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Solar power on commercial properties: What you need to know

Commercial properties of all types are adding solar energy systems to their energy mix. Driven by aggressive federal investments in clean energy, when done correctly these projects can be excellent for the property owner, their tenants and the community. However, property owners should be aware of several key risks when exploring these exciting new value-add projects.

Why is solar energy for commercial properties accelerating so quickly? These projects are powered by three converging trends: electricity rates are increasing, federal and state incentives are expanding, and sustainability goals are getting stricter every year.

Data from the United States Energy Information Administration shows that electric rates have historically risen an average of 3.2 to 3.3% annually since the turn of the century, roughly doubling overall since the early 2000s. Recently, however, this pace has accelerated, with rates rising 7.6% to 8.3% in 2021 alone and even faster in 2022. These rising rates have significantly increased the operating costs for commercial businesses and the commercial properties they occupy, driving businesses and property owners to look for alternatives like solar energy.

Meanwhile, federal and state incentives have expanded aggressively – especially over the past 18 months. The Inflation Reduction Act passed in August 2022 ushered in a generational change in clean energy incentives. For example, the act expanded the Federal Investment Tax Credit from 26% in 2021 to 30% in 2022 and now, up to 50% for qualifying projects and properties in 2023 through 2033. This is among many other new and expanded incentives that make the financial picture of solar energy for commercial properties even more compelling.

Finally, sustainability goals for businesses that own and operate in commercial properties are getting stricter every year. Over the past decade, many businesses have invested in developing sustainability plans around their operations, and now in the decade to come these organizations are putting their plans into practice.

Electricity-related emissions are often a key source of the Scope 2 carbon footprint for sustainably minded businesses and as these organizations work to reduce their emissions, increasing their use of on-site renewable energy is a key tool. Putting these goals and corporate values into practice is driving commercial solar energy adoption.

Now, what are the risks and key considerations as property owners and property managers consider solar energy projects for commercial properties? The core challenges arising early in the project evaluation process are: lease agreements, roof conditions and billing arrangements.

Many commercial lease agreements enable property owners to have control over the building’s physical envelope and electrical infrastructure. On such properties, the coordination of installing a solar energy system can be streamlined. The property owner can construct the solar project, operate it for their benefit, and utilize the power from the project to feed tenant needs, common areas, or both. However, some lease agreements cede control of these elements to individual tenants, often as a triple-net-lease. In these circumstances it is important that the property owner brings the tenant into the project planning process once the initial project viability has been assessed. This will ensure that the tenant’s needs, and rights, are coordinated with the needs of the solar energy project. Ultimately, tenants are usually quite excited about these projects as they can be a highly visible expression of sustainable values, benefiting employee recruitment, customer relationships, and investor preferences, while also generating financial savings for the tenants over time.

Roof conditions are often one of the first concerns of property owners when the discussion of a solar energy project first emerges. Today, advancements in solar energy technology allow projects to be constructed with minimal physical attachments to the roof. Most low-rise buildings can have solar panels installed with a fully ballasted racking system, requiring no physical roof attachments. Taller buildings, or those in complex wind or seismic zones, may require additional attachments, which are installed by a licensed roofing contractor. Many roof-warranty-compliant methods exist today to assure the integrity of the underlying roof and its warranty. Additionally, covering a roof with solar panels significantly reduces the impact of UV radiation on the roof material itself, which can help prolong the roof’s useful life.

Finally, billing arrangements can be a key component to developing a successful commercial solar energy project. This is where having an experienced solar developer leading the project team is extremely important to maximize the economic value of the project. The developer will understand the jurisdiction-by-jurisdiction options available to monetize the solar energy project, including programs like Net Energy Billing, Community Solar, Simultaneous Bill and Sale, and PURPA interconnection programs.

Every day more commercial properties are deploying solar energy to add value to the real estate asset, reduce operating costs, increase tenant satisfaction, and achieve sustainability goals. When done properly, these projects can be a true win-win-win: for the property, for the tenants, and for the community.

This article was originally published on May 19, 2023, in Minneapolis/St. Paul Business Journal

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