The following information can help educate you about a few types of segment flat leases and profit sharing arrangements available and the growing incentives for segment usage.

SOLAR OVERVIEW

The solar industry in the United States is different from other countries in that there isn’t only one country-wide policy on solar encouragement in the US. Instead, the structures of development are dependent on the encouragements of local, state and federal policies and incentives.

For solar segment property use, there are two main types or arrangements for the rooftop or other segment: A flat lease or a PPA (Power-Purchase-Agreement).
SOLAR FLAT LEASE

There are two main parties looking to flat lease rooftop rental space: Independent Power Producers and Utility Companies.

For Independent Power Producers, A Feed in Tariff (FIT) policy, which sets a guaranteed return for selling the energy to utility companies, is the most encouraging policy for flat leasing of rooftop. With this policy, rooftop space becomes valuable as a site to produce energy and sell it for profit.

Utility Companies are looking to flat lease rooftop space in order to build up distributed power generation and meet their Renewable Portfolio Standards (RPS) set on them by each state. An RPS tells the utility companies of each state that they must have a certain percentage of their energy produced coming from clean energy sources. There are also municipal utility companies and investor owned utility companies in addition to state utility companies that are flat leasing roofs due to local incentives.
SOLAR PPA

A Power Purchase Agreement occurs in states that allow for independent power production, but does not have a Feed In Tariff. So the solution is for independent power producers to own and operate equipment on a roof and sell the energy produced back to the owner of the property at a highly competitive (and usually set rate for a number of years), helping the owner save money on energy costs. In some cases, the independent power producer can sell the excess energy produced back to the utility company to earn a better return.

URBAN AGRICULTURE

Urban Agriculture, also known as Urban Farming or Urban Gardening, is a relatively new and emerging industry for food production in the United States. Michelle Obama, first lady of the US, highlighted the importance of Urban Agriculture when she installed a farm on the white house lawn in March of 2009.

The basic concept is to produce agriculture within city or suburban areas in order to sell to the population nearby. The average food in the US travels 14 days before it arrives at the destination for a point of sale. Transportation both increases the carbon footprint of the food produced, and increases the cost of the produce. Distributed agriculture, much like distributed solar, is a method of looking at rooftops and open space to produce what a population needs in close proximity to the population.

The encouragement of urban agriculture development comes from both policies on curbing “grey zones” (areas in cities where residents have no or limited access to produce), as well as city incentives for green roofs (city gives tax break or pays for some of installation). Green roofs is a term for putting plants (food producing or non food producing plants) on a roof so that when it rains, the rain water absorbs instead of running off the building creating storm water pollution. Additionally, green roofs stop the city from trapping heat from the sun, helping cool down the city. And finally, green roofs also help the building underneath with cooling the building.

There are two main types of structures for segment use: Flat Lease or Profit Share.
AGRICULTURE FLAT LEASE

With a flat lease, the commercial agriculturalist will rent the space from a property owner, then produce the food and sell to local grocery stores, farmers markets, Walmarts, and restaurants.
AGRICULTURE PROFIT SHARE

With a profit share, the commercial agriculturalist will split the profits of the produce sold with the owner of the property. There are many arrangements within this, some that involve some upfront cost for the owner, and some that don’t involve an upfront cost. It depends on the size of the project and the business model of the commercial agriculturalist. If it is a restaurant that is hosting the commercial agriculture on the roof, the restaurant may receive extremely well priced produce (picked fresh that day) and will be able to use the garden for marketing purposes to customers as the arrangement. Again, it really depends as the details are discussed with the real estate owner and commercial agriculturalist to find the best fit to benefit both.
STATES AND PROVINCES
BEST BUILDING CHARACTERISTICS
  • 20,000 sq. ft and greater of total space is optimal for Solar. This can be roof space plus adjacent open areas (open land, a parking lot, alternative structures)
  • 5,000 sq. ft and greater of roof space is optimal for Urban Farming
  • Owner occupied buildings or tenants with long term leases (20+ years)
  • Roof is less than 7 years old or you are considering re-roofing
TYPES OF PROPERTIES
  • Agricultural/Farms
  • Colleges
  • Condos
  • Convenience Stores
  • Data Centers
  • Department Stores
  • Government facilities
  • Health Clubs
  • Health Care Facilities
  • Hospitals
  • Hotels
  • Laundries
  • Manufacturing
  • Multi-Family
  • Office Buildings/Campuses
  • Radio and Television Stations
  • Restaurants
  • Schools (Public/Private)
  • Server Farms
  • Shopping Centers
  • Universities
  • Warehouses
  • Water Treatment Facilities
Canadian Legal Concerns

