Stating Buy-Outs on Pre-Paid Leases

[cebury]

There are 6 year Pre-Paid Sunpower leases available right now that clearly state buy-out amounts.

I've seen it here and been told (Federal?) Consumer Lease Protection Law does not allow for stating a buyout amount of panels at the end of the lease -- I think the assumption was a 20yr lease. Also, there are tax implications to the lessor if at lease-end the buyout is greater than FMV, they have to recapture depreciation (since the asset is fully depreciated w/legislation allowing for 100% depreciation in 1st year).

It would seem extremely unlikely (not impossible) Sunpower is establishing leases with unenforceable/illegal clauses. Anyone have the link to the law or know when this OK vs. not? Would the likely outcome be, if they cannot honor that portion of the lease, I'd have to pay whatever FMV actually is 6 yrs from now?

To see an example of their lease overview proposals, Google "sunpower pre-paid lease pdf" the first two are examples from NJ. They have basic terms on the proposal, but it's obviously not a full lease agreement. I'd include the link but that is frowned upon here.

I have a basic proposal on that exact template, except mine are for SP E19 240 panels and the SP inverter (same ones they quoted for me on purchase).
I'll share more once I see and read all the fine print.

[russ]

Links that are advertisements (solar or otherwise) or to a competitor of Solar Town (our host) are not allowed.

Links that are informative and to the benefit of the members are generally allowed.

Your pdf would be of interest to many so no problem.

[orchid]

Actually the Sunpower leases are 20 year lease but with a one time buyout option at 6 years which is a remaining value amount in the chart of the lease proposal you googled. The actual lease states that if you sell your home the system can be purchased for the greater of the remaining value amount or fair market value. Again at the end of the lease the actual lease contract states the purchase option price at the scheduled end of the Lease Term will be an amount equal to its fair market value.

[cebury]

Your pdf would be of interest to many so no problem.

Russ this is the link, an example of a Sunpower lease (from a competitor I assume), but in NJ: http://sonicsolarenergy.com/docs/nj_lease_prepaid.pdf

Orchid:

Actually the Sunpower leases are 20 year lease

I ignorantly overlooked the "20yr lease" part, because that chart has fine print that doesn't seem to apply (looked like they re-used their 20yr Lease Overview template for 6yr ones). I expected the actual lease agreement to be very clear. But that makes more sense now.

but with a one time buyout option at 6 years ****which is a remaining value amount**** in the chart of the lease proposal you googled.

I'm not sure what this means. In this lease, is that not the same thing as stating an amount for the purchase of the panels at the 6yr mark?

The rest of the post made sense, thanks for sharing.

[orchid]

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I'm not sure what this means. In this lease, is that not the same thing as stating an amount for the purchase of the panels at the 6yr mark?

The rest of the post made sense, thanks for sharing.

Yes you are right. They are stating the purchase amount for the panels at 6 years. Sometimes with kids trying to get my attention while I'm typing onthe computer I don't always make sense. You bring up a good point. Makes me wonder if there would be tax implications with this that would then be passed on the person buying out the lease that they weren't expecting?

[cebury]

I was hoping KRenn would be on soon to help point out where I can find the law regarding the operational leases. I've done some searching myself and mostly junk comes up.

http://www.solarpaneltalk.com/showth...ll=1#post28925Operational Lease can't become a capital lease and vice versa, if they're promising him a buydown, then he's entitled to his tax incentives on that system because he's expected to be the ultimate owner at the end.

Perhaps it's not a "promise" b/c options are given?

Its illegal, the IRS hasn't been taking notes, when they do, all these people who think they're getting a $1 buyout are actually going to have to pay FMV for those systems.

There's a few outfits in Arizona and New Mexico who are pulling this nonsense.

And apparently it's now being done nation-wide (or close) by a major manuf, not just local folks. This is financed via Sunpower SunProgram I, LLC who is partnered with Citi http://www.prnewswire.com/news-relea...126314183.html. The lease has several exhibits and clauses that are only "applicable to residents of X state".

