Improving water and energy efficiency and adding renewable energy features (conservation improvements) to their homes are goals of many California homeowners to both reduce utility bills and help the environment. Solar panels and energy efficient furnaces are examples of the types of conservation improvements many homeowners make which can serve both goals.
The cost of such improvements can be significant. The state of California has a strong interest in assisting homeowners make energy and water conservation improvements to their homes to help alleviate the state’s water consumption problems and to reduce greenhouse gas emissions. To further these goals, California has instituted various financial programs to assist homeowners in making changes and additions to their homes. Private companies also offer reasonable leasing deals to allow homeowners to install solar panels with little or no upfront costs.
This Q&A will look at two common ways for homeowners to install conservation improvements: PACE financing for residential one to four units and solar leases. The Q&A will also specifically address the financing and transactional issues that arise from a homeowner’s use of these programs.
II. PACE Programs
i. General Information
Q 1. What are PACE Programs?
A The acronym PACE stands for Property Assessed Clean Energy. PACE programs are offered by various governmental entities to provide property owners with a means to finance conservation improvements and pay for them through an assessment on the owner’s property. PACE programs are available in most areas for both residential one to four unit properties and commercial properties. (This Q&A will only discuss residential PACE programs). While the name references clean energy, PACE programs also finance water conservation improvements. PACE programs are popular, although many homeowners don’t think of themselves as participating in a PACE programs as many of the most popular PACE programs do not include the acronym PACE in their names. For example, the HERO program, California First and Ygrene, are all PACE programs.
Q 2. Who administers PACE programs?
A Generally, PACE programs begin with a local public agency (such as a city, county or municipal utility district) adopting a resolution to create a Joint Power Authority (JPA) to authorize the creation of a PACE loan program. The JPA administers the program directly or may contract with a private entity to administer it. The JPA may authorize either local governments or third parties to make loans to homeowners for the conservation improvements.
Q 3. What types of improvements do PACE programs finance?
A Most programs have a list of allowable improvements. These lists contain a wide range of conservation improvements. While approved conservation improvements vary by program, most PACE programs include improvements such as solar panels, energy star rated core plumbing systems, duct replacement, electric vehicle plug-in stations, pool circulating pumps, water heaters, furnaces, etc.
Q 4. Where does the funding come from for the PACE programs?
A The programs are funded by either private or public sources, or a combination of both. A program could borrow money, for example, from the County, which is then paid back with interest as the lien is paid off by the homeowner. However, typically programs issue bonds to pay for the improvements which are then sold to private investors.
Q 5. How do the programs work?
A Although particulars vary between the programs, generally a homeowner who is interested in adding a conservation improvement to his or her home is first advised to have an energy audit conducted on the property to identify areas of potential conservation improvements. After that, a homeowner contacts the program and submits an application to find out how much he or she is approved to borrow. The homeowner then chooses which eligible improvements he or she wants to add to the home. Next, the homeowner selects a contractor, who usually has to be from a list of program approved or certified contractors. The entity administering the program will then enter into an agreement with the property owner where the entity agrees to pay the cost of the improvement. An assessment lien is placed on the property for the amount owed plus interest. After the work is performed, the PACE program entity pays the contractor. The property owner repays the entity for the improvements as special tax assessment on the property tax bill, generally over a 5 to 20 year period. The property owner pays the lien in the same manner as he or she would pay property taxes.
Q 6. Is the assessment lien similar to a property tax lien?
A Yes, the PACE lien is similar to a property tax lien. It shows up on the property tax bill and is paid at the same time and in the same manner as property taxes.
The PACE lien is also, similar to a property tax lien, a “super priority lien.” Such a lien is senior to all private liens including any deeds of trusts for existing mortgages.
Q 7. How much can a homeowner borrow?
A The amount that can be financed by a PACE lien is both limited by state law and the entity administering the program. State law requires that for a homeowner to participate in a PACE program, the combination of the assessment for the PACE lien and the property taxes for the property not exceed 5% of the market value of the property at the time of the PACE assessment. However, the homeowner is not given any relief should, due to a decline in prices should that amount go up after the assessment is made. (Streets and Highway Code section 5898.)
Most programs also currently limit the amount of any project to no more than 10% - 15% of the market value of the property and will not permit the amount of the lien and any mortgage debt to exceed the assessed value of the property at the time the lien is imposed. See for example, Sonoma County Energy Independence Program (SCEIP) Policy Manual and Western Riverside Council of Governments’ HERO Program Handbook.
