Over the course of the last 6 months, PearlX has led an coalition effort to engage Fannie Mae to update their guidelines to allow for flexible third party owned solar financing structures that will give clarity to multifamily properties and DUS lenders on how they can deploy clean energy technologies to improve NOI and help offset tenant utility costs.
Fannie has confirmed in a public letter, and in follow-ups since then, that they plan to issue guidance on solar leases in 2025. This is a big step forward, and multifamily owners and DUS lenders should take note that solar projects which may have been previously difficult to get approved by Fannie may be streamlined shortly.
This lack of clear guidance causes unnecessary confusion, delays and increased transaction costs, and Fannie could greatly help align the market by issuing clear guidance to DUS lenders on what structures are pre-approved.
This would not be a controversial or even new development for Fannie – the agency approved third-party owned financial structures for single family back in 2015, and now has an opportunity to follow the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Department of Housing and Urban Development (HUD) by issuing clear guidelines that allow for third-party ownership of onsite solar, battery storage, and electrification technologies in multifamily rental communities, and facilitate these technologies reaching the underserved renting populations that have historically been left out of the benefits of clean energy.
Fannie Mae and Freddie Mac collectively back 58% of the US multifamily mortgage market. Multifamily renters have been largely left out of the benefits of renewable energy. While recent developments in some states have helped accelerate the pace of multifamily adoption of onsite clean energy, Fannie Mae’s current guidance prohibiting solar leases poses a major roadblock to further deployment.
Many multifamily properties choose to pursue solar through third-party ownership, wherein a third-party investor will own and operate the onsite solar, and the landlord and residents will enjoy the benefits of reduced bills, electrification, and resilience. This may take the form of a Lease, Power Purchase Agreement, Solar Services Agreement, or a similar structure. This was true before the Inflation Reduction Act (IRA) and is even more true now with its provisions that benefit third-party ownership. This structure can be combined with local, state, and federal incentives to make multifamily solar financially accessible to properties of all types, especially those for whom the cost of outright ownership of a solar and battery system would be overly burdensome.
Fannie Mae’s current posted policy states that solar or solar paired with storage must be owned by the borrower (i.e. the building owner). Fannie Mae has begun considering requests to allow third-party-owned projects on a case-by-case basis, but the ad-hoc approach and continuing written prohibition from Fannie Mae is resulting in a complicated and inconsistent process for building owners who want to install third-party-owned solar, deterring building owners from installing solar altogether. Even if the property is not currently backed by Fannie Mae, its size in the market effectively dictates a policy of prohibition. Fannie Mae has long provided workable guidance for single-family homes and has been a part of multiple conversations and working groups on this topic in recent years, but it has yet to finalize definitive guidance regarding third-party-owned solar for multifamily homes.
This presents several problems. Firstly, it means that the residents of these multifamily properties continue to be left out of the benefits of our country’s transition to renewable energy. Secondly, it threatens to derail the deployment of funds from the IRA. The IRA contains billions of dollars in federal funding that will need to flow through multifamily properties to reach these underserved communities and provide them with the benefits of lower and more predictable electricity costs, cleaner air, electrification technologies, and greater resilience to the impacts of climate change. Third, it prevents owners of these properties from pursuing onsite value creation that directly benefits Fannie Mae by strengthening the real estate asset, as owners can use budget savings to increase property services and amenities or reduce their debt service ratios.
Other similar federal agencies have already grappled with this problem, and we believe there is a roadmap that Fannie Mae can follow to allow solar and storage to be rapidly deployed to benefit renters. Freddie Mac has updated its regulations and provided clear guidance for multifamily properties including broad eligibility; pre-approved forms including Subordination, Non-Disturbance, and Attornment (SNDA) agreements; a detailed checklist designating the party responsible for completing the analysis; and is successfully processing third-party-owned solar systems. HUD similarly has pre-approved legal documents and released helpful guidance in early November 2024.
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