The two lease structures that are most commonly used to finance solar collection installations are the Sale-Leaseback Structure and the Inverted Lease Structure.
The Sale-Leaseback Structure
Under this structure, the system is sold by the Developer to the Investor and then leased back to the Developer, and the Developer delivers the power to the Off-taker via a Power Purchase Agreement (PPA). The Investor would be the owner, and would claim the tax depreciation and the Investment Tax Credit (ITC) Grant. In addition, the Developer would have a purchase option at the end of the lease term.
The advantages of a Sale-Leaseback Structure include:
- Common project finance structure
- Provides 100% financing for the system
- Transfers 100% of the tax benefits to the Investor
- Sale-Leaseback Structure can commence up to three months after the system has been placed into service
- ITC Grant based upon FMV rather than Developer’s cost
The disadvantages of a Sale-Leaseback Structure include:
- Generally not available for Production Tax Credit (PTC) because of ownership requirements
- Developer’s purchase option is more expensive
- Tax-exempt or government entities can’t be the Developer or Investor
- Lease must qualify as a true lease for U.S. federal tax purposes
The Inverted Lease Structure
Under this structure, the Developer leases the system to the Investor. The Off-taker receives the energy from the system via a PPA, and in turn pays the Investor for the energy produced. The Developer may operate the system on behalf of the Investor pursuant to an Operation & Maintenance (O&M) Agreement. The Developer (as owner) claims any tax depreciation, and can elect whether the Investor can claim the ITC Grant. The Investor (as lessee) claims any tax deductions for the lease payments. At the conclusion of the lease term, the system automatically reverts to the Developer.
The advantages of the Inverted Lease Structure include:
- Popularity and understanding of lease structures
- Developer retains the residual interest
- Easy exit for the Investor
- Developer may capture some upside during lease term under an O&M Agreement
- ITC Grant based upon FMV of the system rather than the Developer’s cost
- Achieves separation of ITC Grant and depreciation
The disadvantages of the Inverted Lease Structure include:
- Generally not available for PTC because of ownership requirements
- Investor recognizes income equal to 50% of ITC Grant over initial five years of lease term
- Tax-exempt or government entities can’t be Developer or Investor
- Lease must qualify for credit pass-through election
- Lease must qualify as a true lease for U.S. federal tax purposes
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