The San Francisco Board of Supervisors unanimously passed an ordinance requiring all new residential and commercial buildings of ten stories or fewer constructed after January 1, 2017 to have permanent solar panels or solar heating units.
Currently, California only requires residential and commercial buildings of ten or fewer stories to be solar ready, meaning they need to have adequate roof area (15%) cleared for possible later installation of solar energy systems. [24 Calif. Code of Regulations §110.10]
San Francisco is the first major city to mandate solar energy in new construction across the United States. The ordinance supports the city’s goal to transition to 100% renewable energy by the year 2030.
Codifying solar energy in real estate
The benefits of solar utilities abound:
- clean, renewable energy;
- a 30% federal tax credit for the owners of the system; and
- net metering credits.
Solar units also increase the value of a home and are particularly attractive to progressive first-time Bay Area buyers. Additionally, the new ordinance claims solar energy has the potential to reduce sea level rise, a long-term, creeping threat to the coastal city’s stability.
However, homebuyers may not fully comprehend how home purchases work when solar panels are pre-installed. The homebuyer doesn’t necessarily own the solar panels or get tax deductions simply because the panels are built into the home.
In fact, homes and solar energy systems are typically owned — and thus, sold — separately from one another. Solar panels are not often wrapped into the standard mortgage a homebuyer takes out to purchase the home. Instead, the home is encumbered by a solar lease or power purchase agreement (PPA) which functions as a second solar lien or assessment bond against the property.
Accordingly, these solar bonds paid with the property tax bill are not tax-deductible (but interest paid on the principal is). Thus, they function in the same manner as Mello-Roos payments, which are excluded from homeowners’ property tax deductions. Homebuyers do not automatically get a tax credit for owning a home with pre-installed solar panels. When leased by the homeowner, the panels are owned by the solar company. This means the solar company and the builders are the actual recipients of tax credits.
The assessment bond or junior leasing lien for the solar panels in turn makes it more difficult for homebuyers to later sell the home, as they need to find a rare buyer willing to assume the solar lien in addition to the price paid to purchase the home. Mortgage companies also do not like the existence of the bonds or leasing as they increase the risk of default.
Requirements spur developers’ abandonment
Bay Area residents are already concerned developers might hit the pavement in response to increasing demands made on new construction sites. Thus, the solar requirement gives them pause.
Revision of city ordinances across the Bay Area is becoming the norm as developers and residents battle for control of the rapidly dwindling space available for new construction. Tighter rent increase caps and higher development fees are already repelling developers; solar installation requirements add salt to the perceived wound and possibly dissuade developers from building new housing.
Developers aren’t shy about resisting such requirements, either — just ask San Jose, a city which only recently ended a lengthy legal stalemate caused by the California Building Industry Association’s (CBIA’s) lawsuit against an ordinance requiring allocation of below-market units in new construction.
Developers hindered by these expensive obstacles are beginning to leave the Bay Area’s tech metropolis to work on cheaper, less restricted projects elsewhere which will provide a greater return on construction costs. Commercial construction may not feel any pronounced effects quite yet, as many proposals are already delayed in the face of opposition from not-in-my-backyard (NIMBY) conservatives. However, residential construction delays further inflame the severe lack of urban inventory in the Bay Area, pushing home prices to unsustainable heights and forcing a corresponding downturn in home sales volume.
Thus, initiatives for solar energy and other green solutions are ultimately positive, but they need to be weighed against local housing needs and prioritized accordingly. While solar energy benefits may incentivize homebuyers, there will be no homes to buy if developers abandon San Francisco.
For now, real estate agents need to inform homebuyers of the purchase and leasing options available to them for solar energy systems. Potential homebuyers thoroughly briefed by their agent on the costs and returns of solar energy are better prepared to purchase and maintain newly constructed homes with such systems pre-installed — and part of the price of the home. [See RPI Form 322]