I realize the warning thread you posted about had more of a "ponzi" scheme associated with it, where they collected it all upfront and took who knows how long to install it, assuming until they make further sales to help pay for your panels.

There must be some kind of exception here for lease conversion and/or buyout clause on a shorter term to which may allow for more accurate estimating of FMV?

[Naptown]

I have yet to see anyone here profess to be a tax attorney. I would think that a major lender or manufacturing company would be unlikely to expose themselves to a lease with illegal terms. (Well considering how banks operate lately that may be a stretch) One would think there would be a battery of lawyers drafting and reviewing the lease documents.

[KRenn]

I was hoping KRenn would be on soon to help point out where I can find the law regarding the operational leases. I've done some searching myself and mostly junk comes up.

Perhaps it's not a "promise" b/c options are given?




And apparently it's now being done nation-wide (or close) by a major manuf, not just local folks. This is financed via Sunpower SunProgram I, LLC who is partnered with Citi http://www.prnewswire.com/news-relea...126314183.html. The lease has several exhibits and clauses that are only "applicable to residents of X state".

I realize the warning thread you posted about had more of a "ponzi" scheme associated with it, where they collected it all upfront and took who knows how long to install it, assuming until they make further sales to help pay for your panels.

There must be some kind of exception here for lease conversion and/or buyout clause on a shorter term to which may allow for more accurate estimating of FMV?

Even with the buyouts these lease contracts still state that if the homeowner holds on to the equipment for 20 years, they can buy it at fair-market value. Not sure how they're justifying the buyout but I am sure there's a legal loophole that they've find which allows it, which basically the entire leasing model takes advantage of a series of loopholes. What makes the whole thing possible is the leasing company purchasing it for $20,000 and then claiming to the government that the fair market value of the system is about $30,000 or even $40,000, thus taking the 30% grant/tax incentives and depreciation off the higher number, not the amount that it was actually purchased for. This is not a long-lasting model and the Treasury has been cracking down more and more on this so leasing really doesn't have a very long future as a viable option.


Previously I did speak with two tax attorney's who confirmed that at the end of the term, an operational lease or "fair market value" lease must have a price listed as "fair market value" at that time. None of these new buy-out models break that rule as some of the others have but they have gotten creative with the buyout's and its not just Sunpower but SunEdison and others. Its only a matter of time before you start seeing SolarCity, Suncap, SunRun and Sungevity start following the same model.

Its moving almost into a real-estate type lease purchase option model and it could be something that comes down to the courts to determine the true legality of such a situation but currently, for the buyer, its a fantastic deal in the interim although there is some possibility of tax implications affecting the end-buyer. Because this is so new, none of that is really known yet.

[cebury]

Thank you for your opinion. Seems well balanced from here, especially that last paragraph.

[Ian S]

After looking at the numbers for energy output over a full year (obtained from a friend of mine with a Sunpower system) and how it would have impacted my electric bill over the past year, I've been rethinking my options on solar and have decided to go with the Sunpower lease. There is one thing that many folks seem to ignore: the leasing company gets all the tax credits and utility rebates that the homeowner would get by purchasing BUT they also get the ability to depreciate the entire system at a very rapid rate. That represents many more thousands of $$ in value to the lessor that is generally not available to the homeowner as an individual taxpayer. I think if you work the numbers at something like a 30% tax rate, you'll see why a lease of the prepaid variety starts to look "too good to be true."

The depreciation also presents a wrinkle at the end of the lease: selling the system for any more than $0 will incur a depreciation recapture liability to the lessor. I doubt they'd want to do that although it could I suppose be built into the FMV. Keep in mind that this issue applies even if the lessor removes the system and sells it to a third party.

