Financing a Solar Self-Storage Project: Options and Opportunities

December, 2011

Some see renewable energy as the most recent fad, embraced by hippies and environmentalists, but the reality for many storage owners is that solar just makes economic sense. Climate controlled units that produce obscene electricity bills mixed with an abundance of roof space create an ideal environment to invest in solar energy. Throw in federal, state and utility-based incentives and you can generate a pretty nice return on investment.

The hurdle for many, however, remains the upfront capital costs and the question "how am I going to pay for this?" With costs in the hundreds of thousands of dollars, occasionally approaching millions, it's difficult to imagine funding such a project out of cash. Alas, not to worry storage owners, there are several ways to either forego capital expenditures completely or to finance the installation using traditional debt and equity.

Power Purchase Agreements

The most common structure for storage owners is to set up a power purchase agreement (PPA), a contract by which the property owner agrees to purchase all of the electricity produced by the system at a set price. Under this structure a third-party PPA developer / installer funds the installation in full and is entirely responsible for the maintenance of the system. From an owner's perspective, this situation is nearly ideal because no capital is being deployed to install the system and there is no production risk if the solar panels do not produce electricity as advertised. In a PPA structure, all of these risks fall on the developer.

A typical PPA structure will price the solar-generated electricity below the retail rate charged by the local utility. This is a win-win for the storage owner; not only do they avoid any capital expenditures but they are also able to decrease their monthly utility expense, however subtle that may be. Of course, the rate offered by the developer is dependent on varying factors including local solar incentives and the level of competition among PPA developers.

Some states such as New Jersey offer generous incentive programs that allow PPA developers to aggressively compete for business. Furthermore, because PPAs must compete against local utility rates, states with expensive electricity rates (CA, HI, the northeast US) are prime territory for PPA developers. In other parts of the country where electricity is particularly cheap (South and Midwest), it is more difficult for PPA developers to compete.

Generally PPA contracts include an annual rate escalation of 1% to 2%; this is in-line with historical retail electricity rate inflation, so theoretically PPA rates should parallel retail electricity increases. It is important to note that most local utility rate structures are very complex, sometimes with tiered rate structures or region-specific rates, and therefore it is necessary to have a good understanding of your current electricity rates before signing a PPA contract.

PPAs are long term contracts, varying from 10 to 25 years, with the norm being 20 years. There are several areas of negotiation to consider when signing the PPA including but not limited to: annual rate escalators; early purchase options; and minimum kilowatt hour (kWh) production limits by the developer.

Some of the largest PPA vendors are SunEdison (who created the PPA structure in 2003), MMA Renewable Ventures, SunPower, Regenesis, Solar Power Partners, Tioga Energy, and Recurrent Energy. Generally speaking, there are more active players in markets where solar typically "works"; these markets include California, the Sun Belt states of AZ, UT, and NM, and the northeast (especially New Jersey). Finally, for owners contemplating a PPA structure is it critical to shop around, since per kWh prices can vary dramatically among PPA contract providers.

Solar Leases

Solar leases are similar to PPAs in that they fully eliminate any up front capital costs. Under this structure the property owner leases the solar installation from the lessor at a fixed monthly cost, and subsequently collects all of the offset electricity benefits. The major difference under this structure is that the owner is now liable for the electricity production of the solar system. More specially, if the system does not perform as well as was anticipated, or if it is a particularly cloudy in a given month and the system does not generate the energy expected, the offset electricity costs may not be sufficient to make up for the monthly lease payment in that month. On the flip side, in months when production exceeds expectations, the benefits should more than offset the monthly lease expense.

There are two distinct types of operating leases prevalent in the market, both of which create different tax implications for the owner. A "capital lease" is structured such that the property owner (lessee) is effectively considered the owner of the system. Under this lease structure the owner collects all of the federal and state tax incentives, however they must also list the solar array (as an asset) and the lease payments (as a liability) on their balance sheet.

The second and more common type of lease is an "operating lease." Under this structure, the lessor "owns" the system, and therefore the property owner does not book the installation on their balance sheet, but rather treats the lease payments as an operating expense. It is critical to understand the tax consequences when deciding which lease is best for your facility, and it is recommended that you seek the counsel of a qualified CPA when contemplating between these two lease structures.

Traditional Balance Sheet Financing

For owners with adequate cash on-hand, financing the installation with equity would certainly be an option, however given that most may not have that kind of equity ready to be deployed at a moment's notice, it is also possible to use traditional debt financing to fund the installation. Yves Bienvenu of Global Infrastructure Asset Management is an intermediary that specializes in arranging capital structures to finance large-scale renewable energy projects. Bienvenu suggests that "if your local bank is your current lender, they are likely the best option for solar financing as they are already familiar with the property. Having a single lender finance both your real estate and your solar project avoids any priority lien situations on your solar installation."

Financing a solar installation is very similar to financing traditional real estate as lenders will want to perform a credit analysis to determine financibility and will structure the rate and terms accordingly. If the lender is comfortable with the project, leverage can reach as high as 80% of cost. Unfortunately, however, many local lenders are not familiar with renewable energy projects, neither from an investment nor technology perspective. Because of the general lack of knowledge about renewable projects, debt financing at the commercial scale is sometimes difficult to achieve, often making PPAs and solar leases a more attractive option.


The newest financing vehicle for solar energy is the PACE (Property Assessed Clean Energy) program. PACE financing allows property owners to borrow money from their local government to fund the cost of renewable energy projects. Under PACE, the amount borrowed is then repaid via a special assessment on property taxes. The major benefit of PACE is that the assessment follows the real estate and not the owner, thereby eliminating any complications upon a sale of the property. As with other forms of solar financing, the first lien holder (generally the lender if the property has an existing mortgage) must approve the additional debt to be incurred under the PACE project. Residential PACE programs face obstacles because Fannie Mae and Freddie Mac refuse to purchase mortgages from homes with PACE assessments, citing priority lien issues. Fortunately, however, this does not apply to non-residential properties.

The commercial PACE program is currently only available in a few communities in California (San Francisco, Palm Desert, and Sonoma County) and select communities around the nation (see to see if a program exists in your jurisdiction). While PACE is still in its infancy, it is anticipated that the success of these programs will be the catalyst for expansion into communities across the nation.

If all of this seems too complex, it may be worthwhile to engage an advisor who can create a project rate of return based on energy usage, local electricity rates, and state and local incentive programs among other factors. They can present an array of options from local PPA developers, solar lessors, and potential bank financiers. As with any business decision, the focus is on profitability and return and for some, an investment in solar just might make good business sense.

Inside Self-Storage December 2011

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