Q 8. What other typical requirements does a homeowner have to meet to be eligible for PACE?
A Program eligibility requirements vary; however, generally the homeowner must meet the following requirements:
- The homeowner must be current on property taxes.
- The homeowner must have no judgment liens or federal or state tax liens.
- The homeowner cannot be in bankruptcy.
- The property cannot be subject to a bankruptcy proceeding.
- The homeowner must not be delinquent on any mortgages.
- The homeowner cannot have been late on their property taxes or have only been late a certain number of times. (For example, the Western Riverside County HERO program requires that a homeowner can only have been late once during the prior three years, or since the ownership of the property if less than three years).
- There are limits on the combined total amount of the principal amount of the assessment and the mortgage as a percentage of the value of the property. Typically the combined amount cannot be more than 90% of the value of the property. This precludes most “underwater” properties where the level of indebtedness exceeds the value of the property from being PACE eligible.
Q 9. How does a PACE loan compare to a home equity loan or a cash out refinance?
A Generally PACE financing is much easier to obtain compared to getting a home equity loan or doing a cash out refinance. The eligibility requirements are straightforward (see above) compared to the often complicated and at some times bewildering requirements of mortgage underwriters. Also generally, as long as program requirements are met, programs generally do not look at credit scores or employment history,
PACE financing is also true 100% financing. A homeowner usually does not have to contribute any money to “closing” the loan. Fees and other costs of the financing are usually bundled into the overall financing.
Finally, a PACE lien, can be transferred to a subsequent owner, unlike a mortgage. However, for reasons discussed in section iii, it may be difficult for a seller as a practical matter to actually transfer the lien to a subsequent purchaser.
The main disadvantage of PACE financing is that interest rates and costs are generally higher than mortgage loans, significantly more for homeowners with good credit. Current interest rates on PACE programs tend to be in the range of 6-9% compared to rates in the 3%-5& range as of the time of this Q&A for homeowners with good credit. In addition costs and origination fees can also be high. Those costs are usually bundled in with the principal cost of the improvement making the cost of financing quite high.
Certain PACE programs also carry prepayment penalties but certain mortgage options do as well.
Q 10. Do PACE programs have the same disclosure requirements as mortgage lenders?
A No. PACE programs are not lenders as defined in federal law and therefore, are not subject to the same Truth in Lending/RESPA disclosures required of residential mortgage lenders. Therefore, consumers need to be extra diligent about understanding the terms of their financing. Consumers can be tempted by the low monthly payments which may even be completely offset by energy and water bill savings and overlook the high cost of some PACE financing.
Concerns over the advertising of PACE programs are part of the reason certain Associations of REALTORS® have objected to PACE programs in their area.
Q 11. What are the tax benefits if any of a PACE improvement?
A Homeowners should check with their own tax attorney or accountant for specific advice on the impact of conservation improvements on their taxes. The following is meant as a general discussion of the tax issues surrounding PACE improvements and to provide ideas for a homeowner to discuss with a tax professional.
Depending on the specific improvement, the property may be eligible for various federal and state tax credits for energy efficiency or renewable energy improvements. For example, the federal residential energy efficiency property tax credit is available for certain specified energy improvements including solar panels.
It is unlikely that the assessment or the interest paid for the improvement is deductible. The IRS states that, “Assessments on real property owners, based other than on the assessed value of the property, may be deductible if they are levied for the general public welfare by a proper taxing authority at a like rate on owners of all properties in the taxing authority’s jurisdiction, and if the assessments are not for local benefits (unless for maintenance or interest charges)https://www.ftb.ca.gov/individuals/Real_Estate_Tax_Deduction/index.shtml. The voluntary assessment for a PACE lien is unlikely to fall under this category of taxes. Also, generally interest on loans taken out for home improvements and the home improvement itself are not tax deductible on a person’s residence.
Usually the cost of residential home improvements, however, adds to the property’s basis, possibly reducing capital gains on the property when the property is sold.
If the home is used partly for residential purposes and partly for business purposes or a rental, the cost of the improvement may be deductible or the homeowner may be able to depreciate the costs of the home improvement.
