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Calif. Builders Strategize Ahead of 2020 Solar Panel Rules

The day is fast approaching when the Golden State will begin requiring solar panels on new homes, and residential builders and their lawyers are grappling with the possibility of increased construction costs, questions surrounding installation on multifamily structures and potential marketing issues.

The groundbreaking rules are the first of their kind in the U.S. and will take effect at the beginning of next year. They comprise part of the state’s 2019 Building Energy Efficiency Standards, which were approved in December, and their potential effects were recently amplified when newly inaugurated Gov. Gavin Newsom unveiled a proposed budget that includes $7.7 billion for housing and homelessness, attorneys said.

“I think the impact just got dialed up,” said Ali A. Zaidi of Kirkland & Ellis LLP, “Not just for the real property investors, but also for investors in energy.”

With the possibility of more housing being built, it stands to reason that more people will feel the effects of the solar mandate, one of which may be higher housing and construction costs. That could be problematic, attorneys said, especially in a state where homeownership is already out of reach for many.

But the California Energy Commission, which initially greenlighted the requirement in May, said homeowners will be able to recover the cost of solar installation by paying less on monthly energy bills. There’s also flexibility built into the law that allows a community to band together and share a solar power system, a battery storage system or a system using another type of renewable energy as a way to partially or completely comply with the solar mandate, attorneys said.

Partnerships with solar companies could be another way for builders to defray the costs of installation. Under such an agreement, the solar company would install the equipment at a house, then charge the owner for use of the system for a certain period of time, resulting in little to no upfront cost, lawyers said.

“Just looking at it from what is the solar cost on a home, the implications may not be that dire,” said Daniel Phillip Sinaiko, a partner at Akin Gump Strauss Hauer & Feld LLP who focuses on project finance and renewable energy.

Heather H. Whitehead, a partner at Newmeyer & Dillion LLP, also said there could be some type of consolidation among those involved in the construction and renewable energy industries. A construction and real estate attorney, Whitehead said she’s heard of roofing companies who have or are looking to pair up with solar businesses.

Such agreements could benefit project owners, who don’t really want to own or be responsible for the panels themselves, she said.

Zaidi, whose practice includes a focus on environmental issues and energy regulations, agreed that partnerships and other types of financing options could help mitigate any costs to builders and homeowners.

“We are likely to see a number of strategies emerge around financing structures and shared control or responsibility with regard to meeting this requirement that will make it possible to shift potential increased costs to third parties or spread them over time,” he said.

Good contracts naturally play a part in ensuring a smooth transition when the regulations take effect, especially given the number of parties that may be involved in supplying, installing and maintaining the panels. Contracts need to be thoughtfully drafted to ensure the builder isn’t “left holding the bag” for issues such as panel repair, Whitehead said.

“I think they’re exposed to enough liability as it is with building a home,” she added.

Well-drafted documents will also lay out who’s responsible should anything go wrong with the panels or the building they’re on, whether it’s a damaged roof, improperly wired electrical systems, a fire or any number of construction defects, attorneys said.

“A good contract will try and address these potential issues in a clear way before any problems arise, so if something should happen, the risks are clearly allocated,” said Jennifer Tung, an associate at Hunt Ortmann Palffy Nieves Darling & Mah Inc. who works on construction defect litigation.

Builders will also have to ensure they know what’s in the documents governing the community living in certain multifamily buildings. The state has required those selling single-family homes to offer solar power systems as an option to buyers for years, but this type of requirement is new for multifamily properties, attorneys said. Under the new standards, multifamily properties with three or fewer stories will have to have solar panels installed.

If a condominium association or other such community is maintaining the building’s roof, any potential issues related to damage should be dealt with in its governing documents. Builders need to make sure these deal with solar panels, something that needs to be done when the documents themselves are being developed, said Anna T. Dorros, a real estate partner at Sheppard Mullin Richter & Hampton LLP.

“Typically with solar, you’re attaching it to your own roof so you don’t have to think about it being installed on something that the individual isn’t actually the owner of,” she said.

It’s also important that builders don’t embellish the cost savings, energy efficiency or “greenness” of a home, especially given the general vagueness of the term “green.” Builders should instead be careful about how they market the houses they build and are best served by providing basic information about what the solar generation systems do, attorneys said.

“I don’t think it’s a good practice to oversell and say, ‘You’re going to save tens of thousands of dollars a year,’ if that’s not actually what happens,” Whitehead said. “I think it’s better to manage the expectations.”

But when Jan. 1, 2020, rolls around, it may not even be necessary to market homes with solar panels, said David A. Shimkin, a Cozen O’Connor PC member who works on construction litigation matters.

“This is not an option,” he said of solar panels on homes. “This is the law now.”