US Legal Concerns

Specialized Attorneys

PDF Guides
CANADIAN LEGAL ASPECT WITH A FEED-IN-TARIFF
Disclaimer: The following are articles reprinted with permission from the authors. SEGlet is not a legal representative, and encourages with every lease, power purchase agreement, or profit-sharing arrangement that you seek legal counsel. SEGlet is not affiliated directly with the attorney offices who have written these articles beyond re-printing permissions. SEGlet is not affiliated with any attorneys linked on this website in any of the following sections, but recognizes all attorney’s mentioned here of their public commitment to this industry’s unique legal concerns.

Gold in the Sunshine on Your Roof – Solar Facility Rooftop Leases

Dennis Daoust
Daoust Vukovich LLP
Ddaoust@dv-law.com
Direct: (416) 597-9339

Concern over greenhouse gas emissions (GHGs) has produced a new phenomenon – leases of rooftop space for the installation and operation of solar power facilities. Last May Ontario passed the Green Energy Act. One of its main objectives was to establish a feed-in tariff program (a "FIT" Program) whereby the Ontario Power Authority (the "OPA") committed to purchase, at very favourable rates, all of the green energy produced in the Province. In response to this incentive, owners of buildings are likely to be approached by solar power companies wishing to lease rooftop space to install and operate green energy systems.

Pros and Cons
Once an application is approved by the OPA, the applicant must sign a power purchase contract with the OPA for a term of 20 years. An important component of that contract is the transfer to the OPA of all of the environmental attributes associated with the project. As a consequence, any carbon credits and renewable energy credits belong to the OPA and not to the solar power company or the landlord of the property on which the solar power facility is installed. Carbon credits arise under "cap and trade" systems such as that which Ontario intends to impose. Under a cap and trade system, energy generating plants, commercial buildings, factories and other facilities are restricted to a prescribed annual allotment of permitted tonnes of GHGs emitted by their operations. If the annual allotment is exceeded, the facility owner must pay a fee or fine to the regulating authority unless it is able to purchase carbon credits. Carbon credits arise where a facility succeeds in keeping or reducing the GHGs that it emits below its allotment. Carbon credits can be bought and sold on a commodities market. Renewable energy credits occur where an authority imposes a requirement that a stated percentage of energy used must be provided by renewable energy sources such as solar power, wind power, biomass and similar renewable energy facilities. To meet annual targets, users of energy can purchase renewable energy directly from a supplier or they can purchase credits that are used to fund renewable energy products. Twenty-nine U.S. states and the District of Columbia have established regulatory schemes mandating that the energy production of the state must be from renewable energy. U.S. federal legislation is expected to establish a national program and Canada will almost certainly follow suit. At this time, environmental attributes do not have a large value, but it is anticipated that their value will increase (perhaps very dramatically) within the not too distant future. Accordingly, before leasing out a roof to a solar power company, consideration should be given to the potential value of those environmental attributes. In the absence of favourable tax treatment, government grants or other forms of incentive, the cost of installing a solar power facility on a roof might make the investment unfeasible. Typically, a building, even one with a large roof, would provide no more than 20% of its energy consumption through rooftop solar panels. Furthermore, at present, the cost of electricity purchased from the grid is still relatively low. However, as the volume of solar power facilities production increases and anticipated developments in technology take hold, it is expected that the cost of installing solar panels will reduce substantially. It may be in the interest of a building owner to hold off signing away the ability to install its own solar panels and to use its own electricity so that it can benefit directly from the carbon credits and renewable energy credits that the project gives rise to. On the other hand, the time frame during which environmental attributes are likely to become valuable, and the extent to which they become valuable, is uncertain. It may take several years before the markets mature and trading produces substantial benefits. Also, at the end of the term of the rooftop lease (typically a 20 year period), a building owner may find that the ownership of an intact and functioning solar power facility represents a substantial benefit, particularly when the building owner has not itself been required to contribute to the cost of the installation or maintenance. Solar power facilities will normally have a useful life well in excess of 20 years. The building owner will be able to deal with the environmental attributes in whatever way it wishes at the end of the lease and at the same time will enjoy the benefit of an essentially free form of renewable energy on its roof. Alternatively, the building owner may choose to itself enter into a power purchase agreement with the OPA at the end of the term of the rooftop lease, assuming the FIT Program still exists. A further benefit flows from the fact that the solar panels will normally reduce energy costs in the building due to the shading effect of the panels. Also, depending on the type of installation, the panels may extend the useful life of a roof by serving as a buffer from the elements.