Some PACE programs have stated that that the cost of the conservation improvement and/or the interest on the improvements and/or the assessments are tax deductible. It is not clear what the basis is for these assertions. It is possible that one could argue that the interest on the PACE improvement is analogous to the deductible interest available for a home equity loan but there is no IRS or FTB ruling on that issue. If the PACE program a homeowner is interested makes a representation regarding deductibility, a homeowner is advised to get in writing the basis for that opinion and then contact his or her own tax professional for advice on this topic.
ii. Disclosure Issues
Q 12. Does a seller have to disclose that the property is subject to a PACE assessment?
A Yes. The C.A.R. residential purchase agreement (RPA-CA) requires a seller in paragraph 8.B.(4) to disclose to the buyer whether any items in paragraph 8.B. of the contract are subject to a lien or encumbrance. 8.B. includes all fixtures and various other features of the property including solar power systems, plumbing and heating fixtures, and any other item included in the sale.
Also, a seller has an obligation pursuant to paragraph 11. A. of the RPA-CA and the Seller Property Questionnaire disclosure in V. A. 10., to disclose all material facts about the property of which the seller is aware. This type of assessment would qualify as a material fact as it would affect the value or desirability of the property for the buyer.
Finally, a homeowner is required to provide a preliminary title report to the buyer which also will contain information on the lien (see next question). Pursuant to paragraph 14, the seller must provide the disclosures listed above within 7 days (if the default timeframe is left unchanged) or in a time specified by the parties.
Q 13. Do PACE liens and assessments appear on the preliminary title report?
A The PACE lien should appear on the preliminary title report. PACE liens are recorded and therefore will appear in the title search. Section 5898.24 of the California Streets and Highway Code specifically states that recordation of such documents must be done, in part to assist the seller in fulfilling their statutory disclosure obligations.
Also, if the lien has been on the property for a sufficient time, the lien and assessments should appear on the property tax bill which will then be picked up in the tax reports prepared and included as part of the NHD reports (which are required by the RPA-CA).
Some real estate licensees have stated that in their experience the liens are not being recorded in a timely fashion and are not showing up on the preliminary title report prior to close of escrow. If that were to occur and the seller failed to disclose the lien, the seller would still have liability for the failure to disclose the lien as discussed below. Also, certain PACE programs such as the HERO program have been working with title companies to make sure the liens are more clearly identified.
Q 14. What if the seller does not disclose the lien?
A The failure of the seller to disclose the lien would have the same consequence as the seller not disclosing any other material fact regarding the property, that is, the seller could be liable for any damages that the buyer suffers as the result of the seller’s failure to disclose. In this case, the damages could potentially be the dollar amount the buyer has to pay to clear the lien.
However, a transaction is unlikely to close with an undisclosed lien. The lien will likely appear on the preliminary title or an NHD report that includes a tax report. So the buyer should be aware of the lien prior to closing escrow. Furthermore, most conventional lenders will simply not lend when the there is a voluntary super priority lien on the property (see lending issues below).
Q 15. Is there potential liability to the listing or buyer’s agent on a transaction for the seller’s failure to disclose a lien?
A For reasons discussed above, it is unlikely a transaction would close without the buyer becoming aware of the assessment lien. If that somehow happened, however, it is unlikely that the agents would have any liability.
The agent has an obligation to disclose all material facts of which he or she is aware. If the seller who is under a contractual obligation to disclose material facts does not properly disclose a material fact, it is hard to see how the listing agent would know of, or could know of, the lien on the property, and therefore, there should not be liability to the listing agent for the seller’s failure to disclose.
The same reasoning would apply to a buyer’s agent as well. So the buyer’s agent should also not face liability. However, the buyer’s agent unlike the listing agent also has a fiduciary duty to the buyer. Attorneys for buyers will always try to argue that the fiduciary duty is very broad and that the buyer’s agent should have warned the buyer of a particular risk. To be extra cautious, a buyer’s agent in areas where PACE liens are common may wish to warn the buyer about the possibility of PACE liens. C.A.R. may add warning language on this issue to the standard forms in the near future.
iii. Financing and Transactional Issues
Q 16. Currently can an owner of a property with a mortgage enter into a PACE agreement without violating his or her loan terms?
