After dramatic declines in the cost of panels, solar photovoltaic (PV) systems are producing electricity at costs below utility costs in many parts of the United States. The cost of solar modules has gone from $100 per watt to $1 per watt, and that evolution has changed everything. By 2020, energy analysts expect the price of solar-generated electricity to be at or below the cost of utility-supplied electricity in more than half of United States.
Many organizations have committed to the idea of sourcing their electricity entirely from renewables. Some, including Intel, Kohl’s, Apple, the National Hockey League and Starbucks, buy enough clean energy to offset or run all of their operations. However, property developers selling or renting their spaces have been slower to incorporate rooftop solar into projects. Because their tenants usually pay the electric bills, there hasn’t been much incentive. But this scenario is changing.
What is different?
Some contractor developers see photovoltaic installations as a way to meet green criteria for their buildings and reduce vacancy rates or increase rental rates. More importantly, many people willing to make this investment have found ways to recoup installation and management costs – they have found ways to profit from PV.
Certainly net zero energy buildings, or buildings that produce all their own energy, are a popular activity in the green building market, but there is also a place for buildings that only meet part of their energy needs with photovoltaic systems.
My company, Point Energy, works with developers who push the boundaries of solar innovation every day: Hanover Page Mill Associates and Sharp Development in California; and the Tower Companies in Washington, DC, are three examples of companies that have developed and leased solar offices. They shared their strategies and best practices for our recently released white paper, “Profiting from the Sun,” which explores cost recovery and financing options for developers interested in solar inclusion. (Registration required to download the full report.)
Best Ways to Recoup Costs
Through our research, we have found that developers use five main strategies to manage expenses related to the inclusion of solar power in their buildings.
- Use Gross Lease, Modified Gross Lease, or Full-Service Lease: In models where the landlord pays all utility costs, the lower price advantage can be used to increase the margins they make on Lease contracts. They can set rental rates at market value, but they will earn more on the relationship than competing developers.
- Institute a green surcharge or a green lease: this would create a “value” associated with the solar installation.
- Selling PV-generated electricity directly to tenants: Some states prohibit this practice and may require a special license.
- Take advantage of Property Assessed Clean Energy (PACE) bonds: this type of lease allows the landlord to pass on operating expenses, including property taxes, directly to their tenants.
- Rent or loan the roof to a third-party solar company: Some developers may choose to allow another company to use their rooftops for their solar expansion. An example of a project is the Prologis Kaiser distribution center in Fontana, California. In this model, a third party “owns” the power plant for a set period of time and pays rent to the building owner for the privilege of using their space. In fact, Prologis, a gigantic real estate investment trust, carried out many of these transactions.
Many financing options
Just as they can recoup their expenses in different ways, developers can take advantage of a variety of financing mechanisms and incentives that reduce the capital outlay associated with starting a project. It is not uncommon to see a combination of approaches used, depending on the location of the project. The most common practices include:
- Direct PV purchases: This makes sense if a developer has a positive tax liability and can benefit from tax credits and accelerated depreciation.
- Equipment leases: This is particularly attractive for developers who are not subject to tax (the leasing company receives tax credits and depreciation benefits).
- Property Assessed Clean Energy (PACE) Financing: System costs are included in the property assessment and then paid for as part of property taxes. This responsibility passes to the new owner, if the building is sold.
- Power Purchase Agreements (PPAs): a model commonly used by clean energy purchasing companies; a third party owns the solar system and the developer agrees to pay a fixed cost for the electricity produced over a period of time, usually 20 years.
- Federal Investment Tax Credits (ITC), Accelerated Depreciation (MACRS), and Renewable Energy Credits: Federal solar energy tax credit is 30% through 2020; it starts to decrease thereafter until reaching 10% in 2022. This of course does not work for real estate companies which do not have to pay tax at the end of a given year. There are also an array of national and local incentives, but you have to do your research to find them.
While only a few real estate pioneers venture to put solar on the offices they develop to rent or sell, we expect to see more developers responding to their tenants’ wishes for greener properties and working with these financing mechanisms to achieve this.