Solar Panel leased

[PushinValue]

I called the santa ana FHA appraisal branch and was told after a long time on hold "FHA will not insure properties that have leased solar systems, I have discussed this issue with several other people in the office and we conclude the home is not eligible for FHA insurance." I asked where this information could be seen per HUD/FHA "this issue is not specifically covered within the guidelines, although due to the property having leased equipment, attached to the structure, the ownership is not fee simple absolute".


This specific lease is paid 100% upfront by the current owner, when the home sells, the lease will transfer (no payments due to ALL payment being already made upfront by the current owner)

Thoughts?
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I notified the client, who then told me "the leased solar is personal property due to being on a lease".

My understanding is the solar (attached and integrated to the structure) is real property. Although, the rights associated to the ownership of the panels belong to the solar company...

Thoughts???

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This is an assignment I am currently working on? Recommendations ASAP?

 

[Mile High Trout]

They do technically meet the definition of real property, in the physical sense.

Miss 3 payments to the solar company and they'll mysteriously disappear off of your house, legally.

When you buy a home with a leased item, you're taking on a commitment, as much as a benefit.

This is convenient for appraisers, because that real property item stands apart from the normal appraisal.

Appraise as normal, and give them a little spiff for solar. A buyer who's interested in solar would probably pay a little bit extra, after examining the lease agreements of course. That can get complex, based on terms remaining of assumptive lease transfers. These are the early days of solar where it's unlikely they're paid down yet. You may have to renew a lease after term, to keep them. It's not a rent to own program.

The installation costs are a big deal, and also the attachments may be home specific. In the early days of solar leasing, the aspect of home sales and fungability of contractual obligations and savings benefits were largely overlooked. I've heard that's much better now though, and most solar lease agreements reportedly have saleability deals where the new owner just picks up the lease, under existing terms. Like a true assumption loan, if I'm understanding it correctly.

If you want to really get all the benefit of solar, you've got to own it, not lease it.

 

[PushinValue]

Can you give me a definition of real property?

The lease payment is all up front (already paid). You get all the benifits of solar, without any payment or maintenance costs. Probably better than owning it, who wants 20 year old panels on their roof? Imagine what technology will be 20 years from now.

What about the information coming from the FHA hotline? Any comments on that?

 

[KenAZ]

If the lease is paid upfront it actually will add significant value. You are selling a home with free electricity. Typically a buyer would want about 5 years recovery, so that would estimate at about $15,000 extra for solar panels.

If it is a no money down system, then it adds minimal value. the buyers could buy any other home and add panels. Buying a house that already has the panels just saves the hassels of getting one installed.

FHA makes no sense. I have leased satellite dishes on my house, that will get removed if I fail to pay my bills. Does that mean I do not qualify for FHA financing? Leasing is the safer alternative to buying a solar systm. If panels get damaged, then the leasing company has to replace them.

I run into solar systems all the time in AZ, and have never heard a single horror story. Everyone is happy with them. No one is getting screwed over in their leases. Maybe a few instructors like to make up horror stories . . . but the solar panel business is very highly regulated and they mostly exist due to word of mouth. The solar companies here are very careful to make sure that the customers are happy. After appraising numerous homes with solar panels, I actually paid up front and leased them for my house. Never regretted it. Nothing better than getting the utility bill each month and only paying $0 to $13. I can leave lights on, turn the thermostat to 70 in the summer and basically have no worries about my electric bill.

In summary, Solar panels will add to the sales price, but how much is uncertain. Maybe they should be itemized as furniture and in a separate contract from the home.

 

[KenAZ]

I think I understand the confusion by FHA. There are two different types of solar electric. There are the rare "Off the Grid" systems that have battery storage. These are typically owned and are very expensive. It could be that these types of systems should not be leased, because if they lose the lease, the house would be without electricity.

The typical leased solar systems are connected to the grid. Even if the solar panels were repossessed, the home is still connected to the grid. There is no logical reason for HUD not to loan on these properties.

 

[PushinValue]

would you mention in your report that after calling FHA hotline to address adjustments for the solar system you were told FHA would not take the loan, and after calling again the same was repeated "FHA WILL NOT ACCEPT THIS LOAN". Several appraisers in my office disagree. Does not make much sense to me why they wouldn't.

I am still stuck on the question, is the system real or personal property? From what I understand, anything permanently affixed or integrated into the land/structure is real property...

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Example, you have a second house or garage on lot (on a foundation), it is on a 20 year least that has been FULLY PAID, at the end of the lease the garage/house will be removed by the lessor. Clearly this extra structure adds value, and there SHOULD be an adjustment to reflect the markets reaction to the added benefit of this structure. Same with my Subjects (up front fully paid for 20 year lease). There is CLEARLY and undeniably a benefit of having this fully paid for 11kwh solar system. To not make an adjustment I believe is WRONG, just because "it is a lease". It very CLEARLY adds value, even more value than owned (all maintenance taken care of by the lessor for 20 years) and up to $400 per month in the summer and $100 per month in the winter of electricity, this is SAME AS CASH, all home owners will have to use electricity....

?????

 

[krailey]

FHA Draft Handbook - Solar Leases

I was just reading the proposed FHA changes and found this on page 62 line 13:

Properties with leased energy systems are not eligible for FHA insurance.

I cannot find this draft handbook on the FHA Drafting Table website. The Appraiser and Property draft handbook appears to have been updated on 8/27/14, and Page 62, Line 13 now reads "Special Energy Efficient Systems not part of the Real Estate must not be included in the appraised value."

I cannot post the link, but please see HUD's website, and review the current draft handbook for Appraiser and Property requirements.

Solar panels that are owned are fixtures, and part of the real estate. Solar panels that are not owned should be considered Chattel because they can be removed upon default or termination of the lease. The solar lease terminates upon foreclosure, and if the foreclosing lender does not want to cooperate in transferring the lease to a subsequent purchaser, the company must remove the equipment at their own expense and repair any damage.

As a lender, if I see a Notice of lease as an exception on Schedule B of the preliminary title report, I do NOT want to see value given for the equipment in the appraisal. I do, however, want to see comment regarding the equipment and whether it has an adverse impact on value and/or marketability. Appraisers who provide comparable sales that also have leased solar get 5 stars.

Solar leases do not take priority over the mortgage. The UCC Filing, however, has to be released prior to recordation of the mortgage. In California, the Notice of Independent Solar Energy Producer Contract is not, by Statute, a lien or charge on title nor an encumbrance. It is just a notice, and to illustrate that it has NO impact on title, I have found a title company that will exclude it from the exceptions on Schedule B of the Lender's Policy ONLY (this applies to refinances and not purchases). However, most companies will execute a subordination of the lease (even though the contract itself is not recorded).

The type of solar financing that is not acceptable for FNMA, FHLMC, or FHA are PACE loans and PACE type loans (HERO) that are repaid through property assessments. Because the liens are repaid through property assessments, they take priority over the mortgage. The GSEs are prohibited by the FHFA from lending on properties with PACE financing (with certain exceptions for PACE loans originated prior to July 2010).

In regard to the person that called Santa Ana HOC, I would double check to make sure that HUD is not talking about PACE financing and is clear that the solar lease is not being included in the appraised value or being financed as an energy efficient improvement.

The FHA maximum loan amount can be increased up to 20% for solar, but this does not apply to solar leases. Solar leases cannot be financed as an energy efficient improvement.

 

[krailey]

I think I understand the confusion by FHA. There are two different types of solar electric. There are the rare "Off the Grid" systems that have battery storage. These are typically owned and are very expensive. It could be that these types of systems should not be leased, because if they lose the lease, the house would be without electricity.

The typical leased solar systems are connected to the grid. Even if the solar panels were repossessed, the home is still connected to the grid. There is no logical reason for HUD not to loan on these properties.

I agree with this statement completely. FHA does not allow systems that are the only source of energy to be leased- even if the lease is prepaid for a number of years.

There is a lot of confusion right now about solar. Especially in regard to PACE loans and solar leases, the impact on title, burden upon foreclosure, etc.

When speaking with HUD Santa Ana, it is important to be clear about:

1. Whether the solar is leased or owned.
2. Whether the financing takes priority over the mortgage (PACE loans take priority, solar leases don't).
3. Whether the solar is a supplemental energy source or is the only energy source.
4. Whether the solar is being given value in the appraisal, or is excluded as personal property (with a comment on the impact of the lease on value).

You might also mention that the draft Appraiser and Property handbook posted on the HUD Drafting Table website no longer contains a reference stating leased solar is unacceptable. It has been changed to state leased energy systems may not be included in the appraised value.

 

[PushinValue]

I was very explicit to all above items. I called two separate times to clarify and make myself clear....

I recommend anyone call themselves and see what FHA states to you...


I ask the question again, how can I not give the solar credit when it CLEARLY adds to the marketability and overall value of the property? The lease is 100% PRE PAID IN FULL. There is no way they can come take it off... I believe it is clear and unavoidable to recognize that this feature adds to the appeal and value of the home....

 

[JSmith43]

Krailey, that was a first class contribution to this thread. Please keep posting on topics that interest you! Your expertise is appreciated.