A The ability of a homeowner to enter into a PACE agreement and whether or not entering into such an agreement with the lender would violate his or her loan terms will depend on the terms of the note entered into between the borrower and the lender. Typically most borrowers with conventional mortgages have mortgages which conform to Fannie Mae or Freddie Mac guidelines. The uniform security instruments used for deeds of trust for Fannie Mae and Freddie Mac backed loans (which represent the majority of conventional home mortgages) prohibit the borrower from creating liens which take priority over the lender’s lien without the consent of the lender. See FHFA Statement on Certain Energy Retrofit Loan Programs, July 6, 2010.
As of July 6, 2010, the Federal Housing Finance Agency (FHFA), the conservator and regulator of Fannie Mae and Freddie Mac, directed Fannie Mae and Freddie Mac to make sure all loan documents require approval or consent for a PACE lien. See the aforementioned FHFA Statement.
Also, note that many conventional loans, even if not intended to be sold to Fannie Mae or Freddie Mac, will be made to conform to their standards.
Therefore, generally a borrower cannot enter into such an agreement if they have a conventional loan which conforms to Fannie Mae or Freddie Mac guidelines, without the consent of the lender, which is unlikely to be given. As for loans which do not conform to Fannie Mae or Freddie Mac guidelines, while it is possible that they omit such provisions, it is not very likely.
The HERO PACE program is now offering to subordinate it’s liens in certain instances, generally for a fee. Note that this is not a true subordination as California by law gives the assessment lien a super priority. Rather HERO is contractually modifying its rights to allow the lender to maintain an effective higher priority. If the PACE lien is subordinated, the buyer may be able to enter into a PACE agreement and obtain consent from a conventional lender. Homeowners in areas with HERO PACE programs should inquire with the entity and their lenders to see if such an agreement would allow the homeowner to enter into a PACE financing agreement without violating their loan terms.
FHFA however, has said that for liens made prior to July 6, 2010, that Fannie Mae and Freddie Mac would not enforce the prohibition against such liens in the uniform security instrument. Again, see the aforementioned FHFA Statement.
Q 17. Do PACE programs require the lender to approve the PACE lien?
A Generally not, however, some programs do require the owner of the property to sign a certification confirming that the owner has the lender’s approval to enter into the PACE agreement.
Q 18. What would be the consequence if a borrower enters into a PACE lien agreement in violation of his or her loan terms?
A The lender could in accordance with the loan terms demand that the owner pay off the lien, and if the owner does not, could declare the loan in default and pursue a foreclosure action. However, to date it does not appear that lenders have taken such actions.
Q 19. Can homeowners with a PACE lien refinance their property?
A A person with a PACE lien which has super priority will not be able to obtain refinancing with a loan which conforms to current Fannie Mae or Freddie Mac guidelines, which again would represent the vast majority of conventional refinancing. Fannie Mae and Freddie Mac policies prohibit from purchasing a mortgage with a PACE lien on it. This greatly limits, if not eliminates, the ability of a borrower to refinance the property if there is a PACE super priority lien. (Statement of the Federal Housing Finance Agency on Certain Super Priority Liens). Certain programs have advertised that many homeowners have been able to refinance their property with PACE liens, but it is likely most of those were done prior to July 6, 2010 or the homeowners are using non-conventional financing which may carry higher rates. (FHFA Statement on Certain Energy Retrofit Loan Programs July 6, 2010).
The HERO PACE program is now offering to subordinate it’s liens in certain instances, generally for a fee. Note that this is not a true subordination as California by law gives the assessment lien a super priority. Rather HERO is contractually modifying its rights to allow the lender to maintain an effective higher priority. FHFA has not approved this subordination agreement, however, it is possible that if the PACE lien is subordinated the homeowner may be able to then refinance their homes with conventional financing. Homeowners in areas with HERO PACE programs should inquire with the program regarding the specifics of the subordination agreement and with potential lenders to see if the agreement would allow for a conforming conventional loan.
Q 20. Can a person with a PACE lien sell their property with the lien?
A Yes. However, a homeowner with a PACE lien will have difficulty selling his or her property with the PACE lien on it to buyers with conventional loans. As discussed above, Fannie Mae and Freddie Mac are prohibited from purchasing a mortgage with a PACE lien on it. Therefore a buyer who is using conventional financing is most likely going to be unable to purchase a home with the lien, as most conventional mortgages will conform to Fannie Mae and Freddie Mac guidelines.
