In the Spotlight: Leasing Outside the Box

For owners of commercial property, there are three ways to take advantage of unused rooftop space through installation of a solar system. The first is to purchase the system from a solar installer, often referred to as “integrator.” The benefit of this approach is that the owner can obtain a hedge against rising energy costs, at least for a portion of the energy consumed on-site. While the owner incurs a large upfront cost, the 30% tax credit softens this blow. In addition, the “break-even” point is typically about 12 years, after which time the owner is essentially receiving free energy for the remaining useful life of the solar system (usually 25-30 years). The owner may also be eligible for emission reduction credits (ERCs), which have market value. In addition to the economic benefits, installation of a solar system allows the property owner to purchase and deliver “green” power generated on-site directly to tenants.

Leasing the System

The second approach is to lease the solar system from the integrator. The advantage of this approach is that the upfront costs to the property owner can be dramatically reduced to the equivalent of mere “driveoff” charges under a car lease. Every month, the owner would make two payments ' one to the solar integrator, and one to the utility ' instead of the traditional payment to the utility. The goal, of course, would be that the two payments combined total is less than the current single payment to the utility. The lease term is usually 25 years. Under this approach, the owner typically would not receive the tax credit, and would not be able to sell ERCs.

Using a Utility Company

The third approach is to lease the rooftop space to an electricity producer (typically a utility company) under a power purchase agreement (PPA). Under this scenario, commercial property owners are able to receive a monthly income stream (which could be significant depending on the amount of square footage leased) without incurring expenses and, at the same time, help reduce greenhouse gases in the atmosphere. Under the terms of a typical PPA, the commercial property acts as a host site for solar electricity production, while the electricity producer assumes the responsibility of purchasing, installing, operating and maintaining the solar systems. The electricity produced under a PPA is generally sent back to the utility grid.

Challenges

Each approach comes with its own unique challenges. One issue that appears to exist in all of the approaches for a landlord is the landlord's ability to control access and/or use of the necessary rooftop space without violating the leasehold interests of existing tenants. A proper analysis of any underlying tenant leases should be performed to determine whether the landlord possesses this ability or whether a lease modification is required. If a modification is required, changing existing lease terms may be difficult without concessions from the landlord. To avoid this scenario, new leases should contain the appropriate language granting the landlord the right to control and/or use the rooftop space.

Other issues that should be considered in connection with rooftop solar systems include, at a minimum: 1) the true cost savings to the property owner; 2) the structural integrity of the building; 3) the type of photovoltaic solar system (e.g., thin film versus crystalline silicon panels, tracking versus stationary, etc.); 4) responsibility for the installation and removal of solar systems; 5) concerns that a solar system might obstruct signage, otherwise impede the sightlines of tenants' premises, or reduce the overall aesthetics of the center; 6) allocation of liability for any property damage and injury; and 7) allocation of ERCs and “going green” claims.

Conclusion

A thorough analysis of a commercial property owner's ability to use its rooftop and of the issues that may arise under the applicable approach used by the owner should be considered prior to entering into any such arrangement.

Preston Brooks is a partner with Cox, Castle & Nicholson LLP in Los Angeles, and chairs the firm's Environmental Group. He may be reached at 310-284-2223; [email protected]. Andrew Kim is an Associate in the same office. His practice focuses on retail development and commercial leasing. He may be reached at 310-284-2272; [email protected].

Whether it is due to the emergence of a “green” movement or a desire to find an additional income stream in today's challenging economic market, commercial property owners are now taking advantage of unused rooftop space to install solar energy systems. Although harnessing the sun's energy through photovoltaic solar panels is not a new idea, due to recent advancements in technology and tax incentives (including the 30% tax credit contained in last year's stimulus plan), the cost-efficiency of these systems has improved significantly.

Three Options

Installing the System

For owners of commercial property, there are three ways to take advantage of unused rooftop space through installation of a solar system. The first is to purchase the system from a solar installer, often referred to as “integrator.” The benefit of this approach is that the owner can obtain a hedge against rising energy costs, at least for a portion of the energy consumed on-site. While the owner incurs a large upfront cost, the 30% tax credit softens this blow. In addition, the “break-even” point is typically about 12 years, after which time the owner is essentially receiving free energy for the remaining useful life of the solar system (usually 25-30 years). The owner may also be eligible for emission reduction credits (ERCs), which have market value. In addition to the economic benefits, installation of a solar system allows the property owner to purchase and deliver “green” power generated on-site directly to tenants.

Leasing the System

The second approach is to lease the solar system from the integrator. The advantage of this approach is that the upfront costs to the property owner can be dramatically reduced to the equivalent of mere “driveoff” charges under a car lease. Every month, the owner would make two payments ' one to the solar integrator, and one to the utility ' instead of the traditional payment to the utility. The goal, of course, would be that the two payments combined total is less than the current single payment to the utility. The lease term is usually 25 years. Under this approach, the owner typically would not receive the tax credit, and would not be able to sell ERCs.

Using a Utility Company

The third approach is to lease the rooftop space to an electricity producer (typically a utility company) under a power purchase agreement (PPA). Under this scenario, commercial property owners are able to receive a monthly income stream (which could be significant depending on the amount of square footage leased) without incurring expenses and, at the same time, help reduce greenhouse gases in the atmosphere. Under the terms of a typical PPA, the commercial property acts as a host site for solar electricity production, while the electricity producer assumes the responsibility of purchasing, installing, operating and maintaining the solar systems. The electricity produced under a PPA is generally sent back to the utility grid.

Challenges

Each approach comes with its own unique challenges. One issue that appears to exist in all of the approaches for a landlord is the landlord's ability to control access and/or use of the necessary rooftop space without violating the leasehold interests of existing tenants. A proper analysis of any underlying tenant leases should be performed to determine whether the landlord possesses this ability or whether a lease modification is required. If a modification is required, changing existing lease terms may be difficult without concessions from the landlord. To avoid this scenario, new leases should contain the appropriate language granting the landlord the right to control and/or use the rooftop space.

Other issues that should be considered in connection with rooftop solar systems include, at a minimum: 1) the true cost savings to the property owner; 2) the structural integrity of the building; 3) the type of photovoltaic solar system (e.g., thin film versus crystalline silicon panels, tracking versus stationary, etc.); 4) responsibility for the installation and removal of solar systems; 5) concerns that a solar system might obstruct signage, otherwise impede the sightlines of tenants' premises, or reduce the overall aesthetics of the center; 6) allocation of liability for any property damage and injury; and 7) allocation of ERCs and “going green” claims.

Conclusion

A thorough analysis of a commercial property owner's ability to use its rooftop and of the issues that may arise under the applicable approach used by the owner should be considered prior to entering into any such arrangement.

Preston Brooks is a partner with Cox, Castle & Nicholson LLP in Los Angeles, and chairs the firm's Environmental Group. He may be reached at 310-284-2223; [email protected]. Andrew Kim is an Associate in the same office. His practice focuses on retail development and commercial leasing. He may be reached at 310-284-2272; [email protected].