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The pros and cons of signing a solar lease

What is a solar lease?

A solar lease is a financing option for residential solar panels where the homeowner leases panels from a solar company. Some companies also offer Power Purchase Agreements, or PPAs.

“In a lease, you pay to rent the solar power system, typically for about 20 percent less than you were paying for electricity,” explained Freedom Forever Solar CEO Brett Bouchy. “Power Purchase Agreements (PPAs) work much like solar leases, but instead of renting the system, you agree to pay a set price for the electricity the system produces.”

The contract usually lasts 15-20 years. There is often no down payment and the solar company is responsible for maintaining the system. The homeowner does pay a fee to the utility company to stay connected to the grid, though some states also offer net-metering in case the panels produce more energy than is needed.

At the end of the contract, the renter can renew the lease, buy the panels outright (often for a discounted price), or have the panels removed.

The benefits of a solar lease

Solar leasing and PPAs allow homeowners to go solar without the upfront costs of installing a system, which can range up to $30,000.

“These two programs are zero cost to the homeowner for installation, warranty, and monitoring,” said Nevada real estate agent Blake Guinn. “If you go with these programs you would have two electric bills, one with the solar company and one with your current utility. Those two bills combined should be less than what your annual bill is today.”

The solar company usually handles all the paperwork, too, so it’s hassle-free as far as the homeowner is concerned. As states continue to emphasize solar  – see California’s solar panel mandate –  leasing could be an affordable option for many residents.

Problems with leasing solar panels

Solar leasing does have some drawbacks potential renters should keep in mind.

For one, lessees won’t qualify for tax incentives. The federal government provides a 22 percent tax cut on solar installation costs (though that program could expire in upcoming years). That’s in addition to local incentives buyers could use. With a lease, those benefits stay with the solar company, since it owns the system.

And the included maintenance? It doesn’t always involve top-notch service, which could affect how well the system generates power.

“Maintained is a loose word,” McDonnell said, “because there are lots of systems that aren’t getting the maintenance they deserve, but the homeowner still is responsible for the lease payment every month regardless of production.”

Meanwhile, because the homeowner doesn’t own the system, it doesn’t add value to the house. Owning an installed residential solar system can increase a home’s resale value by up to $15,000.

“One thing of note: Buying adds value to a home – leases and PPAs don’t,” Bouchy said. “If you purchase your solar panel system, it adds value to your home and helps it sell faster.”

Leases can even have a negative effect when it comes time to sell, since the buyers are required to take over the lease unless the previous owners pay it off in full. And that’s assuming the buyers qualify to take it over in the first place.

“There are big issues when it comes to selling a lease/PPA solar program, as the seller expects the new buyer to take over the solar contract,” said Guinn, who has spent much of his career working with residential solar systems. “A realtor or buyer could walk into a horrible contract that could force them to pay 15-30 percent more for electricity due to the solar rates. Third-party-owned systems are very difficult to buy or sell.”

There are also fewer make-or-break issues such as appearance and system size. Leasing companies will design the system to fit their specifications, regardless of how many panels homeowners want or where they want them placed.

Other ways to go solar

Solar leasing is not the only or most popular setup when it comes to residential solar. Other options include:

Solar loans are the most popular, McDonnell says, as they allow homeowners to affordably finance the system, take advantage of tax credits, and add value to the home.

“We have seen payments average 20 percent savings after adding the net utility bill along with the solar loan payment. The homeowner retains the tax incentives in this situation as well,” he said.

A cash purchase has the highest return on investment but is most financially demanding upfront. Meanwhile, a prepaid lease misses out on tax credits but allows for lower upfront costs.

“The leasing company gives a discount on the total project cost, typically 20 percent, and takes the tax credits. This is a good way for a homeowner to essentially ‘purchase’ the system at a discount and make no further payments,” said McDonnell.

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The bottom line on solar leasing

Overall, solar leases present an enticing front with a lot of potential complications lurking in the background.

For homeowners who can’t manage the upfront costs of a cash payment, don’t qualify for a loan, or can’t use the tax credits, it makes solar possible. But some warn that leases are best left as a reserve.

“Owning your system produces the highest savings in the long run. If a loan isn’t an option for you, a lease or a PPA may be the best option for you,” Bouchy said.

If not carefully set up, a lease can leave customers trapped with a cumbersome system and with a real estate headache when it’s time to move on. In Guinn’s opinion, if homeowners are working, pay taxes, and have enough cash or good credit, the scales are in favor of buying.

“Owned systems, either cash or financed, are the only way someone should consider solar on their home,” he said.