Sellers would be limited to those persons who are cash buyers, or buyers who have loans from lenders who make loans which do not conform to Fannie Mae or Freddie Mac guidelines and only where such loans omit provisions restricting the ability to borrow with the super priority lien.
The HERO PACE program is now offering to subordinate it’s liens in certain instances, generally for a fee. Note that this is not a true subordination as California by law gives the assessment lien a super priority. Rather HERO is contractually modifying its rights to allow the lender to maintain an effective higher priority. While FHFA has not approved these subordination agreements, it is possible that if the PACE lien is subordinated, the buyer may be able to use a Fannie Mae or Freddie Mac conforming loan. Homeowners in areas with HERO PACE programs should inquire with the entity regarding the particulars of the subordination agreement and with potential lenders to see if that agreement will allow for a buyer to obtain a conventional mortgage which conforms to Fannie Mae and Freddie Mac guidelines.
Q 21. What are the consequences of not being able to sell to buyers who are using conventional financing which conform to Fannie Mae or Freddie Mac guidelines?
A It is likely to considerably reduce the number of eligible buyers for properties, potentially affecting the purchase price. Also for those buyers who are able to obtain loans, the amount of the assessment lien would most likely be calculated into the debt to income ratio reducing the amount of the loan that can be obtained.
Q 22. Has the State of California taken any steps to remedy this problem with FHFA?
A Yes, two steps have been taken; however, neither has changed the position of FHFA. The first step was that the state sued FHFA in court but was not successful. (County of Sonoma, et al. v. Federal Housing Finance Agency, 710 F.3d 987 (2013)).
The second is that the California Alternative Energy and Transportation Financing Authority (CAEATFA) was authorized by SB 96 in September of 2013 to set a up a program to compensate any lenders for any losses suffered as a result of the super priority of a PACE lien, if the lender were forced to foreclose on a property. However, this loss reserve program has not changed the FHFA stance on PACE liens. The Director of the FHFA stated in a letter dated May 1, 2014 that that the program enacted by the state “is not an adequate substitute for…mortgages maintaining a first lien position and FHFA also has concerns about the Reserve Fund’s ongoing sustainability.” (Letter dated May 1, 2014 From Melvin Watt To Governor Jerry Brown).
Q 23. Why do some REALTORS® oppose PACE financing?
A Most REALTORS® do not have a problem with the goals of PACE financing or the program itself. Rather, there is concern that due to the PACE programs only stressing the positive aspects of their programs in advertising and not any of the issues regarding the transfer of the lien or the cost of financing, that homeowners are not making a fully informed decision when they elect to utilize PACE financing. Three boards in Southern California’s Inland Empire, The Inland Valleys Association of REALTORS®, The Inland Gateway Association of REALTORS® TIGAR, and Southwest Riverside Association of REALTORS® all adopted a motion opposing the PACE program in their area until adequate consumer protections and disclosures are adopted.
Partly in response to that motion, the PACE program in that area and other PACE programs have reached out to try to voluntarily address the REALTOR® concerns and have constructively engaged with the REALTOR® community.
Q 24. What is the position of the Federal Housing Administration (FHA)?
A FHA supports the goals of PACE financing and has recently stated that they intend to issue formal guidelines to assist homeowners who wish to utilize PACE financing.
FHA will apparently be coordinating with FHFA and has stated that the guidelines that it issues will at minimum include:
- Lien Position: Only PACE liens that preserve payment priority for first lien mortgages through subordination;
- PACE payment, structure, and term: PACE financing must be a fixed-rate, fully amortizing loan;
- Eligible Properties: PACE assessments must be attached to single family properties, as defined by FHA, which are 1- to 4-unit dwellings, including detached, semi-detached and townhome properties;
- Equity Requirement: PACE liens that preserve payment priority for first lien mortgages will be eligible for financing that does not exceed FHA’s maximum combined loan-to-value (CLTV) ratio;
- Record Keeping: PACE liens must be formally recorded and be identifiable to a mortgage lender through a title search;
- Additional Consumer Protections: PACE programs must comply with applicable federal and state consumer laws and should include disclosures to and training for homeowners participating in the program.
Q 25. What is the likelihood of the transferability issues and consumer disclosure issues surrounding PACE being resolved?
A PACE programs, REALTORS®, and various governmental and financing entities have all been trying to resolve the various issues surrounding PACE and in particular the transferability and disclosure issues. Many are optimistic that the pending FHA guidelines, which are meant to address many of the central issues of PACE financing, may provide a template to resolve outstanding issues.
