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Can commercial solar be a savior to the retail and office real estate sectors?

At times, it can appear that the commercial real estate (“CRE”) industry has experienced somewhat of a reversal. Traditional office space and retail real estate investments, which have been historically stable, now face potentially unrecoverable challenges. Meanwhile amid the COVID-19 pandemic, remote offices and online shopping have become the norm.

Traditional brick and mortar retail locations’ issues cannot all be blamed on COVID-19. They were on the decline before the pandemic hit the United States, as the traditional mall shopper began to rethink their purchasing routines. Normally, there would not be cause for concern—the CRE market has gone through its share of ups and downs in the past only to eventually recover.

Things feel different this time, however. Even though there will always be a need for retail and office space, there has now been a paradigm shift in the way we are doing business. Many companies who were initially opposed to “going virtual” in lieu of COVID-19, now realize they are able to operate virtually and have started to question why they need to pay long term NNN rents for thousands of square feet of space. In 2020, we have seen scores of articles depicting the malaise that is about to hit the retail and office sector. Below are just a few of the articles written on this subject:

“Office space is another segment of the commercial real estate market that is about to take a severe hit after the coronavirus pandemic has made telecommuting the norm for office workers in a mere two months.” (From the April 30, 2020 Forbes article, “Why the Real Estate Bubble is about to Burst”.)

“Projections from real estate services firm CBRE Group Inc. suggest that property values for apartments, offices and retail real estate won’t find their bottom until the middle of next year. Worse, the rebound to pre-COVID levels could take until 2022 or beyond.” (From the December 22, 2020 Bloomberg article, “Commercial Real Estate’s Pandemic Pain Is Only Just Beginning”.)

It is not all bad news for commercial real estate, however. Renewables like solar are on a path to explosive growth. The combination of a new administration and more states committing to carbon neutral policies should allow for state incentives to only get better. In fact, the Federal ITC Tax Credit was stabilized until the end of 2022 via the most recent COVID-19 stimulus bill*.

So, what does this mean for CRE owners and investors? For starters, depending on their respective state’s incentives and renewable programs, they could rent unused rooftop space for solar applications and/or their parking lots for solar canopies (aka carports) and add hundreds of thousands of dollars of revenue to the NOI. CRE owners could also significantly reduce their overall utility expenses over time through a power purchase agreement.

In some territories like New York’s ConEd (Consolidated Edison), which has a community solar program, the deal would most likely be a straight building roof lease and/or carport installations (a “lease model”). Terms for this type of lease are usually 20 years with option extensions. It’s a pretty standard agreement—it’s similar to the ones you have likely encountered that produce consistent revenue.

Another potential win for CRE owners to consider regarding solar as a tenant, is that most solar companies are in a better financial situation than the traditional retail or office tenant (i.e. favorable credit ratings balance sheet, etc.). The typical solar lease is four to five times longer than a standard tenant lease. As an example, a $60,000 annual lease adds approximately $1.2 Million to the valuation on a five-cap and $1.5 million on a four-cap over a 20-year lease term.

There are other markets where electric energy rates are higher and make state incentives that much more attractive. In cases like these, the transaction involved might be a Power Purchase Agreement (PPA). This is when the property owner pays the solar owner for the electric energy that is being delivered from the solar installation during the PPA term.

“That’s why it is critical for CRE owners to contract with project developers who are not only experts in terms of solar, but understand every facet of the industry. ABOVEgrid for example, has a team with decades of experience across key sectors that fit within the renewable energy industry and has handled hundreds of projects.”

Solar panel rooftop installations might require a roof replacement, depending on its age. If the roof needs to be replaced, the developer could pay for the roof upfront or at least a portion of it. This allows for a rent adjustment over the term depending on the replacement costs. For carports, the property owner would not only benefit from reoccurring rent, but also provide shelter for customers’ and tenants’ vehicles as well as extending the life of the parking lot and reducing maintenance costs. In addition, there is potential to install EV Car Charging Stations.

Anyone who wants to have a solar installation should know it’s a big project and significant investment. That’s why it is critical for CRE owners to contract with project developers who are not only experts in terms of solar, but understand every facet of the industry. ABOVEgrid for example, has a team with decades of experience across key sectors that fit within the renewable energy industry and has handled hundreds of projects. We know the business well and understand that quality and competence are essential for long-term success.

Our expertise is the result of our joint venture with other enterprises that excel in the solar field. Spano Partners Holdings is a well-known leader in solar development and financing, Partner Engineering and Science comprises more than 800 employees in 40 offices and offers full-service engineering, environmental and energy consulting around the world, and Navara Energy is an experienced originator and developer of multi-megawatt PV solar projects and battery storage systems.

Together, we bring our clients a unique level of expertise of developing solar and battery storage projects. Additionally, ABOVEgrid identifies and develops top solar project opportunities that serve property owners, our investors, partners and regional utilities, along with commercial and residential electricity consumers.

Ideally, ABOVEgrid is the type of company CRE owners would want to handle their solar development— a company that understands the industry well enough to ensure customers are going to get the most out of their investment.

PHOTO: ABOVEGRID

Whether a property owner opts to partner with ABOVEgrid is not the issue here. What matters is that there are solutions, profitable ones, to keep retail and office space sectors going. Solar energy is one of those solutions. It can not only help CRE owners increase their cash flow by lowering utility costs, potentially leading to rent increases and more common area maintenance (CAM) reimbursements. From a tenant perspective, embracing solar energy could generate greater camaraderie between them and their clients—leading to lease extensions.

The CRE industry looks a lot different than it did a year ago. While we can’t change what’s happened to the industry, we can do something about how it looks going forward. I believe solar energy can, and will, play a big part in CRE’s rebound and future success.

About the Author Joe Tassone Jr. is the vice president and cofounder of Above Grid LLC, a leading national developer of commercial and utility-scale solar projects. Joe is also Vice President of Accencore, a solar consulting firm and expert project manager with 25 years of development experience. He has been involved with the development of over 5,000 telecommunication projects and 200MW’s of renewable energy projects across the US. He speaks at national and international conferences on commercial renewable energy projects, real estate development, and customer service. He also has over 20 years of experience in start-ups, consulting, real estate development, and leadership initiatives. For more information, email: info@abovegridsolar.com and visit: www.abovegridsolar.com.

*Goldman Sachs says renewable-energy spending will surpass oil and gas for the first time ever in 2021 — and sees total investment spiking to $16 trillion over the next decade.” (Winck,B., Market Insider, 07/17/20)

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