After dramatic decreases in the cost of panels, solar photovoltaic (PV) systems generate electricity at costs below utility costs in many parts of the United States. The cost of solar modules has dropped from $100 per watt down to $1 per watt, and this development has changed everything. By 2020, energy analysts expect that solar-generated electricity will be priced at or below the cost of utility-supplied power in over half of the U.S.

Many organizations have committed to the idea of sourcing all their power from renewables. Some, including Intel, Kohl’s, Apple, the National Hockey League and Starbucks, purchase enough clean energy to offset or run all of their operations. Real estate developers who sell or lease their spaces, however, have been slower to incorporate rooftop solar in the projects. Because their tenants usually pay the electric bills, there hasn’t been much of an incentive. But that scenario is changing. 

What’s different?

Some entrepreneurial developers see PV installations as a way to meet green criteria for their buildings and to reduce vacancy rates or increase leasing rates. Most importantly, many willing to make this investment have found ways to recover the installation and management costs — they’ve discovered ways to profit from PV.

Certainly, net zero energy buildings, or buildings that produce all of their own energy, are a popular pursuit in the green buildings market, but there is also a place for buildings that only meet part of their energy needs with PV systems.

My company, Point Energy, works with developers that are pushing the envelope every day when it comes to solar innovation: Hanover Page Mill Associates and Sharp Development in California; and the Tower Companies in Washington, D.C., are three examples of firms that have developed and leased solar offices. They’ve shared their strategies and best practices for our recently released white paper, “Profiting from the Sun,” which explores cost recovery and financing options for developers interested in including solar. (Registration required to download the full report.)

The best ways to recover costs

Through our research, we found that developers are using five primary strategies to manage the expense of including solar on their buildings. 

1. Use a gross lease, modified gross lease or full-service lease: In models where the landlord pays all of the utility costs, the benefit of lower prices can be used to increase the margins they make on leasing arrangements. They can set lease rates at market value, but they’ll make more on the relationship than rival developers.
2. Institute a green surcharge or green lease: This would create a “value” associated with the solar installation. 
3. Sell PV-generated electricity directly to tenants: Some states prohibit this practice and it may require special licensing.
4. Take advantage of Property Assessed Clean Energy (PACE) bonds: This type of lease allows the landlord to directly pass operating expenses, including property taxes, on to its tenants.
5. Lease or loan the roof to a third-party solar company: Some developers may choose to allow another company to use their rooftops for their solar expansion. One example of a project is the Prologis Kaiser Distribution Center in Fontana, California. In this model, a third party “owns” the power plant over a set period of time and pays rent to the building owner for the privilege of using its space. In fact, Prologis, a mammoth real estate investment trust, has done a lot of these deals. 

Many financing options

Just as they can recoup expenses in different ways, developers can take advantage of a variety of financing mechanisms and incentives that reduce the capital expenditures associated with getting a project off the ground. It isn’t uncommon to see a combination of approaches used, depending on the location of the project. The most common practices include: 

1. Direct purchases of PVs: This makes sense if a developer has a positive tax liability and can take advantage of tax credits and accelerated depreciation.
2. Equipment leases: This is especially attractive for developers that don’t carry tax liability (the leasing company gets to take advantage of tax credits and depreciation benefits).
3. Property Assessed Clean Energy (PACE) financing: The costs of the system are included in the property assessment and then paid as part of the property taxes. That liability is passed on to the new owner, if the building is sold.
4. Power Purchase Agreements (PPAs): A commonly used model among corporate buyers of clean energy; a third party owns the solar system, and the developer agrees to pay a fixed cost for the generated power over a period of time, usually 20 years.
5. Federal Investment Tax Credits (ITC), Accelerated Depreciation (MACRS) and Renewable Energy Credits: The federal tax credit for solar is 30 percent through 2020; it starts shrinking after that until it hits 10 percent in 2022. This doesn’t work, of course, for real estate companies that don’t have a tax liability at the end of any given year. There are also an array of state and local incentives, but you have to do your research to find them.

While only a few real estate pioneers are venturing to put solar on the offices they develop to lease or sell, we expect to see more developers responding to their tenants’ wishes for greener properties and working with these financing mechanisms to make it happen.