Q 26. What will a seller need to do if she or he wishes to sell the property to buyers with conforming conventional financing or refinance a home with a loan conforming to Fannie Mae or Freddie Mac guidelines?
A Give the current positon of FHFA, the seller will most likely need to pay off the lien. Certain PACE assessments are not that large, and paying them off might and not be much of a burden regardless of the level of the seller’s equity.
However, sellers who invested in costly improvements might find paying of the lien to be a significant hardship. Although a seller with sufficient equity might still find this a viable option even with a costly improvement. It is also possible that the improvement may have helped increase the value of the home, making the payoff less painful. The seller should also consult with the PACE program administrator about possible subordination.
The HERO program is now offering to subordinate it’s liens in some instances, generally for a fee. If the PACE lien is subordinated, the homeowner may be able to then refinance their homes or sell their homes to buyers with financing that conforms to Fannie Mae and Freddie Mac guidelines. Note that this is not a true subordination as California by law gives the assessment lien a super priority. Rather HERO is contractually modifying its rights to allow the lender to maintain an effective higher priority. However, FHFA has not approved these subordination agreements and so homeowners in areas with HERO programs should inquire with the entity regarding the particulars of the subordination agreements and with lenders to see if such an agreement would make the property eligible for buyers to obtain loans or for the homeowner to obtain refinancing with loans that conform to Fannie Mae and Freddie Mac guidelines.
If subordination is not viable, and a payoff is necessary the seller should check with the program regarding the payoff costs and if applicable any prepayment penalties and if the program would consider waiving those penalties. Some programs recognizing the need to pay these liens off at sale take steps to help facilitate the payoff process.
Q 27. What should a REALTOR® do when representing a seller with a PACE lien?
A If a seller with a PACE lien wishes to sell their property and not just to cash buyers, it is likely the seller will have to pay off their lien as discussed above.
The REALTOR® and or seller should as a first step contact the PACE provider to discuss payoff amounts, any prepayment penalties and whether there might be a waiver of such fees, as well as the possibility of any subordination.
If subordination is possible, the information should be made available to the buyer, for the buyer to see if such subordination may be acceptable to the buyer’s lender. However, note that as FHFA has not approved such agreements, it is still likely the seller will need to be prepared to pay off the lien.
Q 28. Given the financing issues currently surrounding PACE, for which homeowners are PACE programs most appropriate?
A PACE financing remains an easy way to add conservation improvements to the home. They are most appropriate for the following type of homeowners:
Those who have sufficient equity or whose improvements are not that costly and therefore, would not have difficulty paying off the lien if they need to sell or refinance their homes.
Those who intend to remain in their homes for the duration of the assessment and do not plan to refinance.
Those whose PACE programs will offer to subordinate the PACE lien, in a manner acceptable to lenders, if the owner needs to sell the property or refinance. (However, as stated in question 20, the subordination agreement currently being offered by the HERO PACE program has not to date been approved by FHFA.)
Q 29. Are there financing alternatives for a homeowner who wishes to make conservation improvements to their homes?
A Homeowners with sufficient home equity could go ahead and take a second mortgage out on the property to pay for the conservation improvements. The interest on second mortgages (subject to certain limits) is generally tax deductible. Also, assuming the money from the second mortgage is used solely for home conservation improvements, such improvements would likely add to the tax basis of the property, thereby reducing the capital gain on the sale of the home.
In addition to traditional second mortgages, FHA also has a program that can assist eligible homeowners. The Energy Efficient Mortgage Program allows homeowners to finance the cost of adding energy efficient features to a house as part of an FHA insured refinance of a property. More information on this program can be found at //portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/eem/energy-r .
The downside for many homeowners is the requirement of going through all the hoops and credit checks involved in getting a mortgage, which could make obtaining a loan difficult for some homeowners.
III. Solar Leases
i. General Information
Q 30. What are solar panel leases?
A One way for a homeowner to obtain the benefit of solar panels is to lease the panels, rather than purchasing them. If a homeowner wished to purchase them and install them on the property then the homeowner could simply pay cash, or use other means of financing them including home equity loans or PACE programs where available.
Q 31. Why would people prefer to lease rather than buy solar panels?
