The commercial market has been much slower to initiate solar projects than the residential sector, partly due to financial barriers and partly due to other nuances in commercial real estate. Fortunately, innovative data technologies and a broad variety of new financing solutions are making it much quicker and easier to deploy solar at scale across large commercial and industrial (C&I) portfolios.
As C&I property owners are under increasing pressure to deliver on ESG mandates including solar and other energy sustainability initiatives, here are 10 important questions to consider that could save you and your team considerable hours before starting the solar process.
Typically, most commercial properties are rented by tenants, and the tenants are responsible for each month’s utility bill. Since property owners are the ones fronting the costs of solar PV, the incentive for property owners to make the upfront investment is disconnected. However, we see this dynamic changing as solar becomes more of an asset for property owners. By taking back control of the meter, landlords have the opportunity to charge tenants for the solar electricity at a price lower or equal to the utility, with the ability to then re-allocate those savings for other property improvements. These savings can also be shared with the tenant or used for tenant benefits at the discretion of the landlord.
Pro tip: Update your lease documents to include language that explains you, the property owner, may elect to deliver gas and electric utility services to tenants directly or through an intermediary and the landlord may elect to hold the utility accounts.
Commercial real estate owners with multiple properties would be wise to evaluate which properties in their portfolio are best positioned for solar. Rather than picking properties ad-hoc, properties can be evaluated based on a range criteria to ensure the highest potential value.
To make it easy, Luminia’s proprietary AI software can scan an entire portfolio in minutes using just street addresses to identify which properties will yield the biggest return on investment by factoring in current utility rates, solar availability, roof access, local renewable energy credits and incentives, and more for each individual property. This becomes highly important because these factors differ at the local level, not to mention they are constantly changing.
Once you determine which properties are most optimized for solar, you will then need to decide how to pay for it. While some property owners may have the means to pay cash, however, they may want to use that capital for other budgetary expenses – making third-party ownership models an increasingly attractive and popular option.
In a third-party ownership model, the building owner and the system owner (aka the financier) execute a power purchase long-term service agreement, known as a PPA.
For example, Luminia’s Clean Energy PPA includes a guaranteed power production, which means if the system has not performed the way it was supposed to by the end of the year, Luminia writes a check to the property owner. This would mean Luminia, who manages the build of the system, is also responsible for maintaining production performance. Smart meter and tenant billing software can be also included in the cost of the system, as well as annual “True-ups.”
Since most property owners operate under a business LLC, or a limited partnership, they do not qualify for the solar federal tax incentive nor can they take the accelerated depreciation of the local renewable energy credits and incentives. Unfortunately, this leaves a lot of money on the table.
Instead, Luminia can monetize the tax credit on behalf of the property owner allowing the property owner to take part in the benefit their organization structure typically wouldn’t allow.
When it comes to choosing which properties in a portfolio are ripe for solar, the age and condition of a building’s roof are important factors. Brand new roofs are a great place for your first solar install, because a typical roof lasts 25 years and solar is often warrantied for 25 years. Likewise, a really old roof that has to be replaced might as well be replaced then fitted for solar. In fact, Luminia’s financing structures enable property owners to use the solar savings to pay for the new roof over time as part of the base assessment.
Large flat, single story roofs are also best because rooftop square footage often decreases as a building’s height increases.
Pro-tip: For those with smaller rooftop space, carports (solar mounting systems) or ground mounts are alternative options. Plus, carports lead to electric vehicle (EV) charging, one of the best revenue generators for building owners.
In general, an optimal solar system on a large, flat single-story roof in a sunny location can produce up to 15 kWh per square foot per year. This matters when you start looking at the amount of energy most companies actually use per year.
Understanding a building’s consumption is also key in determining how much energy the solar system can and needs to produce, but gaining access to tenants’ historical consumption can be challenging. A traditional way to collect this information is through past electricity bills. Data in 15-minute intervals is even better, but that can only be accessed through the user’s utility portal and most tenants are uncomfortable sharing their account login.
Fortunately, Luminia offers the option for tenants to use a third-party app, UtilityAPI, in which they simply log in, choose Luminia from the drop down menu, and data is automatically released to the ticketing menu.
REITs are a little bit different, because by definition a REIT is required to earn 75% of its revenue from rent from real property, interest on obligations secured by mortgages on real property, dividends from other REITs, and gain from the sale or other disposition of real property. REITs also have access to cheap capital and green bond funds that are intended for projects such as this, making them more inclined to use their own money rather than source additional financing.
But, every situation is unique. Luminia does in fact work with several large REITs with a model that works well to deliver both real estate income and use the REITs own inexpensive capital.
C-PACE stands for commercial property-assessed clean energy, and we see this type of loan growing exponentially in market share for a number of reasons. For one, more than 30 states have enacted C-PACE legislation, enabling $1B+ in private financing of 2,000+ projects. It’s also a voluntary tax assessment on the property itself, solving some of the main issues of other models by transferring with the property. C-PACE loans are also off balance sheet, meaning no out-of-pocket money, and features a 25-year term.
When it comes to a building sale with Luminia’s C-PACE loan, Luminia pays for the system and gets paid back over 25 years, when you make these next installment payments. As a result of the property that’s supporting it, there’s no personal guarantees, there’s no review of your financials. There’s also a 3-year look back with a C-PACE loan. If you were the owner and have already made renewable energy investments in the building in the past three years, Luminia can write you a check for that money back included in that same base installment (and up to 35% on new construction if it can be defensively attributed to renewable energy, clean energy, or water conservation).
While you may only be able to install solar on one property at a time, it is important to evaluate your entire portfolio at the beginning of the process to identify which property will deliver the highest return on investment. Doing this can also make you realize you may be able to install solar on multiple properties at the same time, based on available financing and local incentives.
Let’s take a 25-year production Clean Energy PPA with a solar generation guarantee on today’s grid rates of 14 cents per kilowatt hour, for example. Where the “brown” electricity is costing 14 cents off the grid, the C-PACE assessment would effectively deliver “green” electricity at 8.7 cents. In just four years savings add up to $1 million, and over 25 years total savings accumulate to $7 million.
To learn how Luminia can help identify your solar ROI as well as provide financing solutions unique to your property’s needs, schedule a meeting with our team today.