By: Peter Conklin
Vice President, Business Development, Radian Generation
Energy use is typically one of the largest expenses of any commercial property. With this in mind, savvy commercial real estate (CRE) owners are increasingly looking at solar power as an effective means of reducing operating expenses and creating a new source of revenue, which could lead to a significant increase in the CRE owner’s bottom line.
The opportunity to invest in solar is growing thanks to a decrease in costs for solar installations over the past few years. The deployment of solar projects has increased 203% since 2010 , significantly reducing overhead costs for companies like Costco, Apple, Kohl’s, Macy’s, Volkswagon, Walmart, Safeway and IKEA . Whether office, industrial, multifamily or retail, commercial properties offer some of the most ideal space for modern solar installations. There are a growing number of cost saving and revenue generating opportunities for commercial property owners hoping to capitalize on this trend.
A recent whitepaper from Radian Generation explains the preliminary topics associated with making a rooftop solar investment decision and outlines key benefits and areas of consideration for CRE owners. Here is a sample of the information in the paper. Download the full version of Commercial Real Estate Owners Boost Profits with Rooftop Solar free here.
1. Rooftop Real Estate Rights: One of the first things a solar developer will need to know is whether the property owner has sufficient title and full legal rights to grant separate control over the rooftop to the developer. A rooftop leased by a developer cannot be subject to existing liens, mortgages or other legal restrictions that prevent the property owner from being able to grant exclusive rights to the solar developer. Often this requires the building owner to obtain a subordination and non-disturbance agreement from its mortgage holder. Consider negotiating these rights in any new mortgage.
2. Roof Maintenance, Repair And Replacement: Most roof-mounted solar systems last 35-40 years, while the commercial roofs on which they are mounted typically have life spans that are far shorter. Most solar installations involve a long-term lease of 20 years or more, so it’s highly likely that roof repair or replacement will be required during the term of the lease and/or PPA.
A rooftop lease for solar can provide attractive new cash flows for a property owner, but the upside can disappear fast if roof maintenance and replacement is not adequately addressed in the solar lease or PPA. Matters such as notice of repairs, the period for the work, relocation of the solar equipment during repairs or replacement and compensation for the developer’s lost revenue during repair/ replacement should be covered carefully.
3. Removal Of Solar Equipment At End Of Lease/PPA Term: The removal of a solar system can be costly. Property owners need to ensure appropriate protections regarding end of term removal of equipment are included in their solar leases.
4. Rent Revenue: When renting a rooftop, CRE owners can structure rent in a variety of ways. Usually, it’s a fixed, all-inclusive rent (sometimes with an escalator), but the solar developer is responsible for all costs and taxes associated with the installation and ownership of the solar project. Alternatively, rent can be calculated based on the electrical output of the system or as a percentage of the revenues received by the developer.
5. Solar Lease Considerations: Property owners who are negotiating a solar lease and/or PPA should also be aware of the following:
• Most solar developers will require access for feasibility inspections and testing.
• The term of the lease likely will need to be 15-20 years, and the developer will probably ask for renewal rights, which are important to the developer because the productive life of a solar project should exceed the initial term of the lease.
• In order to obtain financing to construct the system, the developer may need the property owner to sign certain agreements for the benefit of the developer’s lender (like an assignment of the lease and/or PPA as collateral).
• Property owners will want to make sure the developer maintains adequate insurance coverage for its solar facility and for general liability purposes.
Hi Dan,
Thank you for your comments. Yes, safety is, of course, an important matter. The whitepaper we created at Radian Generation is a primer for those interested in learning more about solar opportunities for their commercial real estate properties. We make a point at the end of the paper to educate those interested about the many variables involved with rooftop solar and encourage those interested to seek additional expert advice as there are many factors that attribute to the success or failure of the project (as with all projects – not just solar specific).
We attribute the failures you mentioned here to two key factors: 1) poor development / design; and 2) inadequate asset management and O&M. Regarding the former, we definitely recommend consulting an experienced developer or solar integrator during the design and construction phases of a project. A badly designed or built project will underperform in the long term and expose both the building and employees to safety risks. Regarding the latter, this is the problem our company is trying to solve. Strong focus on best practices in solar asset management (solarAM) and O&M will ensure that projects perform contractually, technically and financially, as well as identify and correct emerging safety issues over time. As former developers, we observed that the long term management of solar projects has often been neglected or under-resourced.
You might want to read another article about solarAM for additional perspective – https://www.solarpowerworldonline.com/2014/01/managing-solar-project-properly-theres-help/
Thanks again for bringing up an important point.
Hi Dan,
Thank you for your comments. Yes, safety is, of course, an important matter. The whitepaper we created at Radian Generation is a primer for those interested in learning more about solar opportunities for their commercial real estate properties. We make a point at the end of the paper to educate those interested about the many variables involved with rooftop solar and encourage those interested to seek additional expert advice as there are many factors that attribute to the success or failure of the project (as with all projects – not just solar specific).
We attribute the failures you mentioned here to two key factors: 1) poor development / design; and 2) inadequate asset management and O&M. Regarding the former, we definitely recommend consulting an experienced developer or solar integrator during the design and construction phases of a project. A badly designed or built project will underperform in the long term and expose both the building and employees to safety risks. Regarding the latter, this is the problem our company is trying to solve. Strong focus on best practices in solar asset management (solarAM) and O&M will ensure that projects perform contractually, technically and financially, as well as identify and correct emerging safety issues over time. As former developers, we observed that the long term management of solar projects has often been neglected or under-resourced.
You might want to read another article about solarAM for additional perspective – https://www.solarpowerworldonline.com/2014/01/managing-solar-project-properly-theres-help/
Thanks again for bringing up an important point.
HI Peter, I think your points are spot on but are missing another critical point: Safety – both life and building. If the system has any critical failure that causes a failure and potential safety issue for the building then developers must know they’re in the chain of liability. If you look at recent roof collapses on the east coast, rooftop fires, and panels being blown off of roofs, developers must start to ensure that the products they are installing on those rooftops have proper testing and bankability that they won’t contribute a safety problem to the system. Unfortunately there is little required qualification standards in this business so developers are responsible for properly vetting out the equipment they are specing. If you choose to use shoddy products and they fail be prepared for dealing with the situation, whether it be fixing the issue or seeing your client in court.
Also you mention adequate insurance coverage but that is something that is sorely lacking in this industry – as most solar specific insurance is minimal.