A Solar leases, like automobile leases, allow a homeowner to get solar panels in place without a big upfront expenditure. Rather than have to obtain the funds to pay for the installation and maintenance of the panels, the homeowner can often get panels installed without any upfront payments and the leasing companies will maintain the solar panels as part of the lease payments. The homeowner benefits because the energy savings from the installation of the panels is greater the cost of the lease payments.
Q 32. What makes more sense financially to purchase or to lease solar panels?
A The economics of leasing versus buying is difficult to assess as a general matter. For example factors which would weigh into such a decision would be whether the homeowner requires financing and what the interest payments would be, and whether or not the costs of the lease will rise over time as some solar companies raise the monthly fee yearly, as well as the availability of state and federal tax incentives. Another consideration is that purchased solar panels are also included in appraisals of the value of the home for conventional financing (see question 31). A homeowner should spend time comparing the costs and benefits before being deciding whether to purchase or lease.
Q 33. Is a leased solar panel system real property?
A As these are leased items they are generally treated as personal property rather than real property fixtures.
Q 34. Would a seller have to disclose whether the solar panels are leased or owned?
A Paragraph 8.(B)5. of the RPA-CA requires a seller to disclose if any of the items in paragraph 8.B.(2), which includes solar power systems, are leased with seven days after acceptance (unless a different period is agreed to by the parties). The review of the lease documents and the buyer’s ability to qualify for any lease is a contingency of the RPA-CA.
Furthermore question C.2. of the Seller Property Questionnaire requires the seller to disclose if a solar system on the property is leased and then to explain the answer.
Q 35. Does a solar lease show up on the preliminary title report?
A The solar energy systems installed are usually secured by a recorded UCC-1 filing and therefore should show up on the preliminary title. If for some unusual reason the solar system is not secured by such a filing then it is possible there would be no indication of the solar lease on the preliminary title report.
Q 36. What if the seller does not disclose the lease?
A The failure of the seller to disclose the lease would have the same consequence as if the seller did not disclose any other material fact regarding the property, that is, the seller could be liable for any damages that the buyer suffers as the result of the seller’s failure to disclose. However, in the case of a solar lease, it is unlikely such a situation would occur as the seller’s failure to get the buyer to assume the lease could result in the seller being liable for the lease payments and the costs of the possible removal of the panels from the property by the solar company pursuant to the lease terms. Furthermore, the preliminary title report as discussed above which the seller must provide to the buyer should disclose to the buyer the presence of a solar lease.
Also, as solar power systems are generally secured by a UCC-1 filing, most lenders will simply not lend on the property unless the UCC-1 filing is temporarily released, so that the mortgage takes priority, which the solar company will generally not do unless there is an assumption by the buyer or the lease obligation is otherwise handled.
Q 37. Is there potential liability to the listing or buyer agent on a transaction for the seller’s failure to disclose a lien?
A The agent has an obligation to disclose all material facts of which he or she is aware. If the seller who is under a contractual obligation to disclose material facts does not properly disclose a material fact, it is hard to see how the listing agent would know of, or could know of the lease on the property and therefore, there should not be liability to the listing agent for the seller’s failure to disclose.
The same reasoning would apply to a buyer’s agent as well and so the buyer’s agent should also not face liability. However, the buyer’s agent unlike the listing agent also has a fiduciary duty to the buyer. Attorneys for buyers will always try to argue that the fiduciary duty is very broad and that the buyer’s agent should have warned the buyer of a particular risk. To be extra cautious, a buyer’s agent who sees solar panels on a home may wish to advise the buyer about the possibility of solar lease. However, as stated above it is highly unlikely that a transaction would escrow without the buyer discovering there is a lease prior to close.
iii. Financing Issues
Q 38. Are solar panels included in the sale of the home?
A Leased solar panels are likely to be treated as personal property, however under the RPA-CA, pursuant to paragraph 8.B.(2) all solar power systems are included in the sale.
Q 39. Does a buyer have to accept the solar lease?
A No the buyer’s review of and ability to qualify for any solar lease is a contingency of the RPA-CA as stated in paragraph 8.B. (4) of the RPA-CA. A buyer may not want a property with a solar lease, or may find the terms of the lease unacceptable or may not qualify for the lease and can cancel the agreement.
Q 40. What if a seller could not find any buyer who wishes to or qualifies to assume the lease?
