Rising utility rates are reducing your company’s profits. Energy costs will continue to climb, further cutting into profits. Your company decides the timing is right to be proactive and address the energy front by looking for strategies to check these costs. Solar is big in the news, so solar is determined to be a worthwhile potential solution. Solar is also known to give a company a splashy opportunity to promote themselves as “going green”, being innovators, embracing 21st century energy, and positioning themselves ahead of the competition.
The challenge now is to decide which financial strategy to use to purchase your solar system. You could do an Outright Purchase, but that might deplete needed cash reserves and requires a substantial up front capital expenditure. A Loan is a viable method and works very well if the controller is willing to put the purchase on the books as debt, and if additional credit lines are not risked. The generous solar tax credits of 35% Federal and 30% state (NC) make an Outright Purchase and a Loan viable options.
However, your company determines that they are not able to take advantage of the solar tax credits. Your company may have completed a year with little tax liability, or your business, due to its structure, may not be subject to state taxes and, once again, can’t use the solar tax credits. So, another option is a True Lease sometimes called a Tax Lease or a Fair Market Value Lease. The True Lease, in these two scenarios, grabs back the value of the solar tax credits and puts them to work for the business. Those solar tax credits are very desirable benefits to the bank offering the True Lease and will be included to your benefit in the lease terms. The True Lease option meets your economic value add model, and this is why:
- No upfront large capital expenditure. Hold onto the company’s cash reserves for possible or known other needs or investments.
- Finance 100% of the solar system costs. Helpful with budgeting as it spreads the lease payment out evenly over time. Protects the company’s credit lines for other uses as needed.
- Lease payments are 100% deductible as an operating expense. In addition, to 100% tax deduction, depreciation of the equipment can also be claimed.
- Off Balance Sheet Financing. The lease is not required to be entered into the balance sheet as debt or liability.
- Purchase the solar system for a fraction of the original cost. At year 6 in the lease, buy the system at a dramatically reduced price. The fair market value price of the solar system at year 6 may be only one-fourth the original cost, while the system itself still has over three-fourths of its useful life to continue to generate power. A solar electric system reliably generates electricity for decades and retains its technological value. As utility rates rise, these robust power generators will still be making power for over 25 years.
Note: Depending on the lease, there are options to not purchase the equipment at the end of the lease allowing the business to return the equipment. Even though under some leases this is allowable, for a solar system engineered to reliably generate power for decades of production, returning the equipment may not be a sensible strategy especially when the system will be available for purchase at a drastically reduced price.
- Tax credits. These credits have value but not directly to your business tax spread sheet. The business will use these credits to secure the lease and win favorable leasing terms by turning those tax credits to the bank.
- Value of the solar generated electricity. This value will vary depending on the size of the solar system and the power it produces. The solar system will generate solar renewable energy credits (SRECs) redeemable for a cash value and also power that will generate credit from your utility or cash value depending on your utility’s solar program.
The financial equation will be an IRR that beats a 13% return. Unlike most investments that often are accompanied by significant risk, the expected IRR from leasing a solar system is known up front and is not a gamble but a wise business decision.