Re the true (operational) vs capital lease, it's correct that the true lease must use a FMV number for purchase at lease end. But if you look into the reason why, it's because the lessee company typically wants to deduct the lease payments as an operating expense. They aren't permitted to do that with a capital lease with a $1 buyout at lease end. In the case of an individual taxpayer lessee, deduction of the lease payments as an operating expense is generally not possible so that may be where the gray area between the two types of leases arises when an individual taxpayer is the lessee.

At least Sunpower offers some options and the ability to buy out at the end of six years is a good one to consider. I will have some time to make that decision. That said, there's an interesting clause in the lease regarding one end-of-lease option: "If you request that we remove the System, we will do so within ten (10) business days of your request. However, we may choose not to remove the System and if we notify you in writing that we have made such a choice, you will be considered to be the new owner of the System..." That seems like a fairly short period of time for the lessor to arrange to get the system off your roof. Why would they limit themselves like that? Unless they perhaps really do intend to abandon the obsolete 20 year old fully depreciated solar system rather than go to the expense of removal, resale, and depreciation recapture in a market possibly glutted with old solar PV systems. Just a thought.

At the end of the lease, it might actually be a reasonable option to have the system removed and install a new one with higher efficiency, improved technology, lower cost and new warranty. I have a flat foam roof that will be pretty old at that point so perhaps that's the time to have the roof redone i.e. after the old PV system is removed and before the new one is installed.

[KRenn]

After looking at the numbers for energy output over a full year (obtained from a friend of mine with a Sunpower system) and how it would have impacted my electric bill over the past year, I've been rethinking my options on solar and have decided to go with the Sunpower lease. There is one thing that many folks seem to ignore: the leasing company gets all the tax credits and utility rebates that the homeowner would get by purchasing BUT they also get the ability to depreciate the entire system at a very rapid rate. That represents many more thousands of $$ in value to the lessor that is generally not available to the homeowner as an individual taxpayer. I think if you work the numbers at something like a 30% tax rate, you'll see why a lease of the prepaid variety starts to look "too good to be true."

The depreciation also presents a wrinkle at the end of the lease: selling the system for any more than $0 will incur a depreciation recapture liability to the lessor. I doubt they'd want to do that although it could I suppose be built into the FMV. Keep in mind that this issue applies even if the lessor removes the system and sells it to a third party.

Re the true (operational) vs capital lease, it's correct that the true lease must use a FMV number for purchase at lease end. But if you look into the reason why, it's because the lessee company typically wants to deduct the lease payments as an operating expense. They aren't permitted to do that with a capital lease with a $1 buyout at lease end. In the case of an individual taxpayer lessee, deduction of the lease payments as an operating expense is generally not possible so that may be where the gray area between the two types of leases arises when an individual taxpayer is the lessee.

At least Sunpower offers some options and the ability to buy out at the end of six years is a good one to consider. I will have some time to make that decision. That said, there's an interesting clause in the lease regarding one end-of-lease option: "If you request that we remove the System, we will do so within ten (10) business days of your request. However, we may choose not to remove the System and if we notify you in writing that we have made such a choice, you will be considered to be the new owner of the System..." That seems like a fairly short period of time for the lessor to arrange to get the system off your roof. Why would they limit themselves like that? Unless they perhaps really do intend to abandon the obsolete 20 year old fully depreciated solar system rather than go to the expense of removal, resale, and depreciation recapture in a market possibly glutted with old solar PV systems. Just a thought.

At the end of the lease, it might actually be a reasonable option to have the system removed and install a new one with higher efficiency, improved technology, lower cost and new warranty. I have a flat foam roof that will be pretty old at that point so perhaps that's the time to have the roof redone i.e. after the old PV system is removed and before the new one is installed.

!!!! Very good, in-depth intelligent analysis of the issues. The FMV vs operational lease you describe concurs with everything I've heard. As far as the 10 business day-removal goes, virtually every lease I've seen has the same exact clause. Basically the lessor has a certain period of time near the end of the lease where contact must be made. If contact is not made, then basically they default on their rights to the system and ownership transfers to the lessee. To me its a sound out-clause that allows them to remove themselves of any burdens should the value of the solar system be so insignificant that pulling it off the rooftop be more of a liability to them than anything else.


