CREJ - Property Management Quarterly - July 2016
Commercial property owners throughout Colorado are turning to solar photovoltaic systems to cut electricity costs and hedge against future utility rate increases. Coupled with other efforts to increase a property’s sustainability profile, solar installations have the potential to increase property performance and value. Federal and local incentives for solar, along with recent market trends, are driving the traditionally high upfront costs of solar installations down, making the investment in behind-the-meter electricity generation more palatable for commercial property owners and managers. Behind-the-meter systems are renewable energy systems that are custom designed and built for a single building or facility. These systems generate electricity on site to offset utility bills and reduce a facility’s overall carbon footprint. In late 2015, Congress extended the solar investment tax credit, hailed as the United States’ most successful public policy for solar. The 30 percent investment tax credit helped annual solar installations grow by over 1,600 percent since the program’s inception in 2006. Eligible commercial building owners can take the tax credit in the first year after the installation, effectively reducing the cost of installation by 30 percent. Additional incentives are available locally in Colorado. For commercial properties in Xcel’s utility territory, monthly incentives are available at 15 cents per kilowatt-hour for solar PV systems between 10.1 kW and 500 kW in size. Black Hills Energy also offers commercial customers rebates at $2 per watt, plus renewable energy credit payments of $50 per megawatt per hour produced throughout the year. Downward market pressure on solar panel prices and balance of system costs are making solar installation costs more affordable. According to GTM Research, a leading renewable energy market analysis firm, overall PV system pricing in the U.S. fell by up to 17 percent over the course of 2015. Financing Mechanisms New financing tools are making it possible for commercial property owners to invest in solar and building-efficiency projects with no upfront costs. In December, Colorado launched a statewide commercial Property Assessed Clean Energy program. C-PACE financing enables commercial building owners in eligible counties to finance up to 100 percent of renewable energy and energy-efficiency project costs. C-PACE authorizes counties to work with private capital providers to finance qualifying property improvement projects and to collect payment through a special assessment on a property’s tax bill with terms up to 20 years. Commercial loans, by contrast, typically don’t exceed seven years. With these longer payback terms, annual energy savings typically more than offset assessment payments, meaning projects generate positive cash flow immediately with little to no upfront capital needed. Eligible properties include office buildings, hotels, retail, agricultural, nonprofits, industrial buildings and multifamily properties, with five or more units. Paul Scharfenberger, director of finance and operations at the Colorado Energy Office, said that the ability to finance 100 percent of project costs makes C-PACE unique among financing mechanisms. Property owners can finance soft costs, like feasibility studies, and hard costs, such as equipment and construction. Typically, property owners can only finance hard costs. The end result is that commercial property owners utilizing C-PACE do not need to bear any out-of-pocket costs for these projects. “This is particularly attractive for small to midsize (Class B and C) building owners who often lack the capital budget for capital-intensive equipment upgrades, yet have pent-up demand to modernize their building,” said Scharfenberger. With better financing terms through C-PACE and no out-of-pocket expenses, commercial building owners can reap the financial benefits of generating electricity from the sun immediately, significantly reducing electricity costs and protecting against future utility rate increases. C-PACE participants can combine solar installations with other building efficiency improvements, like lighting, heating and cooling upgrades. Combining solar installations with efficiency upgrades often can improve the terms of C-PACE financing. C-PACE project applications, eligibility information and lists of eligible contractors and lenders can be found on the website, www.copace.com. Improving Property Performance Reducing energy consumption by generating electricity on site and improving building efficiency can help commercial buildings qualify for green certification programs such as LEED and Energy Star. These certifications verify that a building meets certain standards aimed at optimizing building energy performance and reducing environmental impact, all while reducing overhead costs through energy savings. A 2015 study published in the Journal of Portfolio Management found a strong correlation between green certifications and property performance, such as higher occupancy, tenant satisfaction and retention rates. The study looked at lease data from nearly 300 office properties across North America. Occupancy rates for the 10-year period of the study were 9.5 percent higher in U.S. buildings with Energy Star certification, then in buildings without certifications. Net effective rents averaged 3.7 percent more in LEED certified properties in the U.S. than in similar noncertified buildings. With increased property performance comes increased property value. The market forces that favor sustainable buildings, particularly in Colorado, make investing in solar a net gain in terms of building income and overall asset value.