Video: Questions to ask TPO providers before selling leases
Due to interest rates and the domestic content tax credit adder, solar leases are dominating the residential solar market right now. What do you need to know to start selling leases? Solar Builder Editor-in-Chief Chris Crowell gets a crash course in third-party ownership (TPO) solar programs from BayWa r.e. Finance Program Manager Joshua Tinaglia.
- 0:35 – Why should I consider offering solar systems via leases – aka third-party ownership?
- 1:48 – Questions to ask of my business before offering TPO?
- 4:06 – Fundamental differences in leases vs loans, as a business model
- 5:49 – Is there more work on the front end?
- 7:08 – How do I evaluate TPO providers? Fine print to watch for?
- 11:01 – How does TPO change my cashflow?
- 12:58 – How does a lease deal change my O&M strategy?
- 14:24 – What if a TPO customer wants to add a battery?
- 16:47 – Examples of how financing can sink or save a business.
Watch the full 20 min TPO discussion above, jump to a timestamp, listen as a podcast, or read through the takeaways below.
Why should solar installers offer third-party ownership (TPO) financing?
Tinaglia: It’s another tool for your tool belt; it’s going to allow you to approach a market, your neighborhood, and have access to maybe two or three more homeowners out of 10 because they didn’t want to take on debt. They didn’t want to do a loan. They didn’t want to put money down or perhaps they’re trying to save money on a monthly basis, and they’re more payment constrained vs. their utility bill. TPO is going to beat a loan all day even with rates having dropped recently.
You’re going to be able to address customers you might not have won before and say I can get you a lower payment than your utility bill by X amount more by using this product. I think that’s really attractive for you, and also gives you another steady revenue stream for folks who are in that category, for areas where that’s going to be more of a concern.
How do I know the right financing options to offer my customer base?
Tinaglia: It is more complicated than just a lower payment because ultimately the tax credit plays a big role. We can even take the domestic content piece aside and just talk about the 30%. Can someone monetize that? If not, that’s an easy TPO.
The TPO provider does that for you. Since they’re the ones that own the system, they get the tax credit benefits and pass that off to the homeowner, typically. If you’re equipped business-wise to educate customers on the long-term benefits of TPO versus traditional sales, then you’re set up. If you’re not, and you’re already struggling to sell finance, it’s going to be hard to sell a different kind of finance.
Make sure your sales team understands:
- How these are structured
- How the benefits align for a homeowner
- And how also they might not work for a homeowner
The last thing you want to do for your long-term viability as a company is to be putting folks in bad finance structures that don’t actually make sense for them. You’re asking for bad reviews and not getting referrals.
Make sure your sales team understands that this is more than just a payment, it is thinking about the entire financial viability of a homeowner — while also not giving tax advice. You’re in a really tough position as an installer — believe me, I’ve been there — where you’re trying to manage all these expectations with homeowners. But if you do what’s right, you’ll come out on top.
What are the fundamental differences with TPO financing in the short and long term?
Tinaglia: The O&M piece [operations & maintenance] plays a big role in the true difference between TPO and cash or financing.
Let’s take a step back: If you’re an installer in business today, are you getting calls from orphaned homeowners who don’t have a solar installer anymore because that company went out of business, and you’re getting calls to fix their equipment? The homeowner is frustrated, you’re busy, but you could capitalize on that and perhaps monetize it. It’s a whole different vertical of your business that could be helpful.
Why does that play into TPO? Well, you might already have O&M set up inside your company, which is great. If not, you want to make sure the structure that you’re getting from the TPO provider [compensates you for] that O&M. … Thinking about TPO providers and how they structure their O&M is a huge fundamental difference between cash and finance because that is on you, ultimately. So ask those questions of your TPO providers.
Is there more work to do to get a project approved by the TPO provider?
Tinaglia: Important question because yes, you’re going to be tasked with doing more steps. I don’t want to scare anybody off, but it’s a necessary thing to do.
