By Brian von Moos, Director of Utility-Scale Development & Solar Consulting, Borrego Solar
The volatility of today's real estate market has many commercial property owners searching for new revenue streams.
Improvements and renovations can increase a property's overall value, but the upfront labor and materials costs, plus any potential revenue that might be lost if tenants must vacate during construction, are substantial financial risks for most property owners.
However, there is a new opportunity for commercial property owners to increase the value of their properties without disrupting the income generated through having tenants. A new solar energy procurement program allows property owners to lease their unused rooftops and generate a guaranteed revenue stream that produces an income while also increasing the property's resale value. This is conceptually similar to the process of leasing rooftop space for cell phone towers.
Background: Net Energy Metering (NEM), Best for Owner-Occupied Buildings
The most common types of solar power installations are Net Energy Metering (NEM) projects. NEM is a billing mechanism that allows retail energy customers to receive credits on their energy bills for the energy generated by their solar energy systems, while they continue to pull and use energy from the grid to meet their electricity consumption needs. Under a NEM mechanism, the utility debits and credits the customer's account on a rolling basis as energy is pulled from and added to the grid, settling up a final bill at the end of the year. NEM is advantageous for business because solar happens to be most efficient and produce the most energy during peak hours, in the middle of the day, when energy is at its most expensive. Because credits for the generated solar energy are provided at those higher retail rates, NEM solar projects eliminate the largest portion of a businesses' energy bill.
NEM works best for owner-occupied buildings because the owner, who would purchase the solar asset, can benefit from the energy savings. By the same token, NEM doesn't work as well in circumstances where the building owner is not using a substantial amount of energy at the site, as there would be no on-site utility bill against which to apply the credits.
That being said, solar can still generate a concrete benefit for real estate investors, REITS and other income property owners, under the structure offered by a new program in California.
Whole Distributed Generation (WDG): Bypassing the Need for Owner-Occupied Arrangements
There are currently a number of new energy procurement programs administered by the big three California investor owned utilities (IOUs): Pacific Gas & Electric (PG&E), Southern California Edison (SCE) and San Diego Gas & Electric (SDG&E). These programs give utilities an incentive to purchase energy from Wholesale Distributed Generation (WDG) projects. WDG projects are small, wholesale generators that sell energy directly to the utility, instead of delivering energy to the user to credit a specific utility bill, as with NEM.
WDG projects are located near a point of interconnection to the grid, such as on top of and/or near an existing building tied to the utility grid. Because solar energy systems are modular and can be installed on rooftops or in small vacant fields in and around developed infrastructure, solar makes a great WDG project.
Without the need to be tied to a utility bill, WDG projects open the market up to properties that are not necessarily owner-occupied and provide REITS and property owners with a new application for going solar that wasn't previously available.
Developers looking to ‘rent'
Commercial and industrial facilities with large, flat and un-shaded rooftops are some of the most cost-effective locations for siting solar. A typical WDG structure will see the property owner lease out available roof space to a solar project owner—or "rooftop tenant"—who installs the solar system. WDG mechanisms align the interests of the rooftop tenant with those of the building owner: the rooftop tenant obtains a contract to sell the energy to the local utility through one of the aforementioned programs, then installs the system, generates revenue from selling energy to the utility and pays rent to the building owner for use of the rooftop space, land or parking lot. The arrangement has no impact on building tenants, other than, perhaps, a greater attraction to the building because it is being used to generate clean, renewable energy.
Terms of the lease of the roof space are long and provide the building owner with stable rent income. For most REITs, a WDG mechanism can add a three to five percent increase in revenue to the bottom line. For example, a property with more than 100,000 square feet of usable roof space could receive an extra $40,000 to $60,000 a year, at no cost whatsoever to the property owner. In addition, a solar energy system's lease revenue increases the property's resale value: whoever buys the building steps into the existing lease agreement—the equivalent of buying an occupied building with tenants underneath the roof.
WDG: Important things to consider
Despite these benefits and opportunities, not all properties are a good fit for this program. Site-specific considerations, such as the structural strength of the building and age and condition of the roof must be taken into consideration. It's important to identify a company with a long track record of installing rooftop and ground-mounted, commercial-scale solar energy solutions and immediate access to project financing. Additionally, the permitting process with the utility can be cumbersome. As such, it's important to find a solar partner who has shown success developing WDG projects. A good partner can help address any site and permit issues through a properly drafted lease.
Certain WDG projects executed through new, innovative utility procurement programs can offer newfound lease revenues to property owners and REITs. WDG can also deliver significant economic benefits through local job creation, and state and local governments could benefit from increased tax revenue from lease income and sales of the clean, renewable electricity. Furthermore, WDG opens up the solar market to non-owner-occupied properties and provides an efficient approach for states to meet their aggressive renewable energy goals at a megawatt pace.