More and more commercial real estate owners are recognizing the value that solar can bring to their properties. This is especially the case in key states where the incentives are particularly impactful for the revenue streams.
Seizing the economic opportunity and moving forward with a commercial and industrial (C&I) solar project is initially exciting, but the process can become more complicated when it’s time to sign a contract with the solar company of choice — especially if it’s for the first time. The contract phase of a commercial solar project can often be the most intricate and time-consuming part of the process. To shed some light on this, we’ve identified four things for your company to consider before signing a solar contract.
This one may seem obvious, especially for companies that already know the ropes of solar, but the first thing to consider is what kind of project makes the most sense (and money!) for the given property. At a high level, there are three main pathways to go solar, each with their own type of contract:
Different solar companies specialize in different contract structures, so plan to spend time determining which path makes the most sense before going to market to find a solar vendor, preferably with an agnostic solar advisor who can provide you with data on all options. This is one of the first things SolarKal does for clients to ensure that they forge ahead on the pathway that optimizes their solar revenue potential.
Below, we focus on multiyear contracts like roof leases and power purchase agreements (PPAs), but contracts to simply build the project (EPC contract) will follow similar rules.
Many times, solar companies will push an abbreviated contract such as a Letter of Intent (LOI) or a Lease Option Agreement (LOA) ahead of a full site lease or PPA. This is usually done to allow the company to quickly gain site control in order to get an interconnection application in place early or start some of the initial development work while the rest of the contract is being negotiated.
The benefit here is that it can shave a few months off the project timeline and in some cases allow the project to squeeze into a solar program before an annual deadline. However, it’s worth noting that these agreements, sometimes as short as one or two pages, can bind a client to a solar company before the important contract terms are worked out. This can lead to unexpected difficulties later. We work with our clients to ensure that if they’re going the LOI or LOA route, they are provided contractual flexibility to opt out if issues arise with the selected developer. At the very least, the “agreement before the agreement” should include the main commercial terms that the client feels comfortable moving forward with, which brings us to our second consideration.
Here’s a situation to avoid when going solar: The parties have spent time and legal money negotiating a contract only to hit a roadblock due to a disagreement on the commercial terms. It’s best to agree on these as early as possible. Commercial terms are more than just price. For example, in leases and PPAs, they will dictate the length of the contract (typically 15 to 25 years with mutual extensions), determine the base price and if it includes any kind of annual escalator, and outline production guarantees, upfront roof proceeds, maintenance, termination options, and more.
Once these commercial terms are established, the parties can move on to the more nuanced language in the contracts.
Finding middle ground on contract language requires both parties to understand what is “market,” meaning standard in the industry. While solar is an established technology, the current contractual approaches (PPAs and leases) are a bit newer. The solar industry has begun to establish which terms are and aren’t industry standard, or “market,” but there is variability from company to company. That said, solar projects generally follow a standard process, so terms regarding roof rights, site access, and shutdowns are typically uniform.
Perhaps more important than what is “market” is understanding what is clearly “nonmarket.” Solar companies that push 35-year terms on a rooftop solar lease or refuse language about protecting the roof are not following the industry standard norms.
It’s important for both the solar company and the client to have a good grasp of this concept prior to working through a contract, as it will make negotiating a more productive process. It’s always best when the solar company has experience with the relevant type of client and project. Similarly, it's best when the entity going solar is represented by advisors and legal counsel that have experience with solar.
Bonus consideration! SolarKal has a standard lease template we often use, as well as a shorter “key commercial terms” document that helps clients familiarize themselves with the transaction language. Ideally, though, a solar advisor like SolarKal will be there along the way to ensure that the client won’t be bound to any unfair or uncommon terms. With over 100 completed and active projects for over 50 national clients under our belt, we’ve got a good grasp on what’s market, and we use that knowledge to prevent clients from signing one-sided agreements.
Solar is a long-term investment and a long-term relationship. Lease agreements and PPAs are often 15 to 25+ years! To make sure the life of the solar project pans out successfully for everyone, it’s critical to understand that there are obligations on both sides. The obligations of the solar company are more easily assumed — their job is to develop, install, and maintain the system without causing damage to or disrupting operations at the property. This is, of course, a bit of an oversimplification, but their job at the end of the day is to install a successful project!
On the other end, the obligations from the landlord/host can be just as important. They must cooperate and allow the solar company to carry out their work unhindered. This might mean providing access to the site for structural/electrical analyses, designating a reasonable area for staging equipment, and allowing the installers the space and time to construct and maintain the system properly. These obligations are often described in the solar contract as the “permitted use and access to the property.” There will also be business obligations, such as allowing the solar company to transfer the project between special purpose entities.
Here at SolarKal, helping our clients understand the ins and outs of the project prior to signing a contract is one of the most important services we offer and a big part of our 86% conversion rate from RFP to completed project. Keep these four things in mind before signing a commercial solar contract, and the satisfaction of seeing signatures on a fair and well-thought-out agreement will be worth the effort.
