Commercial Solar Due Diligence Checklist

When evaluating a commercial solar project, it’s crucial to ask the right questions to ensure a sound investment. Here’s a comprehensive checklist:

Key Factors to Check:

Experience of the Developer: What is the developer’s track record with solar energy projects?
Capital Costs: Who is responsible for covering the capital costs of the project?
Tax Benefits: Who claims the 30% Investment Tax Credit (ITC) and the bonus depreciation?
Ownership Structure: What is the ownership structure of the solar project? Is there any debt involved?
Assignment on Sale: What are the terms if the property is sold?
Vacancy Risk: What happens if a tenant moves out? How is vacancy risk managed?
Financing Source: Who is providing the financing for the project?
Property Taxes: Who is responsible for paying property taxes related to the solar system?
Transaction Fees: Are there any transaction fees? What are they?
Investor Returns: What returns can investors expect? Will you provide your financial model?
Roof Considerations: What are the details regarding roof warranties, structural integrity, insurance, and potential replacement?
Repair and Maintenance: What is the plan for repair and maintenance after installation?
Solar Equipment: What are the specifications of the solar equipment? Are Tier 1 modules used?
Purchase Option: Is there an option to purchase the system? If so, when and at what cost?
Due Diligence Process: What does the due diligence process involve?
Design, Engineering, and Permitting: What is the process for design, engineering, and obtaining permits?
General Contractor and Engineer: Who are the general contractor and engineer for the project?
Project Timing: What is the timeline for the project?
Legal Representation: Which law firm is handling the legal aspects of the project?

Asking these questions will help ensure you have a thorough understanding of the commercial solar project and its implications.

Planning for Solar: Why Early Preparation Matters

Does the idea of building a project and figuring out solar later resonate with you? From my experience in real estate development, treating solar as an afterthought is inefficient. It often led to costly and time-consuming adjustments, including negotiating lease amendments and spending over $4,000 to modify loan documents for solar financing. These issues could have been avoided with better upfront planning.

If you’re thinking about adding solar to your property, it’s essential to proactively incorporate relevant terms into your lease agreements and loan documents. Doing so will save you time, streamline the process, and provide you with more financing options when you’re ready to move forward. Be sure to consult with your legal team to tailor these additions to your specific situation.

Here’s a breakdown of what to consider:

Lease Agreements

Most leases only specify that the landlord must provide power but don’t detail its source. Including solar-specific clauses can ease future transitions. Here’s how to handle it:

– **Include a Clause for Future Solar Installations**: Add language stating that if solar is installed later, the tenant agrees to purchase electricity from the solar system through a Power Purchase Agreement (PPA) or similar arrangement.
– **Clarify Pricing Terms**: Ensure that the tenant’s electricity rate from the solar system will not exceed their current rate, or will be offered at a discount. Tenants generally welcome solar if it doesn’t cost more than their existing electricity.

Loan Documents

Communicate your solar intentions with your lender during the term sheet phase to maximize financing options and avoid costly future amendments.

– **Seek Consent for C-PACE Financing**: Request approval for future third-party C-PACE financing, which covers energy upgrades like solar. This will involve a property tax lien to secure the financing.
– **Discuss Financing Limits**: Your lender may impose limits on financing amounts, so address these points early and ensure they are documented in the Deed of Trust.
– **Permission for Solar Equipment**: Ask your lender to agree to solar equipment installed by a third-party investor and consent to any necessary easements or site leases for solar equipment on your roof.

Properly addressing these details early on will make the process smoother and more cost-effective when you’re ready to add solar to your commercial property.