The Tenant on the Roof

The volatility of today’s real estate market has many commercial property owners searching for new revenue streams. While improvements and renovations can increase the overall value of a property, the upfront costs of labor and materials as well as the potential revenue that could be lost if tenants are forced to vacate during construction are often too large of a financial risk for most owners.

However, commercial property owners have a new opportunity to increase the value of their properties without disrupting the income generated by their tenants.

A new type of solar energy procurement program allows property owners to lease their unused rooftops, and generate a guaranteed revenue stream that not only provides cash but increases the property’s resale value. In many ways, it’s very similar to the process that was used to lease roof space for cell phone towers.

Net Energy Metering (NEM) projects are the most common type of solar power installation. NEM is a billing mechanism that allows retail energy customers to receive credits on their energy bill for the energy they produce from a solar energy system, while they continue to pull energy from the grid to fill their electrical consumption needs. The utility debits and credits the customer’s account on a rolling basis as energy is put in and pulled from the grid, and settles up a final bill at the end of the year.

The advantage with NEM for businesses is that solar happens to be most efficient and produces the maximum amount of energy during peak hours when energy is its most expensive, – i.e., the middle of the day, – and the credits for the solar energy produced are provided at those higher retail rates. Through NEM, solar eliminates the largest portion of a business’ energy bill.

That said, NEM works best for owner-occupied buildings, because the owner, who would purchase the solar asset, can benefit from the energy savings. On the flipside, NEM doesn’t work as well in situations where the building owner is not using a substantial amount of energy at the site – if they don’t have a utility bill on the site, they have nothing to generate credits for. This leaves real estate investors, REITS and other income property owners without a clear benefit from solar. That’s where this new program in California comes in.

There are a number of new energy procurement programs, administered by the big three California investor owned utilities: Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric. The programs have the utilities seeking to purchase energy from what’s known as Wholesale Distributed Generation (WDG) projects. WDG projects are small, wholesale generators that sell energy directly to the utility, as opposed to delivering energy to the user to credit a specific utility bill as with NEM.

The 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. Solar makes a great WDG project because it is modular and can be located on rooftops or small vacant fields in and around developed infrastructure.

By eliminating the need to attach to a utility bill, WDG projects open the market up to properties that are not necessarily owner occupied, and provides real estate investment trusts and property owners with a new application for going solar that wasn’t previously available.

Developers Looking to ‘Rent’

As it turns out, commercial and industrial facilities with large, flat and un-shaded rooftops are some of the most cost-effective locations for solar. A typical WDG structure would have the property owner leasing out the available roof space to a solar project owner – we can call them the rooftop tenant – who installs a solar system. The rooftop tenant obtains a contract to sell the energy to the local utility through one of the programs mentioned previously, 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 the tenant underneath the roof who goes on business as usual, other than the fact that they might be more attracted to the building knowing it’s used to generate clean renewable energy.

This can add between three to five percent increase in revenue to the bottom line for most REITs. 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.

Things to Consider

Despite these opportunities, not all properties will end-up a good fit for this program. It’s important to identify a company with a long track record of installing rooftop and ground-mounted, commercial–scale solar energy solutions and has immediate access to project financing. The permitting process with the utility is also very cumbersome, so it’s important to find a solar partner who has shown success developing WDG projects. Site specific considerations are also a concern such as the structural strength of the building and age and condition of the roof. With a good partner, these issues can be addressed through a properly drafted lease.

Certain WDG projects through new innovative utility procurement programs can offer new found lease revenues to property owners and REITs. In addition, WDG can deliver significant economic benefits through local job creation. State and local governments also may benefit from increased tax revenue from the lease income and sale of the clean renewable electricity. Furthermore, WDG opens up the solar market to properties that are not owner-occupied, as well as provides an efficient approach for states to meet their aggressive renewable energy goals at a megawatt pace.

Brian von Moos serves as director of solar consulting for Borrego Solar. He can be reached at [email protected] or 510-849-8318.

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