A The seller would have a couple of options. A seller could pay the costs of an early termination of the lease, which could be substantial, for those buyers that do not qualify or do not wish a lease. The seller could also lower the purchase price of the home or give a buyer a cash credit at close to make assuming the lease more desirable to a potential buyer. Some companies allow a buyer with weak credit to put a deposit to make up for the poor credit score and the seller could offer to pay that.
Q 41. Does a buyer have to have a certain credit score to qualify for a lease?
A Some leasing companies require that the buyer meet certain credit qualifications. Presumably most persons who are able to get a loan would qualify, however, there are cases where the buyer has not met the credit standards of the leaseholder and therefore is ineligible to assume the lease.
However, some solar companies are now trying to address this issue by allowing a buyer who otherwise qualifies to purchase the property with the solar power system to put a deposit to offset their credit situation.
Q 42. Do solar panels increase the appraised value of the property?
A Most conventional loans conform to Fannie Mae and Freddie Mac guidelines in their underwriting. Fannie Mae guidelines do not allow an appraiser to consider leased solar panels in the appraised value of the property. Solar panels which are owned are treated not treated in the same way and would be appraised pursuant to traditional underwriting guidelines. See Fannie Mae Selling Guide B2-3-04: Special Property Eligibility Considerations (12/16/2014).
Q 43. How are the costs of the lease treated by the buyer’s lender?
A The monthly cost of the lease is considered in assessing the buyer’s debt to income ratio. This would not apply to a power purchase agreement if the payment goes just for the payment of the energy.
A power purchase agreement is one where a third party installs and owns the solar panels and the homeowner pays for the cheaper power generated thereby reducing the buyer’s energy costs. Such an agreement is more like a way to simply pay a lower utility bill and utility payments generally do not affect the debt to income ratio. Fannie Mae Selling Guide B2-3-04: Special Property Eligibility Considerations (12/16/2014) https://www.fanniemae.com/content/guide/selling/b2/3/04.html
Q 44. Shouldn’t the cost of the lease in the debt to income ratio be reduced by the average energy savings?
A There is an argument for that, but that is not is in the current Fannie Mae guidelines.
Q 45. What should a homeowner interested in a solar lease ask the solar company regarding resales?
A Homeowners who are interested in solar leases may wish to ask the solar companies:
- What are the credit and other requirements required for a buyer to assume the solar lease?
- Does the company offer alternatives to buyers with weak credit, such as placing a cash deposit?
- Does the solar company have a dedicated team or other procedures to facilitate the transfer of leases to buyers?
- How long does it take typically for the lease transfer to occur?
- Can a lease be transferred easily within the timeframe of a thirty day escrow?
Q 46. What should a REALTOR® do when selling a home with a solar lease?
A The REALTOR® or seller should immediately contact the solar company to find out the various options available when the property is being sold such as:
- Requirements and procedure for a buyer to assume the lease.
- If the seller wants to take the panels to a new residence is that a possibility?
- Payoff amounts, if the seller needs to payoff the lease.
Assistance with the escrow process unfortunately varies between companies. Some companies now have dedicated teams to make the escrow process as smooth as possible which is hopefully a trent that will continue to grow.
Q 47. Where can I obtain additional information about this and related subjects?
A This legal article is just one of the many legal publications and services offered by C.A.R. to its members. For a complete listing of C.A.R.'s legal products and services, please visit car.org/legal.
Readers who require specific advice should consult an attorney. C.A.R. members requiring legal assistance may contact C.A.R.'s Member Legal Hotline at (213) 739-8282, Monday through Friday, 9 a.m. to 6 p.m. and Saturday, 10 a.m. to 2 p.m. C.A.R. members who are broker-owners, office managers, or Designated REALTORS® may contact the Member Legal Hotline at (213) 739-8350 to receive expedited service. Members may also submit online requests to speak with an attorney on the Member Legal Hotline by going to //www.car.org/legal/legal-hotline-access/. Written correspondence should be addressed to:
CALIFORNIA ASSOCIATION OF REALTORS®
Member Legal Services
525 South Virgil Avenue
Los Angeles, CA 90020
The information contained herein is believed accurate as of September 30, 2015. It is intended to provide general answers to general questions and is not intended as a substitute for individual legal advice. Advice in specific situations may differ depending upon a wide variety of factors. Therefore, readers with specific legal questions should seek the advice of an attorney. Written and revised by Sanjay Wagle, Esq.