Solar panels as a form of alternative energy continue to grow in popularity, both on residential and commercial projects. As the demand for solar panels increases, so does the likelihood of a creditor grappling with a customer when securing lien rights on solar projects. Unlike traditional forms of energy, determining lien rights on properties with solar panels—like many caveats in construction credit—depends on the type of project.
"What's of vital importance is to know who your contract is with—that's the biggest thing," said Chris Ring, of NACM's Secured Transaction Services. "It depends on the type of solar panel project there is and what role the customer is playing in that project."
When determining if a creditor has lien rights on a project, Ring advised looking into a few key features on the project: Are the solar panels affixed to a single rooftop, and if the panels span across a large plot of land, is the customer leasing that land from one or more owners, or does the customer own the entire plot of land?
If the panels are affixed to a rooftop and do not span outside the property's address, determining lien rights becomes a straightforward process. Like other means of filing liens on a property, check with specific state laws and file a lien accordingly; solar panels do not have a direct effect on the type of lien filed, nor do the panels fall under specific lien guidelines—provided the state in question does not have any provisions.
The process becomes more complex when the solar panels sit within a large plot of land.
When gathering information about the project, creditors should understand who owns the land where the panels reside. Ring said to get a "general description of the property," which indicates who the owner(s) of the land are. If the plot of land is big enough, Ring said there may likely be more than one owner, meaning a creditor would have to file multiple leasehold liens on what is supposedly one project. If the customer is also the owner of the land, then the creditor will not have to engage with lien rights under leasehold interests.
Creditors have another option outside of liening on a property or leasehold interest, provided the debt and the project are substantial enough.
"If you're in a situation where you're not getting paid, you can sue for judgment," Ring said. "If it's the owner involved, not only does the work on that one project come into play, but all the assets of the owner can come into play when you're trying to enforce a judgment on that large owner entity."
Ring said this option comes to fruition when the original value of the property dips for whatever reason such as economic downturn. When filing a lien, the creditor only has rights against the current value of a property, not the value when the sale was made, meaning a lien on the property would be worth less than originally anticipated. Suing for judgment brings all of the owner's assets into question.
But, Ring said, suing for judgment only applies when the creditor is working directly with the owner.
"If they're working for a general contractor or subcontractor, they can't bring the assets of the owner into play because their only hook is into the actual piece of property they're working on," Ring said. "If any company has a direct contract with the solar array company who actually owns the entire project, then they can often do a lien on leasehold interest, or they could sue the judgment and bring all of the assets of the customer into play."
Creditors have options when working with solar panels, but the options become limited when creditors do not know enough about the project.
"It all circles back to that original concept we talk a lot about, which is figuring out where the piece of property is that you're supplying, and who that property owner is, and does the company who is commissioning your work, does the owner of that project, actually own that land?" Ring said.
—Christie Citranglo, editorial associate