Window to the Law: Solar Panel Financing Issues

As the use of clean energy sources grows, consumers are beginning to incorporate in their homes clean energy devices like solar panels. While solar panels may result in an energy savings for a homeowner, the panels are expensive and many consumers need financing to purchase and install them.

These financing arrangements can lead to problems when the owner tries to sell the house, causing delays in the transaction or even causing the transaction to collapse.  In this month’s Window to the Law, we offer help for real estate professionals in identification of solar panel financing issues early in the transaction so that the buyer can be informed of how these issues may impact the transaction.  I am Finley Maxson, NAR Senior Counsel.

There are three ways that consumers ordinarily finance solar panels: PACE financing, second mortgages, and leases. These financing arrangements may cause problems when they result in the price the buyer must pay for the property becoming higher than the actual property contract price.

PACE stands for Property Assessed Clean Energy.  PACE programs are authorized by states but implemented at the local level.  A PACE program provides loans to property owners installing conservation improvements on their property.  The loans are repaid through the property tax bill.  A lien is put on the property for the amount of the loan, and that lien has super priority in the same way a tax bill does. Because of the lien’s super priority status, any property with a PACE loan will not qualify for many federal mortgage programs such as those by Fannie Mae or Freddie Mac unless the lien is removed.  

Additionally, because PACE loans are paid through property taxes, the property tax bill is larger than would normally be expected relative to the property’s value.

Solar panels are also commonly financed by placing second mortgages on the property.  While such mortgages do not have a super priority, they must either be paid off or assumed by the buyer at closing.

Finally, solar panel companies offer solar panel leasing arrangements for home owners.  The leases are secured by a UCC lien on the property, and the leases will either contain a due on sale clause or will require the buyer to separately qualify for the lease, which can delay the transaction.  

As you can see, these solar panel financing arrangements may require that the seller or buyer take action to close the transaction, such as the buyer qualifying for and assuming the current financing arrangement, or the seller paying the loan and discharging the lien.  But problems may arise when these financing issues are not identified at the outset and addressing them may delay or even preclude the scheduled closing, because, for example, the buyer is not eligible for the higher financing needed to close the transaction.  A further complication can occur when sellers believe that they own the solar panel and want to remove from the property.

Real estate professionals can avoid transaction delays by identifying all information about solar panel financing and encouraging the seller to make it available to the buyer early in the process.  This will avoid delays/wasted time by allowing the buyer to determine whether and how solar panel financing issues may impact the buyer’s ability to purchase the property.

To help address solar panel financing issues, some states and state REALTOR® associations have begun adding questions to their property condition disclosure forms to require sellers to disclose the presence of solar panels as well as other information, such as liens on the property or whether the panels were financed through a PACE-type program.  Real estate professionals should make their clients aware that solar panels may raise the cost of the property to the buyer, require the buyer to qualify for the solar panel financing, or require the seller to pay off the solar panel loan prior to closing.  The earlier these issues are identified, the better chance the parties have of avoiding transaction delays or other problems caused by the solar panel financing.

To learn more about solar panel financing, please consult the resources shown on the screen. 

Thank you for joining us for this edition of Window to the Law.