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Third-party financing adds some luster to solar industry

Just when solar power seemed like it was being overshadowed by an easing of the energy crisis and high interest rates, it may now have a chance at a comeback, with the help of an investment idea known as third-party financing.

The recession hit the fledging solar industry hard, but even as manufacturers were closing their doors, the investment community was taking a closer look at the tax benefits to be derived from leasing solar equipment.

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Third-party equipment leasing is a common investment practice, but the combination of a 10 percent investment credit, a 15 percent federal tax credit on solar equipment, and other inducements makes solar power an extra-tempting tax shelter for investors.

Basically, solar manufacturers sell their equipment to investors, who then lease the equipment to homeowners, who pay a monthly fee. Or, investors seek out commercial users, mount the solar panels on a warehouse or factory, and actually sell the power to the customer while retaining all rights to the equipment.

A typical example is Equinox Solar of Miami. A manufacturer of solar panels, Equinox sells its equipment to A.T. Bliss & Co., a financing and marketing firm. Bliss gathers venture capital by pooling the resources of limited partners seeking tax shelters. The limited partners in turn join forces with Nationwide Power Corporation, a leasing agent. Nationwide Power does all the legwork, finding homeowners who are willing to lease the equipment, installing it, and servicing the account and the equipment. In return, Nationwide gets 25 percent of the monthly rental while the partners retain 75 percent. This reverts to a 50 -50 arrangement in increments over 20 years.

The homeowner pays an initial installation fee of close to $500, and then a monthly charge of $20 for the first two years. In Florida, the average monthly hot-water bill for a resident is $40 to $65. After two years the fees are adjusted to equal 50 percent of the current rate Florida Power and Light is charging their customers. In addition, Nationwide agrees to free replacement of any damaged equipment, and there is no charge for service calls.

A variation on the theme is the system American Solar King of Waco, Texas, is using. They locate a customer who wants low-priced energy and secure a 10-year user agreement, with options to renew. The company then seeks out an intermediary, such as a brokerage, which brings together investors seeking tax shelters. American Solar King sells the equipment to the investors, who in turn sell the solar power to the customer for 80 percent of the going utility rate. Instead of actually leasing the equipment, the investors become, in effect, a small utility company.

For homeowners and solar manufacturers, the advantages of third-party financing are obvious: The homeowner isn't burdened with purchasing expensive equipment, and solar manufacturers gain new markets. But what's in it for the limited partners who are assuming most of the risk?

As a short-term investment, the prospects are not overly promising. The first five years of the investment isn't profitable, says Reinhard Mueller, treasurer of A.T. Bliss. ''But the equipment has a relatively long life and the write-offs make it attractive over the long term for the right investors.''

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In fact, the 10 percent investment credit and the 15 percent federal tax credit generally offset an investor's down payment on the equipment. At the same time, deductions on interest on money borrowed and accelerated depreciation add a bit more sparkle to the package.

Investment analysts say that in several third-party financing deals, the price of solar equipment is being marked up substantially to provide investors with the most favorable tax benefits possible.

Some solar manufacturers and dealers have expressed concern that the federal government may alter the 15 percent tax-credit law, or close the loopholes that make third-party leasing viable for investors, because such arrangements were not the original intent of the law.

David Redding, senior vice-president of finance for American Solar King, takes issue with that sentiment: ''Who's to say what the intent of the law is. There's no question tax credits encourage people to invest in alternative energy; no one specified how it was to be done.''

Certainly the law has encouraged this type of investment. Many homeowners interested in solar would not or could not pay the $1,800-$5,000 cash cost of a domestic solar hot-water heater. Others have shied away from solar because of their uncertainty and ignorance concerning the reliability and servicing of solar equipment. But third-party leasing removes most of these concerns, and has led to an increase in the the number of solar systems in operation.

The increase is evident in the earnings and stock prices of companies that have used third-party leasing. American Solar King's revenues are expected to climb from $5.6 million in fiscal 1982 to a corporate-projected $20 million this fiscal year. Two investment-banking firms have made their own projections of $26 million and $33 million for American Solar King.

A. T. Bliss revenue has swelled from $3.7 million in 1979, when they began their involvement in these programs, to $40.9 million last year. Now other solar manufacturers are contemplating third-party leasing, spurred on by the investment community.

Jack Graves, senior vice-president for marketing at Novan Energy in Colorado, says investors are soliciting his company for projects. But he prefers to take a conservative approach. ''If tax credits are allowed to expire at the end of 1985 , you could end up with production capability way beyond what you could market, '' he says. ''I'd prefer a growth rate I could continue to support.''

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