The SunPower lease is definitely intriguing because you can do a prepaid lease, and then at Year 7 be at the same junction point as someone who paid substantially more to buy it, in terms of ownership. From what I've seen, the pricing in some areas can be less than $1 a watt for the prepaid, then throw in another $700-1500 at the end of 6 years and the system is 100% yours? Absolutely nuts in terms of the value that it presents, especially utilizing panels that are among the priciest out on the market.

[Naptown]

Remember that this year is the last for 100% depreciation. Next year it is 50% balance over 5 years.
So they have the depreciation all this year. Even without the accelerated depreciation this is a 5 year scheduled property anyway so worst case at the end of 5 years it is written off.

[KRenn]

Remember that this year is the last for 100% depreciation. Next year it is 50% balance over 5 years.
So they have the depreciation all this year. Even without the accelerated depreciation this is a 5 year scheduled property anyway so worst case at the end of 5 years it is written off.

Yep, so people can expect some increased costs on the leases starting next year, which some of these companies have as much admitted to anyways.

[cebury]

Glad your back Ian! The last we heard you were done considering solar altogether, glad you reconsidered.

Yeah, of the dozens of Cons that typical leases suffer, this new SunPower has remedied a large majority of them. Basically, the contract is reasonable and there aren't any gotcha's that are visible from this side. Who knows what could happen in the industry here in CA that might change things. But with the CA being so green and the legislation to back it combined with market competition seemed to change things for consumers who have yet to purchase solar.

Capturing depreciation is certainly where the the leases can pay off for them but not us individuals.

Edit: LOL I typed up this response hours ago explaining the depreciation and 100% this year, 50% next year, etc. But forgot to click Submit... Thanks, as always, for sharing guys.

[cebury]

!!!!
The SunPower lease is definitely intriguing because you can do a prepaid lease, and then at Year 7 be at the same junction point as someone who paid substantially more to buy it, in terms of ownership. From what I've seen, the pricing in some areas can be less than $1 a watt for the prepaid, then throw in another $700-1500 at the end of 6 years and the system is 100% yours? Absolutely nuts in terms of the value that it presents, especially utilizing panels that are among the priciest out on the market.

THANK YOU. It's nice to have some confirmation the lease is as good as it sounds.

I was so glad when I got my lease quote they didn't swap out the panels with older (junk). Same exact panels as the purchase, just for 20% lower overall from purchase price (including buyout). I don't have to worry about them going out of business in the next 5 years (not as much as I would with SolarCity or other pure-lease places) and what that might entail vs. a 20yr lease.

So far, Sunpower installers have been the most honest and straightforward folks in my area. Supposedly there is some value to being "sunpower chosen installer" as they don't let just anyone do it. But that's another topic altogether.

The only thing I'm looking for in the lease is that the 10yr full warranty (that is required for California CSI rebate participation) is still in effect AFTER the Buyout period, i.e years 6-10 are still fully warranted. I've been told by the installers "you get the 10years regardless of financing" but I haven't finished scouring the lease yet. It would be very unlikely they wouldn't honor it, since they'd be losing out on the rebate and making folks unhappy vs. buy.

I just can't find anything major wrong with this lease (yet). Sunpower + CA rules remove nearly all the issues/concerns with other leases and in other states. And the 20% reduction makes them in-line or lower than Chinese panels. In one of my quotes, it drops from Post-Rebate: $4.00/DCWatt to $3.20 DCWatt (20.8k/6.5dc).
I am aware however, if I could find another equivalent lease for non-sunpower, it should be 20% lower than that. I haven't found it yet, but there is one more isntaller in town who is doing 20yr with 10yr buyouts. But if that's carried by them, as a smaller company w/outside financing, I won't be interested. It's probably not even worth my time at this point.