There continues to be a strong push for renewable energy and, in recent years, schools across the United States have installed solar panels on their rooftops or elsewhere on campus. In addition to big names such as the University of Arizona, Princeton and Yale, more than 3,000 K-12’s have installed solar as well. Not only is this a great “green” initiative, but it also helps educational institutions reduce their massive utility costs.
Studies of the solar energy market show that larger systems earn a bigger return on investment which means large institutions, such as schools, have the biggest opportunity to save with solar. Through a transition to solar power, there is the opportunity for schools to see millions of dollars in energy savings over the course of 30-years.
The biggest obstacle to using solar is often how to pay for the transition. Should the system be bought outright or is it better to contract with a third party owner using a lease? Since the majority of schools are nonprofit organizations and not able to take advantage of solar tax breaks, many opt to finance the system through a lease.
An operating lease is a finance agreement where the term of the lease is shorter than the actual useful life of the equipment. For example, solar panels with warranties of 20-25 years may be leased for 7-10 years on an operating lease. An operating lease may be the ideal financing structure for schools that don’t have an appetite for the Federal ITC or the Modified Accelerated Cost Recovery System (tax credits for depreciation). An operating lease allows the lessor to utilize the tax benefits and pass that value back to the lessee in the form of lower lease payments.
There are many benefits to utilizing a solar operating lease, including:
- It allows the institution to preserve capital.
- No burden to limited cash flow. With an operating lease there is not a hefty up-front charge. The school can make fixed payments as it generates electricity, ultimately eliminating some utility bills.
- Off Balance Sheet. One of the most popular advantages of an operating lease is that it may allow payments to be deducted as operating expenses during the period in which they are paid.
Univest Capital, Inc. is a subsidiary of Univest Bank and Trust Co., an Equal Opportunity Lender. Please note that this communication is for informational purposes only and neither this financial institution nor any of its affiliates give tax or legal advice. Consult a tax advisor regarding what may be best for your institution’s situation.