Some Special Concerns
Assuming a building owner has elected to lease its roof to a solar power company, several concerns must be addressed:
• Non-disturbance agreements, consents or acknowledgements may be needed from mortgagees of the building or from ground landlords.
• The solar equipment may be subject to a personal property security interest or lien in favour of a lender. The rooftop tenant's lender will seek agreements from the landlord and the owner of the building as well as the mortgagees of the building to the effect that the solar power facility will not be treated as a fixture and will remain the property of the rooftop tenant. The lender will also seek an opportunity to cure defaults of the rooftop tenant to avoid cancellation of the lease. A forbearance commitment and an opportunity to assign or transfer the rooftop lease to the purchaser of the solar power facility may also be required.
• The production, review and approval of detailed engineering drawings, inspection rights, supervision rights and adherence to approved plans as well as all governmental requirements will be important elements of the rooftop lease, particularly with regard to the integrity of the roof and structure of the building.
• Alteration rights will also be contentious. The tenant will need to limit changes to the landlord's property that would interfere with sunlight, while the landlord will be concerned about alterations that might affect its building.
• Particular attention to maintenance and repair obligations must be taken to ensure that the solar power facility is always maintained properly and safely. Solar power facilities will normally have a life expectancy well beyond the term of the lease and the landlord will be concerned about asset preservation.
• A sizeable deposit will be needed to protect against damage to the building, and possibly the cost of removing the solar panels and restoring the building at the end of the term.
• There are specific insurance requirements, such as environmental damage and environmental impairment coverages, as well as boiler and machinery insurance. Risk transfer clauses, such as releases and indemnities, must also be specifically tailored.
• The need to relocate the solar power facility, or components of it, in order to allow the landlord to maintain and repair the roof or to make alterations to the building must be negotiated.
• Snow removal and snow disposal will be a concern.
• Damage and destruction and rebuilding obligations associated with the building and the facility, and various other concerns need to be addressed.
These items represent a small sample of specific concerns related to this type of lease. Daoust Vukovich LLP is able to assist in addressing all of the relevant concerns as it has investigated all leasing aspects of this emerging business opportunity.

AMERICAN/USA LEGAL ASPECTS of POWER PURCHASE AGREEMENTS
Disclaimer: The following is a Webinar from Pepperlaw that was conducted on May 13, 2010 and referenced here for its simplicity of use. It explains Power Purchase Agreements, about hosting Solar Projects, Pro’s and Con’s and generally provides a good overview. This webinar is accessible publically and is linked here for your convenience in understanding PPA agreements. SEGlet is not affiliated with Pepperlaw.

SolarWebinarSeries_051310.pdf

SPECIALIZED ATTORNEYS
The following is a list of attorneys who specialize, or advertise specializing in, leases that are unique to cleantech. SEGlet is not affiliated with any of the attorneys on this list. This list is a guide to help you locate and find legal assistance quickly; specifically in relation to leasing rooftops or open land for clean energy or urban agriculture projects.



PDF GUIDES