Leasing companies have created three different types of leases, a zero down lease - meaning no money down at signing, a lease with money down, and a prepaid lease – a large sum is required upfront, with no subsequent lease payments for the term of the lease. Our goal for the second part of this three part blog series is to explain each leasing option as well as the type of homeowner who would benefit from each option.

The Zero Down Lease

A zero down lease is a good fit for homeowners who do not have the upfront capital needed to purchase the solar system outright or who do not qualify for a low interest home equity loan (because there’s not enough equity in their home). Zero down leases are great for this type of homeowner, particularly those who are pursuing solar for environmental reasons rather than long term financial savings.

One of the things to be aware of when signing a zero down solar lease is something called an “annual increase” or “payment increase”. Simply put, this is the percentage that the monthly lease payment will increase, every year, for the duration of your contract. On average, the annual increase will range from 2-4%.  A yearly payment increase can have a significant impact on the actual savings of a solar lease. For example, if the contract terms state a 3% per year increase in your lease payments, and the utility company also increases their rate 3% per year, then the homeowner comes out about even. However, if it turns out that the lease’s annual increase eventually ends up being higher than the yearly increase in the utility rate (e.g. historically TEP has a 2% annual rate increase) then, financially, the homeowner loses.

Some zero down leases, specifically those with a low annual increase, can be cash flow positive, meaning the lease payments are equal to or less than your utility bill. The financial disadvantage of the zero down lease is similar to any lease: just like leasing a car, in the end, the homeowner will pay significantly more for leasing the PV system than if they were to purchase the system up-front, and they will not own the system when the lease is up.

A Money Down Lease

A money down lease is essentially the same as a zero down lease, except the leasing company usually exempts the lessee from any annual lease increase, and the monthly lease payments are lower. This option makes sense for homeowners who are not comfortable with their lease payments increasing every year and for those who have a small amount of capital to put toward the cost of the system.

The Prepaid Lease

The prepaid leasing option is as close as one can get to actually owning a system, while still leasing. However, this requires a larger upfront expenditure than the money down lease, but it is still less than purchasing the system up-front. The upside to this option is that the lessee will not have any additional lease payments under this arrangement. Nonetheless, like the other leases, there can be a problem in transferring the lease if the lessee decides to sell the home and the new owner does not want or is unable to take on a lease. The lessee could lose their upfront investment and incur other financial penalties for terminating the lease too early.

Both the money down and the prepaid lease can offer a high rate of return, often over 10%. However, actual system ownership provides greater overall savings. In the third and final part of this blog series, we’ll dive into the numbers to illustrate the difference between the various financing options.

In Closing

Solar leasing companies are putting forth an increasing number of options for homeowners, and for certain individuals, particularly those with little upfront capital and who are not interested in owning the system, leasing can be a good fit. However, each of these lease option has its tradeoffs. The zero down lease has a yearly payment increase and negligible savings. The money down and prepaid lease locks the homeowner’s capital into a solar system which they do not  own and they may have problems recapturing their initial investment if they decide to sell their home before the end of the 20 year contract.

Check out the other blogs in this series:

Weighing the Solar Options: Leasing vs. Financing vs. Owning a Solar Electricity System: Part 1 of 3

Solar electric Financing: Zero Down Loan vs. Zero Down Lease: Part 3 of 3