The concept that commercial real estate owners might soon be able to generate their own electricity through cheap solar power is incredibly alluring.
However, while the continued development of solar technology has showed promise, it remains critical for commercial property owners to carefully evaluate the returns of a potential solar energy installation.
Varied Approaches to Commercial Solar Projects
Depending on the asset, there are a number of solar approaches commercial property investors and owners may be able to pursue. Properties with large roofs – such as schools, shopping malls, or industrial spaces – may simply be able to lease their roof to a solar vendor.
In that case, the actual financial calculations are simple, as long as the lease protects them by requiring the solar vendor to provide for removal of the panels and other equipment at termination (among other potential lease terms).
Since the capital expense of installing solar panels may not be attractive to a number of property owners, one of the most common arrangements is the concept of a Power Purchase Agreement. Through this type of partnership, a third-party solar firm pays for the costs of installing the equipment, and then charges the property owner for using that power.
“We’re seeing more and more interest in PPAs with our clients,” says Alex Spilger, Senior Vice President of Sustainability with Cushman & Wakefield’s Global Occupier Services team. “The concept of zero up front cost to the building owner can be very attractive.”
In terms of financing, one option in some areas is PACE (Property Assessed Clean Energy) assessments. In this case, the up-front cost of the project is paid for by local governments, which then attach a repayment lien on the property. The cost of the project is then repaid as a line item on the building’s property tax bill over a 10 or 20-year period.
However, because the program isn’t as cost-effective for smaller towns and generally also needs mortgage holder approval, it may not be appropriate for some situations. Legislation authorizing the program in Massachusetts was passed in 2016, with guidelines currently under review. Financing is expected to be available in early 2018.
Projects Require Careful Analyses
Regardless of how a solar installation may be financed or leased, property owners need to take a holistic view in evaluating the incentives and other financial factors involved with the decision.
“There are a plethora of situational factors which can impact the ultimate financial returns a solar panel installation can generate for owners,” says Eric Tilden, Senior Project Manager for Cushman & Wakefield’s Sustainability Services. “Everything down to the cost of on-peak versus off-peak power usage can move the needle.”
At the state level, the price of Solar Renewable Energy Certificates is driven by Renewable Portfolio Standard set at the state level. In Massachusetts, that standard began in 2003, when the state required that electric suppliers generate one percent of their power from renewable sources. The current goal for Class I sources (which generally include new solar, wind and other power projects) is to reach 15 percent by 2020 and an additional one percent for each of the following years.
In addition, tax incentives for solar projects include the Investment Tax credit for solar as well as accelerated depreciation.
In many properties, the structure of the lease (full service gross versus net) can also impact the financial returns for a solar project. If the costs don’t align with the ultimate beneficiary of the solar system, then the project may not make sense at the current time.
Many additional considerations also come into play, all the way down to the local level, where different municipalities have different levels of flexibility in terms of on-site power generation.
Owners should understand how the energy output will shift over the life of the system, whether the owner will be able to sell excess power generated back to the grid, and how rebates and programs such as net metering are managed in each individual location.
“While the technology is always improving,” says Stefan Sargeant, Executive Director of Cushman & Wakefield’s Valuation & Advisory team. “We’ve found that – at least for now – some form of incentives are needed to help these projects break even from a pure financial perspective.”
Those technological breakthroughs continue to promise additional shifts with solar. Tilden notes scientists at Stanford are now researching how to effectively replace silicon in solar panels with perovskites, crystalline structures that are easier to manufacture and have the potential to convert sunlight to electricity more efficiently than silicon. Regardless of the final form, technological advancements are coming.
Of course, the push for sustainability in commercial properties is not only limited to financial returns, as it can also play into larger corporate sustainability and greening efforts, which are an important part of many companies’ employee wellness and talent retention programs.
With so many pieces to consider, it’s important that discussions about solar installations focus not only on the present, but also future opportunities which may present themselves.
As the technology involved continues to become efficient and less costly, projects which don’t break even financially today may make far more sense at a later date.