Despite the rising popularity of solar in the residential market, commercial and industrial real estate owners have remained slow to deploy solar on their properties. For the majority of commercial leases, the landlord owns the building, but the tenant pays the electric bill. This problem of “split incentives” – where the economic benefit of solar goes to the renter, but the cost falls on the landlord – creates a disconnect for the owners of tenant-occupied buildings.
While this barrier has prevented many commercial real estate (CRE) owners from undertaking renewable energy projects, here are four ways tenant-occupied property owners can benefit from solar.
Solar presents a unique opportunity for property owners to effectively “sell” energy generated onsite to building tenants as part of the rental agreement. This shifts the economic benefit of solar back to the property owner, while tenants enjoy potential savings and other business benefits of embracing renewable energy.
In most cases, property owners will achieve increased income while also delivering savings to tenants as they pay less than the utility’s price for electricity.
By capturing the available savings from solar, CRE owners can experience an immediate increase in the property value. The increased net operating income (NOI) described above can be monetized using either a tenant billing model or a shared savings lease amendment, with a multiplier effect on property valuation. Improving property efficiencies through clean energy distribution can also help buildings achieve green certifications that in turn increase a property’s marketability and desirability.
On the flip side, sustainable policies at the local, state and federal levels have begun influencing building requirements and construction mandates. Buildings that fail to meet future carbon reduction requirements, whether mandated by government or by tenants, will be at a competitive disadvantage and are likely to see increasing vacancy and decreasing property values over time.
The investment tax credit, also known as the federal solar tax credit, first came into play in 2006 to support the growth of solar energy in the U.S. Multiple extensions have been made to keep the credit available over the years, putting hundreds of thousands of dollars back into the pockets of property owners across the county.
The 2022 ITC offers a 26% tax credit for solar systems projects that begin construction this year for both residential and commercial properties. However, the credit will be phased down in the coming years (22% in 2023 then a permanent drop to 10% for commercial properties in 2024), making now the most financially opportunistic time to install solar.
With more and more businesses facing expectations and pressures to achieve sustainability targets, energy efficient buildings are in high demand. To attract and retain renters, the onus is on landlords to provide amenities that favor a carbon-free lifestyle, like solar, battery storage and electric vehicle (EV) charging. By delivering solar projects in the context of a partnership, CRE owners will see improved tenant relations and retention.
Many apartment tenants are also now seeking housing that aligns with personal interests to decrease their carbon footprint. Installing solar is a win/win that makes renters feel good about where they live.
Research from real estate giant Jones Lang LaSalle (JJL) recently revealed that sustainable buildings attract higher-quality tenants – which reduces risk and likelihood of turnover – and allows for higher rent prices of up to 10%.