Who Needs Third-Party Finance? Loan Programs Offer Low-Cost Direct Ownership Opportunities

19 january 2013

Direct ownership of solar systems offers an array of benefits generally not available to third-party finance. And new loan programs are making it easier to achieve that goal.

To date, direct ownership has not been a primary driver of small-scale solar deployment. Instead, residential and commercial customers alike appear to strongly prefer third-party ownership—via leases or power purchase agreements—over direct ownership. According to SunRun, 75% of the California market relies on third-party financing.

That’s likely due to the immediate cash requirements necessary to invest (a typical 5-kW residential system can cost on the order of $20,000–$35,000, assuming installation costs of $4–$7/W). And if my own experience is any indication, end-use customers are generally not interested in filling out the paperwork necessary to recover the tax credit offered to homeowners (as distinct from the business investment tax credit or 1603) or utility renewable energy certificates (RECs).

With respect to the cash layout, there may be some new opportunities to borrow the lion’s share of the installed system costs, negating most out-of-pocket expenses. And although there is likely more paperwork than in a third-party lease transaction, the benefits of direct ownership may be worth the effort.

One example loan option is the “Step Down” program offered by Admirals Bank. Step Down works directly with installers and developers to essentially promote the program through their client contacts. Step Down is available in every state except for Texas. According to Ryan Wells, Vice President and Director of Renewable Energy Programs for Admirals Bank, the bank is signing up roughly seven to 10 new contractors every day, and the bank is writing several million dollars in residential solar loans each year.

Step Down is a registered program under Title 1, administered by the Federal Housing Authority (FHA) of the U.S. Department of Housing and Urban Development (HUD). According to HUD, the agency insures eligible private lenders against loss on property improvement loans they make. Loan applicants must have good credit histories and the ability to repay the loan in regular monthly payments.

Title 1 loans are capped at $25,000 for single-family homes or $60,000 for multifamily structures and can have maximum terms of 20 years. Different loan aspects apply for manufactured housing — whether on permanent foundations or not.

Wells indicated the bank loans under Step Down carry a fixed simple interest rate of 4.95%–9.95% for most borrowers and are tax deductible. He also argued direct ownership — achievable for many when partnered with a low-cost loan—offers several advantages over a third-party lease, including locked-in payments (some third-party leases escalate annually), a likely appreciation to the home, and ownership rights to alter or move.

I searched for developers that know about Title 1 financing and found several. For example, Black Platinum Solar — serving the Phoenix, Arizona, region — encourages customers to consider a Title 1 home loan. The company — an Admirals Bank client — explains, “[u]nlike a lease, as the property owner you own the PV system, receive any incentive rebates from your utility company, and can take the state and federal tax credits.” Which, as mentioned above, can be a lot of work but may also provide significant cost benefits to motivated homeowners. Other loan specifics include:

• No equity or appraisal necessary
• Both secured and unsecured loans available
• Flexible terms (5, 7, 10, 15, or 20 years)
• Fast pre-qualification process, typically in 24–48 hours
• 100% up-front funding
• Low, fixed rates based on current market rates in your area
• Tax-deductible interest (be sure to consult your tax adviser)
• No pre-payment penalties.

In fact, a wide range of other government programs are available, including from Fannie Mae, Freddie Mac, the Veteran’s Administration, and the Environmental Protection Agency. These programs offer customers a wide range of financing opportunities and should speed deployment of solar systems.