Real Estate Advisor: Key Considerations of Going Solar

July 20, 2015

With interest in solar power soaring in recent years, it’s no surprise that some savvy commercial property owners with vast swaths of rooftop or other open space are determining whether to use some of that space for solar panels. While solar installations can cut operating costs, reduce taxes and even create an additional revenue stream, they also come with some complex issues that require careful consideration.

Choose your approach

Several options are available for property owners interested in solar power. For example, you can install solar panels and use the power yourself, sell the power to tenants or both. You could also sell the power to a utility company. This additional revenue stream can increase the value of the property. This could result in extra property taxes if the property is reassessed by local taxing authorities, however.

To avoid possibly steep upfront costs, consider entering into a power purchase agreement with a solar developer that installs, owns and operates panels on your property and sells the power to you. Or you can lease or license your roof or other space to a developer that will sell the power to other parties.

Look into a tax break

One of the current lures for solar investors is the investment tax credit, which is available to eligible taxpayers that install, develop or finance the project that uses the credit. The credit equals 30% of expenditures, with no limit, but is set to drop to 10% in 2017. Eligible solar energy property includes equipment that uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat. Hybrid solar lighting systems, which use solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight, are also eligible. Passive solar systems and solar pool-heating systems, however, are not eligible.

Secure roof rights

When entering a rooftop lease or licensing arrangement with a solar developer, the developer may require evidence that you have sufficient title and legal rights to grant separate control over the roof to the developer. The roof can’t be subject to existing liens, mortgages or other legal restrictions that impede you from granting the developer exclusive rights.

You may also need to obtain a subordination and nondisturbance agreement from your lender. Ensure that the developer obtains appropriate insurance coverage as well.

Anticipate roof maintenance

Roof-mounted solar installations generally last 35 to 40 years, but the lifespan of a commercial building roof is usually much shorter. If the roof has been leased or licensed to a solar developer, the revenue stream can dry up quickly if the agreement doesn’t address maintenance issues. The lease or licensing agreement should include provisions related to:

  • Notice of repairs,
  • Duration of work,
  • Relocation of solar equipment during the work, and
  • Compensation for the developer’s lost revenue during the repair or replacement work.

If the roof was repaired or replaced shortly before the installation of solar panels, pay careful attention to the terms of any applicable warranty. Solar panel installation activities could invalidate critical warranty provisions.

Do your research

Solar power is increasingly popular, with major companies like Costco, Kohl’s and Walmart all getting into the game. Before you jump on the bandwagon, however, research the concept carefully to determine how to best take advantage of the energy opportunities in your market.