Freddie Mac’s Guidelines for Underwriting Multifamily Properties With Solar Panels

Adding solar power to a multifamily property might seem like an easy choice. However, from Freddie Mac’s view, it was much more complex than most owners and investors realized. So, they now have a Multifamily Seller/Servicer Guide that includes a section on solar agreements, as well as a solar analysis document.

A stumbling block in the past related to three different categories of financing. The first was an outright ownership of the solar equipment by the borrower, providing little risk to Freddie Mac. The second is a third-party-owned solar structure, under which the borrower contracts with a third party that owns, installs, and manages the solar equipment on the borrower’s site. The third is an affiliate-owned structure, under which a large multifamily sponsor creates a separate legal entity from the borrower to own and maintain the solar panels, often as a way of claiming federal tax credits.

It is the second and third structures that create increased risk, as there is now complexity in ownership and a question of who is borrowing money to purchase the property when a physical structure on the building isn’t part of the transaction. Some of the risks include tax credit capture, subdebt to public utility regulation, and local zoning codes.

There were also issues of information flow or lack thereof. Lenders often couldn’t provide the necessary data to identify and mitigate risks. That made deals more cumbersome and time-consuming, causing some parties to take part.

The seller or server must fill out the solar analysis document and provide it to Freddie Mac. It includes information about the equipment, like who is the solar equipment tenant; legal rights of access, who consumes the generated power; the appropriate documents about the arrangement; whether there are preliminary installation fees or expenses; whether there are financial obligations on any mortgagee or subsequent owner; and other details about any arrangements.

According to the guide, there are title insurance policy requirements, questions of borrower or third-party ownership, insurance requirements, and questions of subordination, nondisturbance, and attornment. Freddie Mac can also require additional documents, such as an estoppel certificate, collateral assignment, credit enhancements, and modifications to loan documents.