SF Apartment : October 2017
by Alexandra Patey
Owners and managers of multifamily buildings looking for ways to maximize the value of their properties should consider solar energy.
While uptake of solar energy systems continues to grow throughout California, the cost savings of solar technology have yet to be fully realized within the multifamily building sector as a smart, sound investment opportunity that can bring new value and revenue streams to the business. Whether you own one multifamily dwelling or represent a portfolio of buildings throughout the state, solar will keep your property desirable and shows you are advocating sustainable energy solutions, meeting progressive tenant preferences and considering your position in the overall housing market competition.
According to the McGraw Hill-Construction report, “Green Multifamily and Single Family Homes: Growth in a Recovering Market,” owners and firms “that do not begin making preparations for a significant uptick in the green residential market risk being locked into an increasingly uncompetitive segment of the residential market.”
Virtual Net Metering
The value proposition of solar for multifamily buildings is made possible by virtual net metering. It is a program offered by utilities, including Pacific Gas & Electric, that allows an apartment building owner to install a single solar electric system that can be shared virtually among tenants and common area accounts, resulting in reduced energy bills for all.
With virtual net metering, the solar power generated onsite is divvied up among the participating residents and common area accounts by predetermined percentages, as defined by the property owner, resulting in a direct kilowatt-hour credit on individual monthly utility bills. The ability to share the credits for energy generation greatly improves the economics of installing solar on multifamily buildings. Both property owners and their tenants receive direct utility bill savings while bypassing the need to physically connect the solar system to each meter.
Benefits of Solar
While solar installations on single-family homes in California have increased greatly over the past decade, the multifamily housing sector has lagged. More than one-third of the state’s population lives in multifamily housing, but their homes account for less than 5% of residential solar. Greater use of solar in this sector can contribute significantly to achieving local and statewide renewable energy and carbon reduction goals and, as our business case points out, provide real-world financial returns.
Reduced operating costs.
The level of savings that solar can provide for common-area accounts will depend on how much of the original load will be offset with solar generation. A system can be sized up to the annual load of the building and many systems are designed to offset 85% to 100% of a building’s energy needs. Solar also hedges against rising utility rates, which are common in California. During June 2016 to June 2017, the average cost of electricity rose nearly 7% for both the residential and commercial customer sectors, according to the U.S. Energy Information Administration.
In today’s market, sustainable features are commonly sought qualifications renters look for in a new home. Buildings with solar are often associated with higher quality, and access to a green home can motivate new tenants. In urban population centers, like San Francisco where luxury units are in high demand, green features are a bonus. In addition to the financial savings such features provide, renters also appreciate the environmental aspects that energy-saving technologies bring to a community as a source of pride. Sustainable features, like solar, result in higher occupancy rates and reduced tenant turnover. A Harris Interactive poll of more than 2,000 Americans found that nearly half (49%) consider eco-friendly features more important than luxury items in a home (31%).
Higher rate of rent.
Increased rent can be collected from tenants who receive solar savings, which could recoup the cost of the system. To preserve tenant appeal, an owner should only consider raising the rent by a portion of the tenant’s utility savings to allow them to realize a net savings. The overall reduction in tenant expenses creates an incentive for new and existing tenants, ultimately reducing tenant turnover.
Once the system (or lease or power purchase agreement) has been paid off, the added rental fee for the solar savings is purely profit. While the payback period will depend on the level of savings achieved by the common and tenant loads, EnergySage data shows a typical payback range of three to seven years for small commercial buildings that go solar, depending on the installation type. Roof mounts, ground mounts and carports are all viable installation approaches.
Increased property value.
Research by the U.S. Department of Energy’s Lawrence Berkley Laboratory shows that homebuyers consistently have been willing to pay more for homes with host-owned solar photovoltaic energy systems, averaging about $4 per watt of photovoltaics (PV) installed. This value is recognized by appraisers across all building types, including the multifamily building sector. McGraw-Hill’s 2006 SmartMarket Report states that [multitenant] buildings renovated to meet green standards can bring a 7.5% increase in a building’s value.
Solar may not be a required green standard in all cities throughout California, but the state has been phasing in rigorous building code requirements that direct owners and builders to deploy degrees of energy efficiency upgrades and renewable generation. By preemptively deploying sustainable upgrades, ahead of state code, you offer an even shinier attraction to a potential buyer. If, and when, that potential buyer requests to see the energy profile and annual electricity costs for the building, they will be pleased with the assessment, as compared to similar buildings without solar.
Financing Solutions and Incentives
According to the California Solar Initiative, the cost of solar in the state ranges from $3-$5/watt. Financial incentives include the 30% federal investment tax credit (FITC), as well as MACRS depreciation benefits. The FITC will remain at 30% of the total system cost through December 2019 and will step down to lower percentages in the following years.
There also are various favorable financing products available for solar projects, including solar loan programs, property assessed clean energy (PACE) loans, leases, power purchase agreements (PPAs) and most recently, the roof-lease model that can create an additional revenue stream straight to the owner’s pocket.
With PACE loans, a contractor installs the system with no upfront capital cost, and the building owner pays back the loan through a special assessment on their property tax bill over a period of years. Leases have a third-party developer own and maintain the solar electric system, with the building owner paying a fixed monthly fee for the life of the lease contract. PPAs, like lease agreements, allow a third party to own and operate the system while the property owner purchases the system’s energy at a set per kilowatt-hour price, typically lower than local utility rates.
The roof-lease model, also known as a roof-income agreement (RIA), entails a third-party solar provider leasing your unused roof space for a monthly fee, installing the solar system and working with tenants to opt in to solar savings. This RIA model is unique in bringing in a new stream of income for part of your building that would otherwise not be monetized. Two providers of RIA financing based in the Bay Area are EcoVolt Solar and Electric Trees.
The Center for Sustainable Energy is partnering with EnergySage to offer an online solar marketplace for multifamily property owners where they can request solar bids for their properties. A building owner or manager submits some site-specific information and a pool of prescreened solar contractors will reply with proposals directly through the online platform. The website MultifamilySolarCA.com has been specifically designed for California’s multifamily sector, a largely untapped market in the solar industry.
The website also provides access to multifamily solar toolkits, such as a step-by-step guide for apartment building owners and managers when considering solar for their properties. The toolkits will help owners organize and manage solar projects, and will include tips for monitoring system performance and tracking the project’s success.
“This online solar marketplace will allow multifamily customers to receive comprehensive, unbiased information about their solar energy options, while at the same time connecting with several high-quality contractors in their area. By evaluating multiple quotes though a competitive marketplace, participants can expect to save 20 percent or more on their solar energy systems than market averages,” said John Gingrich, senior vice president for strategic partnerships at EnergySage.
CSE initiated MultifamilySolarCA.com through the Department of Energy SunShot Initiative’s Solar Market Pathways Program, working with the California Solar Energy Industries Association and the Interstate Renewable Energy Council, as part of efforts to expand solar access to renters and tenants in California via virtual net metering.
The Center for Sustainable Energy is a mission‐driven nonprofit dedicated to developing a clean energy future that addresses climate change, increases energy independence and generates lasting economic and environmental benefits. Learn more at EnergyCenter.org
EnergySage is the leading online comparison‐shopping marketplace for rooftop solar, community solar and financing. Learn more at EnergySage.com