The TPO provider is going to be in a relationship with this customer for 20-plus years. They want to make sure you installed this to spec, and it’s going to live through that lifetime. Mostly it comes down to more pictures. You’ll be taking more pictures post-install to submit to your provider to show there’s no drooping wires touching the roof, everything’s aligned, the micros are tightened to spec, this is the exact SKU of the product I promised that I would install — which is also going to be important for domestic content purposes.
So, yeah, you’re going to have more steps, but if you want to make more money and serve more customers, you’re going to have to do some things that are a little harder than the normal way of doing it.
How do I evaluate TPO providers?
Tinaglia: Every TPO provider is going to have a different strategy in how they monetize the tax credit for domestic content, and if that gets passed on to the homeowner.
The one end of the spectrum, you aren’t going to be able to take anything with the tax credit. It is for the TPO provider. Just sell it, and that it is what it is, but we’re often using the ability to sell something that’s American-made, which is great. It’s going to get a lot of people interested.
Swing over to the other spectrum where we have TPO providers who are going to be able to pass that savings on to you, the contractor, whether that be for you to keep yourself and increase your margin or pass off on to the homeowner to save more money.
Price is obviously a major factor in your sales as an installer, so having that flexibility from a TPO provider is important. When you’re evaluating them, ask them.
- How is this going to be monetized?
- Who’s getting the tax credit?
- How am I able to use that in my sales pitch?
Understand from the lease provider how they monitor systems. How production is guaranteed. That’s not only going to decide operationally where to allocate some resources but also from the sales side. How are your salespeople going to pitch O&M?
You could get into compliance. How are you making sure that you’re compliant [when monetizing the tax credit]? Because if they’re not staying compliant, they might not be around very long to help you do more business.
Ultimately, have a backup plan. Have not only the loan provider and TPO provider, but maybe have one that does both. Have a second one that you have just in case. Diversification is key.
In that same vein, make sure to ask if they are looking for a certain amount of volume per month. Will you turn me off if I’m not giving you five deals a month? If I’m using you for a second look, how mad are you going to be?
How are you going to treat a homeowner who’s trying to sell their house? Can I buy it out and sell it easily to the next homeowner? Do you guys underwrite the new homeowner and just seamlessly transition to them? What does that look like for you because some of those are baked into contracts, some of them aren’t, but you definitely want to know that ahead of time.
On the financial side for the installer, how does TPO impact cashflow?
Tinaglia: Payment milestones are about the same. If you’re looking at how you get paid from a loan at M2 or beyond, it’s going to be about the same on a TPO project.
It depends on what you’re going to do on the O&M side and factoring in the cost in the future of a truck roll and replacing equipment. You might be compensating for it on the front side because that was factored in, but maybe not. Important question to ask your TPO provider because they all have different strategies.
If you have a prover who offers split pay through your distributor, that’s obviously going to improve your cashflow because you’re getting your biggest bill paid right then and there. Any money you’re receiving from the provider, you’re immediately able to apply that to operations or forward-thinking things like marketing, investing in assets, etc.
How does a lease deal change my O&M strategy?
Tinaglia: Again, question to ask the TPO provider: How are these things factored in? What is the compensation if X? If I have to go replace a module, am I getting a $250 stipend? Am I getting $500? It is absolutely baked in; you just need to ask the details so you how much you should buffer on the O&M side.
Going back to the conversation about the flexibility of a provide to give you some savings on the tax credit — maybe that also changes how much you keep for yourself, just to factor in future costs. So:
- What is the TPO provider going to give you?
- How much does it really cost you to do said truck roll?
- Are you getting enough out of that deal?
That could tell you then and there that maybe that’s not the provider for me, or hey, this is great, let’s go with it and we can pass all the savings on to the homeowner and not worry about it on the back end.
What if a TPO customer wants to add a battery?
Hear that answer and the rest of the chat right here:
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