Third-Party Owned and Operated Solar Power for Commercial Real Estate Owners
Lower Operating Costs, Zero Upfront Investment, and No Maintenance
Energy consumption is the single largest contributing factor to operating expenses for commercial officebuildings in the United States. One-third of most operating budgets is allocated to energy use, and as much as thirty percent of the energy that buildings consume is used inefficiently or unnecessarily. This presents an opportunity for property owners to identify and adopt cost-saving practices that will improve their building’s energy efficiency and reduce its operating costs. Fortunately, for these forward-thinking CRE owners, solar energy is one of the most effective solutions.
Historically, the purchase and installation of solar panels required significant upfront costs and investment-grade credit, additional time and resources to identify and collect on government incentive programs, and the manpower and technical expertise to manage ongoing maintenance and operations. While the long-term financial and environmental benefits of these systems was appealing, many companies struggled to supply the criteria for its initial development. This created an opportunity for third-party solar developers to profit from ample, government-sponsored solar incentives by managing the financing, construction, and maintenance of solar installations on behalf of property owners. All they needed was the space. Today, there are many solar developers who will pay to lease space on your roof or land, where they will fully fund, build and maintain a solar installation for the duration of the lease. In addition to a steady stream of rental income, the property owner also secures reduced energy rates over a long-term period, helping to reduce operating costs.
Commercial Solar Power 101
In commercial real estate projects, the most common type of solar installation is a grid-tied photovoltaic system. Photovoltaic panels convert sunlight into direct current electricity, which is then converted to alternating current electricity -- the kind that powers most appliances in the United States. The property owner remains connected to the local utility grid, which can supplement the solar power generation during periods of minimal sunshine or surges of demand in power supply. As such, a grid-tied system reduces (rather than completely replaces) the power currently emitting from the electric utility.
What Property Types are Right for Solar?
Does your building have a large, open roof or an expansive parking lot where solar panels could be installed to form a canopy? These types of structures are ideal for solar installations. But your building’s structure is only one factor in considering the potential success of a solar project. Other criteria include:
• Region receives substantial sunlight
• State has pro-solar policies and incentives
• Uses large amounts of electricity (generally more than 200,000 kWh annually)
• Minimum of 10,000 square feet that is both unshaded and available for the installation
• High, local energy costs
• Property owner demonstrates credit worthiness (investment-grade credit or equivalent)
New and existing buildings are both ideal sites for solar installations. While these systems typically supply industrial structures, they can also be highly effective on corporate campuses with sufficient open land, parking area, or roof space. Based on local energy rates, government incentives, and the quantity of sunshine, property owners within the following states are able to calculate a profitable return on their investment within the first year:
• New Jersey
Secondary markets include Maryland, Pennsylvania, Ohio, and Illinois; and tertiary markets include Arizona, New Mexico, and Colorado.
A Massive Market Opportunity
During the past ten years, the price of solar panels has dropped dramatically and solar installations have grown tenfold. This has driven down the cost of solar energy to the point that it is now at grid parity with retail utility prices. This means that the cost of energy produced from the sun is equivalent to your local utility company’s electric rates. In addition, many states offer attractive solar incentives to encourage job creation and meet clean energy goals. States also have mandates that require power companies to meet certain requirements for alternative energy, such as 20 percent alternative energy by 2020. In turn, utility companies offer incentives to real estate developers and property owners to integrate alternative energy sources into their operations. This ideal environment has fed billions of investment dollars into companies to specifically fund solar projects, while large corporations like Walmart, Apple, and Ikea have built dozens of solar plants at their facilities.
The Financials of “Free” Solar
Third-party solar developers own and operate their projects. They pay to lease space from a property owner, invest the required capital to develop the solar installation, and work in financing structures with banks to make efficient use of available tax credits and other tax benefits related to using a solar array. The contract for these third-party solar development projects is called a Solar Power Purchasing Agreement (SPPA), which offers property owners an alternative to financing and owning a solar panel system. This contract is similar to a traditional Power Purchasing Agreement (PPA), which defines the commercial terms for the sale of electricity between a utility and an electricity buyer.
Benefits of a SPPA:
• No upfront cost to buy solar power
• Provides predetermined electricity rates for the term of the contract (typically 15 to 20 years)
• Offers expert production monitoring and metering
• No responsibility for equipment operations or maintenance
• Potential to help meet your company’s environmental policy objectives
• Option to purchase the system at fair market value after a set time-period
With these benefits come the challenging intricacies of negotiating with third-party developers versus purchasing a system outright. A SPPA may also not be the most effective strategy for property owners when the needs of the tenants do not necessarily align with theirs. If capital improvements are paid for by property owners, and energy bills are paid by tenants, this would negate any incentive for property owners to invest in energy-saving technologies. Alternative financing options exist that better address the landlord-tenant relationship.
Alternative Financing: PACE Loans
Alternative Financing: PACE Loans Property-Assessed Clean Energy (PACE) loans offer financing to commercial and industrial property owners and are repaid using an annual assessment on their property tax bill. This assessment leverages the general alignment of energy efficiency improvements and property taxes. Property owners pay both energy costs and property taxes in owner-occupied buildings and under gross lease structures, and pay neither under “triple net lease” structures where the tenant is responsible for property taxes and other property costs. Small and medium-sized businesses that do not possess investment-grade credit can also benefit from PACE programs.
How much does a single solar panel cost? Since 2008, panel prices have dropped 90% and currently average $250 per panel.
Case Study: Patterson Companies
Patterson Companies owns and operates more than 17 distribution facilities across North America to fulfill orders for their dental and veterinary products. To reduce the company’s operating expenses, they reached out to Cresa for help with performing an energy audit to identify opportunities for cutting costs.
The Ideal Location: Dinuba, California
Together with engineering firm DLR Group, Cresa explored alternative energy systems and the related incentives. They recommended the company’s Dinuba, California facility as an ideal location for a solar development due to the region’s high energy costs, state incentive programs, and high energy use; and the building’s large, flat roof.
Third-Party Solar: No Capital, No Maintenance
Patterson Companies was receptive to a solar development, but was not interested in funding the installation or maintaining the panels. Cresa developed a Request for Proposal (RFP) for the project based on the company’s criteria, identified three reputable third-party solar developers, and selected Renewable NRG Systems (NRG), a sustainable design and manufacturing company based in Vermont. Cresa then negotiated the terms of the lease for rooftop space and the energy Connection Agreement.
The First Step: Low-Hanging Fruit
Before launching into solar development, Cresa, NRG, and DLR Group worked closely with the Dinuba distribution center manager, Paul Schutz, to execute simple, cost-effective energy efficiency upgrades that would reduce the company’s overall energy usage and maximize future solar benefits.