Although more and more property owners are considering generating the electricity they need by placing a Solar Renewable Energy Project (“REP”) on their rooftop, up-front construction costs for the REP can pose a problem for many. So, how can a property owner finance a REP? One answer is for the property owner to secure a traditional bank loan - but - what can be offered as collateral? A cutting edge issue in the green industry is the use of the Solar Renewable Energy Certificates (“SREC’s”) which are generated by the REP as collateral for the loan. In considering this issue, an initial question for lending institutions is whether a borrower can grant a legally enforceable security interest in SRECs. In short, under the Uniform Commercial Code (“UCC”), SRECs do qualify as collateral and as such, an enforceable security interest can be granted in them. However, due to the inherent variability of the value of an SREC, only the most progressive lending institutions are currently accepting SRECs for collateral.

UCC § 9-102 defines collateral as “the property subject to a security interest” without providing an exhaustive list of the types of property that can qualify. One type of property that can be used as collateral under the UCC is a “general intangible.” A “general intangible” is defined by the UCC as “any personal property, including things in action, other than accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-of-credit rights, letters of credit, money, and oil, gas, or other minerals before extraction.”

For purposes of the UCC, SRECs would be considered general intangibles since they are “personal property” and are not, by definition, accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-of-credit rights, letters of credit, money, and oil, gas, or minerals. Therefore, in terms of enforceability of the security interest, an SREC may be treated like any other traditional collateral. The lending institution will require a Security Agreement to be executed, setting forth the specific terms of the lending institution’s interest in the collateral, and the filing of financing statements to perfect its security interest.

A SREC represents 1,000 kilowatt hours of electricity and is currently selling at auction in New Jersey at $640.00 each. Despite this selling price, as stated above, currently commercial banks are not routinely accepting SRECs as collateral for loans to finance REPs. This is likely due to the fact that although the selling price of SRECs is high now, their value will vary and the current economic climate is not conducive to such financial risk-taking. The commercial banks that are accepting SRECs as collateral for loans seem to be proceeding with caution and will typically require a lien on other collateral in addition to the SRECs, often including the underlying real estate. In addition, some commercial banks won't lend funds for the construction of a REP until the REP is already installed, thereby requiring the borrower to obtain a bridge loan.

Although there are potential stumbling blocks, owning a REP will not only allow your property to work for you in producing clean organic energy but it can also be lucrative. For more information regarding the sale of SRECs at auction, see

Another potential method of financing a REP is through a public electricity utility. Depending upon a borrower’s location and credit, up to 60% of the funds needed to construct a REP may be made available by PSE&G’s Solar Loan Program. All PSE&G residential, business, municipal, and non-profit electric customers are potentially eligible. These loans are specifically designed to be repaid by SRECs over the course of time. Additionally, the Solar Loan Program will lock in a fixed minimum price, thereby giving the borrower some security in knowing that a “floor” price for the SRECs to be generated by the REP exists. See

Finally, if all else fails and owning a REP outright is not financially possible, property owners may consider entering into a Solar Power Purchase Agreement (“PPA”) with a private third party known as a solar service provider. If the property owner is a public entity in New Jersey, certain bidding procedures for the work must be followed. However, private property owners are free to contract with any third party provider they wish. A PPA is essentially a financial arrangement whereby a third party provider installs, owns, operates, and maintains a REP on a property (typically, a rooftop) in exchange for the rights to the SRECs that are generated by the REP. The benefit to the property owner is obtaining clean energy at a heavily discounted price without having to front any money. The benefit to the third party is the income generated by the sale of the SRECs. There may also be other financial benefits and tax incentives.

Regardless of how a property owner finances a REP, a REP can result in a win-win situation for both the environment and the property owner/consumer.

If you have any questions about the legal implications surrounding the financing of a REP or if you are considering entering into a PPA, please don’t hesitate to contact Greenbaum, Rowe, Smith & Davis, LLP. Our Green Building Practice Group is comprised of professionals who can provide the full spectrum of counsel from drafting and negotiating construction contracts or lease agreements to obtaining local land use approvals and securing other necessary permits.