BY DOUG CUSHING
Oregon has been one of the leading states supporting the expansion of solar power, both in terms of manufacturing and installation of generating capacity. This includes state funding of manufacturing plants and limited subsidization of home generation systems. Private companies are also moving to install generating systems, some for their own purposes, to feed the grid when possible.
An early choice on either a residential or commercial building setup is how to finance the project. Some choices are easy, the homeowner or building owner accesses a line of credit or simply pays cash. Some utilities may provide funds to the entity installing the system, which then leases it to the property owner. Alternately, the property owner may execute a subordinate deed of trust or execute a UCC fixture filing to secure payment for the equipment setup.
What are the collateral consequences of the different options? If the provider uses its own credit and claims a Purchase Money Security Interest (PMSI) or a deed of trust on the real estate, what do they really hold? If the system is leased and the installer or utility claims the first position, how does this interest resonate with a first mortgage?
The first question will be whether the installed system is a fixture or deemed part of the building improvements. A fixture is personal property, so a UCC filing would be the method used to secure a lender. Does that determination also control the claims of an installer who may expect the right to claim a mechanic’s lien that attaches to a building?
Oregon courts test whether an item has been annexed to the property, attached to the property, and intended to be permanent. The relation of the party to the building may matter, and statements of these parties can be factors in determining whether the improvement was intended to stay with the building. As the typical home or commercial building system is affixed to the structure, to provide power primarily to that building, and for the indefinite future, they may sound like permanent parts of the real property. However, there may be only a few bolts and electrical wiring connecting equipment that is readily disconnected and removed.
As annexation can be a subjective intent factor, cases from the Oregon courts may seem contradictory. Above-ground pipelines were deemed real estate in a mining operation, but personal property in an orchard. Depending on the size, nature of attachment, and potentially the extent to which the system is primary or secondary as an energy source, a court could make a different call on seemingly identical systems.
The homeowner may have a much different sense of their home's attachments than a sophisticated business owner in analyzing the effects of annexation to a building. Similarly, the financing entity's concept of ownership must be clear at the outset. That party will usually first determine the form of financing and security. Some items seem clear—wall-to-wall carpets are real estate, gas ranges are not.
A property owner who defaults may not care whether they have granted a deed of trust, a UCC security interest, or a lease, but there are different enforcement issues, particularly in a bankruptcy or multiple claimant situation. Better to make sure from the outset what those rights and risks entail. The holder of a UCC security interest may have priority over a mortgage lender in the case of a default if they funded the purchase of the system before it was installed and perfected their interest within a narrow timeline. A property owner adding solar some time after financing the purchase of their home or commercial building may not care who is first, but in the case of a default lenders will. A UCC interest can be foreclosed much sooner than a mortgage or deed of trust, which could surprise the lender post-foreclosure to see a solar system gone.
As is often the case, full and early disclosure, often at least three months, among all the parties (majority owner, lender, installer, system seller, utility) as to the exact nature of ownership and potential default rights can keep everyone happy—so long as the sun shines!