What are they? Who cares about them? And what could they mean for your solar project? Any time a business borrows money from a creditor (i.e. lender), the creditor is likely going to file a UCC-1 financing statement to secure their claim to whatever collateral has been put up for the particular loan. The Uniform Commercial Code (UCC) is a set of guidelines for states to follow when developing their laws for sales and other commercial transactions. It results in very similar, if not identical laws in each state, such that, while records of financing statements are managed at the state and county levels, the forms look largely the same and have similar implications across jurisdictions.
Commonly known as ‘liens’, these financing statements are publicly available through a state's Secretary of State office and most often accessed by new lenders considering extending credit to a business. While they do not disclose the amount of credit that has been extended, financing statements do articulate which of the debtor’s assets the creditor is using to secure the loan. Existing statements also give lenders an idea of where they would be in line to recover assets in the event of a default. Typically, seniority follows a ‘first in time, first in right’ rule, meaning that the first lender to file has first priority, but there are a number of exceptions:
- A lien waiver signed by a senior lender can give a junior lender priority when it comes to the specific collateral in question.
- A purchase money security interest allows a lender to jump ahead of other creditors in the priority line on rights to any collateral that they can prove their loan was used to purchase.
- In many states, but not all, property tax liens also break the chronology rule.
In solar, there are a couple of debates going on related to lien rights and lender seniority. Most prominently, there has been disagreement about the seniority of PACE loans compared to pre-existing mortgage lenders. Many mortgage lenders were opposed to the PACE financing structure for this reason; the Federal Housing Authority issued lender guidance on the topic in August 2015 (read more here).
Just as important is the discussion of whether solar systems are considered real or personal property. Real property is typically defined as real estate (i.e. land and buildings) while personal property is essentially anything else. Some argue that solar systems qualify as a type of real property known as ‘fixtures’ - a non-removable attachment or appendage to another piece of real property. Others argue that solar systems are personal property because they could be dismantled and removed. Most states have limited, if any, litigation history establishing a precedent specifically for solar systems. In a forthcoming post, we will discuss the actions taken thus far by courts and solar professionals and examine the implications that either definition may have for borrowers, lenders, and installers.