On the long and winding road of solar project development, property taxes are frequently an afterthought. Yet, the presence, or lack, of a property tax on a solar energy system has significant implications for a project’s profitability. According to SEIA, 38 states in the U.S. have property tax exemptions for solar, and there are more states that are pushing them forward (most recently Colorado). However, property tax exemptions are nuanced, often with different treatments for personal property (business equipment such as tools, fixtures, and vehicles) and real property (land and buildings).
This can sometimes mean that solar energy systems and third-party financing arrangements will not qualify for the exemptions. Moreover, there are some solar markets where property tax exemptions are individually negotiable — but not definite. Georgia and Massachusetts are two examples.
In Georgia, legislative efforts and utility programs have sought to increase solar development. Despite these efforts, project margins remain very tight because of low PPA rates. In addition, the state relies on property taxes (not sales tax or income tax) to generate much of its income, which means solar projects face the additional burden of real property taxes. As a result, we have seen cases where a “good” project’s viability hinges on the project’s tax treatment.
Massachusetts provides another interesting example. For the last 40 years, the state has had a property tax exemption for energy systems that provide primary and auxiliary power to private, tax-paying entities. However, local tax assessors in Massachusetts have the authority to interpret whether or not a solar energy system qualifies under this exemption — and assessors are motivated to increase tax revenues.
We have seen interpretations from the Massachusetts Department of Revenue (DOR) range depending on the County. One common interpretation holds that the system owner must be the local taxpayer; thus, third-party owned systems would not qualify. Another common interpretation holds that all the power from the system must be consumed on-site from the host; thus, any net-metered systems would not qualify. Alas, this ambiguous guidance leads to uncertainty for solar development — and a potential landmine for solar developers and financiers.
In some cases, we have seen developers successfully avoid the property tax cost by negotiating a payment in lieu of tax (PiloT). Such PiloT agreements offer a developer with strong local roots an opportunity to add value to the project through savvy negotiation. Often, showing a local authority that a project cannot go forward without a PiloT can help. Similarly, emphasizing that the system will not be a heavy consumer of municipal services can be compelling (unlike many other property-owning businesses, your solar panels won’t be calling the police, sending kids to school, or attending the local Fourth of July parade).
In states like Massachusetts and Georgia where property tax exemptions are not straightforward, it is prudent to ascertain the likelihood of a tax exemption as early as possible, and project stakeholders should be aware of possible headaches (and increased transaction costs) associated with these tax exemptions. Working with a financing partner who has strong previous experience can also remove risk from the equation.
Lead image: Property money via Shutterstock
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