftop projects, if the roof needs to be reinforced to support the panels and is due to be replaced within five years, it may be practical to combine the solar and roofing projects.
Is the site near an interconnection point? This is critical for utility scale projects as interconnection is extremely expensive to build and is fraught with regulatory challenges and delays.
What tax credits and incentives are available? These vary based upon the project's size and the state and municipality.
Tax Incentives
There is a panoply of federal, state, and municipal incentive programs that provide grants, tax credits, and other sources of financing or revenue for solar and other renewable energy projects. Most notably, the recent bailout package (Emergency Economic Stabilization Act of 2008) and the stimulus package (American Recovery and Reinvestment Act of 2009) include more than $42 billion in grants and energy-related investments that directly or indirectly benefit solar projects, plus they include specific solar technology tax credits. These grants include a program that will enable taxpayers to redeem solar investment tax credits that exceed their tax liability; eliminate the tax penalties for subsidized energy financing; and provide billions for "smart grid" efficiency and renewable energy research. The Business Solar Investment Tax Credit set forth in Internal Revenue Code Section 48 was extended through December 31, 2016. This tax credit allows for an offset of regular and alternative minimum tax in an amount equal to 30% of the cost of solar equipment. Owners of solar energy systems also can take advantage of a 5.5-year equipment depreciation schedule. The tax credits can either be used directly by the landowner/ project owner or bundled and sold to tax credit investors.
Transaction Structures
Solar power developments generally use one of four structures:
Sole Ownership. For projects that are one megawatt or less and will satisfy existing on-site or adjacent load, direct ownership by the landowner is a realistic possibility. Several commercial installers can construct such projects, it is easier to satisfy existing load requirements than to develop projects for offsite end users, and both conventional debt and municipally issued tax-exempt bonds can be used for financing. Recent changes to California law authorize cities and counties to enter into contracts with owners of improved property to bond for the installation of permanent improvements for renewable energy and energy efficiency.
Sale-Leaseback. A sale-leaseback is a financing that uses a lease as the security instrument rather than a mortgage, and the landowner first conveys the project to the financier, who then leases it back to the landowner. The tax implications of this structure need to be examined carefully, particularly the use of tax credits. This type of transaction can also be structured as a land-banking opportunity, whereby the solar developer acquires the property from the real estate developer pursuant to an option contract.
Third-Party Leases. Under this structure, the landowner leases the project to a third-party who builds, owns, and operates the facility. This structure is extremely common because the landowner's involvement in the project's development is minimal. The rent typically increases as the project meets development milestones such as obtaining key permits, groundbreaking, commercial operation, and specified dates.
Joint Venture. In a joint venture, the landowner and a third-party build, own, and operate the facility jointly. This structure is attractive where the landowner wants "a piece of the equity," is willing to take development risk, and has found a compatible and experienced solar power developer. Tax credit or tax equity financings typically are structured as a form of joint venture.
Sustainable Development
The push to sustainability is not a new concept. Implementing solar technology can lead to a win-win situation for landowners, furthering corporate environmental objectives such as reducing carbon dioxide emissions and other air pollutants, and increasing revenue and profitability.
Goodwin Procter LLP is one of the nation's leading law firms, with a team of 700 attorneys and offices in Boston, Los Angeles, New York, San Diego, San Francisco and Washington, D.C. The firm combines in-depth legal knowledge with practical business experience to deliver innovative solutions to complex legal problems. We provide litigation, corporate law and real estate services to clients ranging from start-up companies to Fortune 500 multinationals, with a focus on matters involving private equity, technology companies, real estate capital markets, financial services, intellectual property and products liability.
This article, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin Procter LLP or its attorneys. © 2009 Goodwin Procter LLP. All rights reserved.
