Are Solar Leases Actually Bad For Homeowners?

The solar lease has made going solar possible for over 100,000 Americans, but there's still little that we know about the long-term implications of the financial structure for homeowners and the industry. A typical lease term is for 20 years. With the average home selling in 5-7 years, that means a potential buyer is buying not only a home, but a lease obligation as well. 

The solar industry itself has a high success rate of transferring leases, but that may not tell the whole story. Bloomberg pointed out earlier this week that just having a lease can scare away homebuyers who don't understand or want the long-term obligation, and that's becoming a challenge for people to consider. As the residential solar industry grows, this is something for homeowners, companies, and investors to consider. 

Are rooftop solar installations like this one helping or hurting home values? Source: SunPower.

The challenge of a solar lease
The first thing to understand is why solar companies want to sell leases to homeowners. As companies moved into the residential market, they had a hard time selling a system that could cost as much as $40,000 in cash when loans weren't readily available. So, a lease was conceived that brought the initial cash outlay for homeowners down to as little as $0 and was very profitable for solar companies. 

SolarCity (NASDAQ: SCTY  ) and SunPower (NASDAQ: SPWR  ) have seen that leases add more value for shareholders than simply selling systems. They're able to sell off the tax benefits to tax equity investors and collect revenue to cover their financing costs over 20 years. SolarCity says the present value of all cash flows, or retained value, from the residential solar systems it installed last quarter was $1.82 per watt, and value in the past has approached $2 per watt. SunPower doesn't explicitly give retained value per watt, but management says its retained value is in excess of $2 per watt. 

Workers install a residential system. Source: SolarCity.

This is important because it's advantageous for solar companies to sell leases. They're higher margin, and in SolarCity's case it's why the company focuses solely on leases in the residential market. But they're also a 20-year obligation for homeowners, which is a challenge when trying to sell a home.

A homeowner who signs an initial lease may see the value in monthly energy savings, but the new homeowner may not, and the home buying process is complicated enough without making a decision on a solar lease. It's also very possible that anticipated savings projected when the lease was signed don't turn out to be true when the home is sold. I highlighted some of the optimistic and problematic assumptions solar companies use when selling leases in an article here

It should also be noted that most leases allow new buyers an option to take down the systems, but even making that decision is a lot for potential buyers.

Solar can add value for homeowners
What's interesting is that, while accusations of leases lowering the value of a home are increasing, there's little dispute that owning solar panels adds value to a home. The Lawrence Berkeley National Laboratory released a study late last year that showed that the average home that has solar panels that are owned, not leased, appreciates in value by $25,000.

The fact that solar panels could add to the value of a home makes sense. There's no financial obligation as there is with a lease, but there's a benefit in the cost savings solar energy provides. Not each homebuyer will value a purchased system the same, but it's an incremental value add to say the least.

A solar home community in California, an increasingly popular offering for home builders. Source: SolarCity.

How will solar companies adapt?
One of the challenges solar companies like SunPower and SolarCity face is educating homeowners about what leases are and how they're structured. They're not just an obligation, they're a way to save money on energy overall. But often times that side isn't appreciated by a potential homebuyer, and that's understandable.

Long-term, the industry may adjust by increasing loans or cash sales versus leases because those actually add value to the home. I recently discussed this in a deep dive I did on the residential solar industry. Trends are already showing that loans are gaining traction, and GTM Research recently predicted that solar leases will peak this year at 68% of the residential solar market and fall in coming years. Pushback from homeowners who are having trouble selling their homes may be another piece of that. 

Given the margins solar companies generate from solar leases, this isn't a trivial debate for investors. Generating $2 per watt from leasing a system versus razor thin margins for building them make the economic incentive the lease. But the economic incentive for homebuyers may push them elsewhere. 

The answer to whether solar is good or bad for homeowners may come down to how a project is paid for. Asking a potential buyer to take over a 20-year obligation is a lot, even if they have the option to take the system down. Buying puts the onus on the current owner, but could increase the value of a home. At the least, this is another thing for homeowners looking at solar to consider. 

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.


Read/Post Comments (2) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 27, 2014, at 11:49 AM, markp1950 wrote:

    Leases are better than the utility company, but I would prefer ownership......

  • Report this Comment On August 06, 2014, at 3:35 PM, Garn333 wrote:

    When I read articles like this I often have to wonder about the assumptions being made. For example(s):

    1.It keeps being mentioned that “just having a lease can scare away homebuyers who don't understand or want the long-term obligation” but I have yet to see where this data is coming from… Who is reporting these figures and what are the percentages of “scared homebuyers”? And as noted later in the article these are ““accusations” of leases lowering the value of a home”. So still no real report/data on that assumption.

    2.“A homeowner who signs an initial lease may see the value in monthly energy savings, but the new homeowner may not”. Why exactly would they not? There are either saving to be had or not. So if you are going to assume they may not, why don’t we assume they WILL. I have to guess that most people, when shown the saving, are going to be willing to take over a leased solar system. And please don’t start with the system will be out dated in 10 years. That maybe somewhat true but not to the extent that the system will not still hold value. Plus the new owner will have fewer years to be locked into the lease before owning the system out right, if they choose not to resign the lease at the end of the 20 year agreement.

    3.“It's also very possible that anticipated savings projected when the lease was signed don't turn out to be true when the home is sold”. Again, if we are going to make assumptions, it’s also possible for those saving to increase.

    4.“There's no financial obligation as there is with a lease” when buying a home with a purchased system. Really, you just said earlier, like two lines above this one, that a purchased system increases the value of a home by $25k. I would say that is as much of an obligation, if not more so, than a lease. It’s just that it is rolled into the closing price of the home. You are still “obligated” to pay your mortgage, and that term is typically 30 years of obligation. Plus what are you left with then. Assuming (Since that is what we are both doing here) the typical system is good for 30 years and the purchased system had been on the roof for 5-7 years before the new home owner purchased the home, that would mean that at the end of the 30 year mortgage the system will be 35-37 years old and most likely need to be removed or replaced, at the expense of the home owner. Whereas with the lease they will come and remove the system at no cost after 20 years.

    5.This I agree with. “One of the challenges solar companies like SunPower and SolarCity face is educating homeowners about what leases are and how they're structured. They're not just an obligation, they're a way to save money on energy overall. But often times that side isn't appreciated by a potential homebuyer”. But I think by the time the average home is sold (5-7 years from now) people will be a lot more educated in the benefits of solar and will be wanting a system, leased or purchased.

    6.“Pushback from homeowners who are having trouble selling their homes may be another piece of that”. Are they really having problems selling because of the solar system? And if so I doubt it makes that much of a difference if the system is leased or purchased.

    7.“versus razor thin margins for building them”. I keep hearing this…If this is true and margins are so “razor thin” then how are the solar companies that only sell, not lease, making any money? I assume through financing, and why wouldn’t a company like SolarCity be able to do the same things if required.

    8.“Asking a potential buyer to take over a 20-year obligation is a lot”. By your own admission the average home is sold around the 5-7 year mark. So the “obligation” Is more like 15-13 years. I realize this is still long term but wording it as you did makes it sounds even worse than it actually is.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3010853, ~/Articles/ArticleHandler.aspx, 12/27/2014 5:12:01 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement