Page 22 - North American Clean Energy September/October 2019 Issue

solar energy
Following “Tradition”
How a well-known operating lease makes a
compelling financing alternative for commercial solar
by Stanley S. Fishbein, JD, LLM (Tax)
THE “TRADITIONAL” OPERATING LEASE HAS BEEN USED
for decades by equipment salespeople to sell all types of commercial equipment, from office equipment to factory machinery - even big-ticket items like aircraft. Unfortunately, in the solar industry, sales opportunities are being missed because the “traditional” operating lease is not well known, and even less understood.
It’s time to demystify this “de facto” financing method. This concept offers many features and benefits that not only differentiate it from alternative financing choices, but also make it an ideal choice for certain potential customer profiles.
Many companies, when they recognize the affordability and investment value over the life of a system, will actually prefer to invest in owning a long-lived solar system.
The value through ownership of a solar system is very attractive, especially when energy savings is combined with tax benefits, renewable energy credits, and any other incentives. Because there are other needs for cash in a business, however, discovering the right financing is key to making ownership affordable within a company’s operating and capital budgets. This is where the lease becomes a compelling financing alternative.
Leases are pretty well understood and tend to follow a similar pattern across industries. In the solar industry, a “traditional” operating lease (also known as a true lease) is a usage agreement between two parties, whereby the owner of the equipment (Lessor) gives to another (Lessee) the right to use the equipment for a period of time (Term) in return for some form of consideration (typically monthly payments). If a purchase option is not exercised, the Lessee is required to return the equipment to the Lessor.
By replacing upfront capital investment with 100 percent tax-deductible, fixed monthly payments (no escalator) that have been subsidized by the monetized value of the lessor’s tax benefits (investment tax credit and depreciation), the “traditional” operating lease serves as a quick, affordable path to ownership.
Fixed monthly payments, followed by a purchase option price, will typically total less than the original solar system price; there is no interest paid, and the cost to own will be further reduced by the tax-deductibility of these payments. Just looking at the numbers, this “traditional” operating lease should be considered the de facto method of financing for companies seeking ownership.
Compared to a loan, the “traditional” operating lease (with its lower, fully tax-deductible payments) will provide
a company with all the same energy savings and non-tax incentives, while
also conserving cash in the company
for working capital and other uses. This has the added benefit of increasing a company’s profitability. What’s striking
is that companies will obtain a similar or lower after-tax cost of ownership using the “traditional” operating lease versus a loan!
This similarity of after-tax cost of ownership is due to the different set
of tax benefits under each method. Using a loan, a company obtains the investment tax credit and tax deductions for interest and depreciation. Using
the lease, that company obtains lower monthly payments (subsidized by the lessor’s monetization of the ITC and depreciation) that are 100 percent tax- deductible as rental expense, as well as a tax-depreciable purchase option price.
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SEPTEMBER•OCTOBER2019 /// www.nacleanenergy.com