Getting Solar, Cell Tower, and Rooftop Lease Approval from HUD

A new HUD draft notice offers both opportunities and responsibilities for owners.

HUD recently released a draft of a new notice aimed at owners of HUD-assisted or HUD-insured multifamily properties, outlining the steps required for approval of commercial leases involving rooftop solar systems, cell towers, and other similar equipment.

The draft notice’s intent is to centralize the process for reviewing requests from owners to enter into such leases. HUD’s notice offers both opportunities and responsibilities for owners. Commercial leases such as those involving solar power can provide substantial long-term financial benefits through energy savings and rental income, and recent federal incentives make clean energy installations particularly appealing.

The notice is the latest in HUD’s commitment to supporting energy efficiency and revenue generation in affordable housing. Leasing rooftop space for solar can generate rental income. It can also reduce electricity costs, improving a site’s financial stability. But owners must approach these types of commercial leases with a clear understanding of the costs and requirements involved. They need to demonstrate that their sites are structurally and financially prepared for rooftop installations, with a plan for maintenance and necessary adjustments to reserves.

HUD’s draft notice makes it clear that rooftop leases and installations must not adversely affect tenant living conditions or the property’s long-term viability. And compliance with HUD’s financial, insurance, and environmental requirements is essential for successful approval. It sets clear requirements for multifamily housing owners interested in entering such leases, such as ensuring that a property’s roof can handle new equipment and is adequately insured.

HUD Rooftop Lease Rider. The notice includes a HUD Multifamily Solar, Cell Tower, and Rooftop Lease Rider to be signed by all parties prior to the installation of the solar electric system, cell tower system, or other rooftop equipment under a commercial lease. It also includes a sample self-certification to be completed by owners, which requires them to attest to several items, including the condition of the project roof, insurance coverage, and having a plan for removal and reinstallation of rooftop equipment in the event of roof repair or replacement during the lease term.  

With the Inflation Reduction Act providing financial incentives like tax credits for clean energy initiatives, HUD anticipates a rise in applications for rooftop solar leases and wants to ensure that these negotiations align with its guidelines and don’t impair a site’s viability. We’ll go over what HUD is saying about requirements for owners seeking to install rooftop or other on-site solar systems and HUD’s approval process.

Requirements for HUD Approval

The notice will apply to any owner of a HUD-insured or HUD-subsidized multifamily site that’s subject to a multifamily housing business agreement. This may include those sites subject to a regulatory agreement, HAP contract, or project rental assistance contract. For these sites, HUD has long mandated that owners seek approval before entering commercial lease agreements, especially those that could affect a property’s mortgage security or tenant conditions. HUD categorizes on-site solar leases, cell tower installations, and rooftop leases, as “encumbrances” that require careful review to protect HUD’s interests. And for owners, these leases represent potential opportunities to improve property cash flow and provide on-site renewable energy to reduce utility costs.

For owners seeking HUD approval for a rooftop lease, the process involves submitting a detailed package to HUD, which is then reviewed by HUD account executives (AEs). The notice outlines each component that must be included for HUD to consider the request. Below are the key requirements:

Lease agreement. Owners must provide an unexecuted copy of the proposed lease or other related agreements, including any Power Purchase Agreement (PPA) with solar vendors. The lease documentation should clearly outline the terms and financial commitments.

Lease payment estimates. Annual estimates of lease payments or benefits expected from the lease must be included if not specified in the lease agreement itself. For solar-only leases, owners should provide estimates of system productivity and potential electricity cost savings the site and/or residents would receive.

Self-certification, replacement fund provisions. HUD mandates that owners complete the HUD Multifamily Rooftop Lease Owner Self-Certification form. This requires owners to agree to increase deposits into the project’s reserve fund for replacements if there is such a fund and if they are responsible for financing the removal and reinstallation of rooftop equipment for anticipated roof replacement during the lease term. This fund is intended to cover major repairs. Owners must also submit a financing plan for the removal and reinstallation of rooftop equipment, regardless if the site has a reserve fund for replacement.

Roof inspection (for rooftop systems only). For rooftop leases, HUD requires documentation from a recent inspection by a third-party roofing contractor. The report should assess the roof’s condition, remaining useful life, and capacity to support the proposed equipment. Any required improvements must be documented and submitted along with the request.

Mortgagee approval (FHA-insured properties). If the project is FHA-insured, owners must include documentation showing that their mortgage lender approves of the rooftop lease arrangement.

Optional additional information. The submission package to HUD for approval may include supporting documents like maps of equipment placement, information on subsidies received, and any other relevant project data. It’s important to note that for solar leases at HUD-assisted sites, HUD will require benchmarking on energy consumption and emissions reductions is required within 18 months after installation.

HUD’s Approval Process

Once the owner submits a complete application, HUD’s AE reviews it to confirm that the owner is in compliance with HUD’s conditions, including any outstanding regulatory or financial obligations. For example, a recent below satisfactory management and occupancy review rating or an outstanding failing REAC score using either NSPIRE or prior standards will indicate to the AE the owner is not in good standing. Owners with compliance issues may need to address these concerns before approval is granted, although HUD may approve a request if a satisfactory plan for resolving these issues is in place.

The AE will then forward the documents to local HUD counsel for legal review, assessing the lease for compliance with HUD’s requirements and ensuring that the lease doesn’t compromise HUD’s financial interest. Following this, HUD’s decision is communicated to the owner. Approval letters, signed by the Multifamily Asset Management Division Director, will authorize owners to proceed with the lease.

Conditions After HUD Approval

Upon approval, owners must fulfill additional obligations, including:

Execution of lease rider. HUD’s Multifamily Solar, Cell Tower, and Rooftop Lease Rider must be executed before equipment installation. This document formalizes the arrangement and includes HUD-approved lease terms.

Insurance coverage. Adequate insurance is required throughout the lease term and during installation or removal. This insurance protects both the rooftop equipment and property in case of damage. HUD or the performance-based contract administrator staff will confirm this requirement has been met during the site’s next management and occupancy review.

Benchmarking and utility adjustment. If the site uses solar-generated electricity on-site, HUD requires utility benchmarking to measure energy and emissions reductions, which must be submitted to HUD within 18 months.

Also, if assisted tenants at the site receive a utility allowance for electricity expenses, the owner must complete and submit a new baseline utility analysis, in accordance with Notice H-2015-04 (or successor guidance), to adjust tenant utility allowances if the solar electric system will reduce the cost of energy consumption by lowering actual electricity rates.

And owners who use PPAs with solar vendors may also need to adjust tenant utility allowances, as lower electricity rates may impact the utility allowance provided to tenants. The owner is likely purchasing electricity from the site’s solar electric system at a cheaper rate than they otherwise would from the electric utility. If this reduces the rate at which assisted tenants purchase electricity, then the PPA will reduce the cost of energy consumption. Therefore, a new baseline utility analysis would be required.

Reserve fund adjustments. If roof repairs are anticipated during the lease term, owners may adjust contributions to their reserve fund for replacements to cover the expected costs. If the owner is responsible for financing the removal and reinstallation of the rooftop equipment necessary for an anticipated roof replacement during the lease term, the owner must contact their AE and complete Form HUD-9250 Funds Authorizations to request HUD’s approval to increase the rate of deposits to the reserve fund for replacements with commercial lease income. HUD says this step can be performed with the original submission for approval of the lease rather than after HUD approval has been received.