Solar Power in CRE
For our blog today we had a conversation with Benoy Thanjan, Founder and CEO at Reneu Energy, a research and consulting firm focusing on solar energy projects, energy hedging, and environmental commodities. In short, Benoy helps companies “go solar”.
Benoy, what are the main benefits for a property owner to consider solar energy?
Solar not only provides building owners with the ability to lower and hedge their cost of electricity, but the ongoing operational and maintenance of solar system is minimal. If the building is not owner-occupied, solar creates an additional revenue stream through charging tenants for solar energy. In addition, the building owner can market to potential and existing tenants about having solar on their building. Furthermore, a solar system will increase the value of the property and it is beneficial for the environment.
OK, so I own a few buildings and I’m interested. How do I know if my properties are a good fit?
All property types (Multifamily, Industrial, Retail, Office, etc) are candidates for solar. Our main considerations when we evaluate a building for solar is if there is significant open area on the roof free from obstruction and shade caused by trees or adjacent buildings. We also consider the age and condition of the roof since the solar project lifespan is 25 to 30 years. We don’t want the roof to be replaced during that time period.
I like it, but I’m cost-conscious. What is a reasonable payback period on a solar investment?
If you take advantage of the best financing and incentive options available for these investments, there is a quick payback with owning a solar system. Usually we expect that period to be between 3 to 8 years for a long-lived asset that will be in-service for 25 to 30 years. The payback depends on the cost the owner currently pays for electricity, the state level incentives, and the energy production of the solar system.
What are government incentives like in 2018?
Two of the most prominent Federal incentives for solar are the Investment Tax Credit (“ITC”) and accelerated depreciation through Modified Accelerated Recovery System (“MACRS”). ITC allows for 30% of qualified expenditures related to the project to be deducted from taxable income through 2019, however, ITC is scheduled to step down to as low as 10% by 2022. MACRS allows the company to write-off the value of the solar project with the cost recovery period of 5 years. State benefits are different for solar development and the two common forms of incentives are through a cash rebate or the sale of environmental commodities.
How does a corporation finance the installation of one of these solutions?
Corporations can own solar by paying up-front or they can lease the system through an Operating Lease or Capital Lease. The main difference between an Operating Lease and Capital Lease is the lessee is taking advantage of the tax benefits in a Capital Lease and the lessor is taking advantage of the tax benefits in an Operating Lease. Another difference is the buyout provision of a Capital Lease is usually $1 at the end of the lease term, but for an Operating Lease the buyout provision is Fair Market Value at that time or 15% to 20% of the original cost of the system.
An Alternative option for corporations are Power Purchase Agreements (“PPAs”). PPAs allow corporations to avoid upfront and operational costs, as well as maintenance and performance risks that can be associated with owning the system, and give the corporation an agreed upon power rate (usually for a 20-year period) that is currently lower than their current power rate.
Thanks for dropping all that knowledge Benoy. How do our readers get in touch with you about solar for their portfolios?
If they contact Reneu Energy and mention StackSource, we can provide a free phone consultation to discuss whether a property might be a good candidate for solar.
Our expert Capital Advisors help you secure your ideal capital stack, resulting in a lower cost of capital for your investments in less time and with more transparency than a traditional commercial mortgage brokerage. Learn more at StackSource.com.