Solar for commercial property investors

• A daytime load, not a night shift. Solar earns when the building is busy. A site that runs 8-to-5 on weekdays will consume most of what it generates; the cosmetics case below used 57.5% of its own generation on site and exported the rest at 10 c/kWh. A site that runs through the night absorbs less and exports more, and export earns a third or less of what avoided grid power does.
• A roof with a quarter-century left in it. Panels outlast most roofs. Inspect the structure, the membrane, the penetrations and the warranty before the design is fixed, because replacing a roof underneath a working array is the most expensive mistake in this model, and it lands on the owner.
• A tenant that intends to stay. The income is only worth what the term is worth. A three-year tenancy with no renewal is a three-year asset with a removal problem; the agreements we price assume a longer horizon, and the extension years are conditional on the tenant and the lease.

The other side of the same sentence: a PPA’s “no upfront capex” does not remove a fifteen-to-twenty-five-year purchase obligation. The cost moves from capital to commitment, and commitments are what a buyer discounts.

• The tenant says no, or leaves. You own a system and an empty building. The asset remains and the export income continues, but the charge that made the numbers work stops. A tenancy with years left on it, or a covenant worth relying on, is the difference between an income agreement and an optimistic one.
• The roof fails after installation. Lifting and reinstating an array to replace a membrane is a five-figure interruption, and it belongs to the owner unless the contract says otherwise. Inspect first, and price any roof work before the solar, not after.
• Nobody agreed how to measure it. Two reasonable people can disagree about what the array produced, what the building consumed, and what the tenant should have been billed. Fix the meter, the reading method and the settlement cycle in the agreement, not in a later argument.
• The discount is misunderstood. Fifteen per cent off the solar consumed is not fifteen per cent off the bill. Most of a commercial bill is not solar, and a tenant who expects otherwise is a dispute waiting to happen.
• The export income disappears. Network export limits and curtailment are set by the distributor, not by the design. You keep the export credit, so you also carry the curtailment — and on a constrained part of the network, that can be most of the midday.
• The numbers were quoted as net. Operating costs run roughly 0.5% to 1% of capital a year; insurance and an inverter replacement land inside the term; none of the figures above deduct any of it. Gross returns are how the structure is sold. Net returns are how it is kept.

Do I need the tenant’s permission to put solar on the roof?

For the installation, usually not beyond the access and notice terms in the lease. For the recovery of a charge from the tenant, yes: the agreement has to be written with the tenant, not imposed on them. Many commercial leases already allow a landlord to recover outgoings or supply additional services, but not all do, and the mechanism, the notice and the treatment at a rent review depend on the wording. Get the lease read before the design is finalised.

Is a contracted charge the same thing as a PPA?

No. A power purchase agreement is a long-term contract to buy electricity from whoever owns the system, and in a third-party PPA that is not you. A contracted charge is what the tenant pays you for solar you own. The tenant still buys the rest of its power from its retailer as it does today, and the solar payment is a separate line.

How is the tenant actually charged?

Against the solar the building consumes, measured at the meter. The rate is set below the tenant’s grid price, then invoiced however the agreement says — monthly, with the outgoings, or on the retailer’s cycle. The two things that must be agreed in writing are the measurement basis and the settlement mechanism, because a disagreement about either turns a saving into a dispute.

What return should I expect?

On the buildings we have priced, the owner’s gross year-one receipts came to 13% to 19% of capital, before operating costs, tax and vacancy. Discounted, a ten-year agreement at 5% was worth about $203,000 against $154,043 of capital on the first case; at 10% it was worth about $160,374. Neither figure is a promise, and both depend on the tenant staying.

Can I sell the building with the agreement in place?

Yes, and that is the point of owning the system. The asset and its income travel with the freehold, so a buyer acquires a building that is cheaper to occupy and a contract that pays. The buyer’s valuer will decide what the remaining term and the tenant covenant are worth, and a short remaining term or a weak covenant is worth less than a long one with a good tenant.

How big a system does a tenanted building support?

Size to the tenant’s daytime load and the roof, not to the capital available. A site that runs one shift will self-consume most of what it generates; a site that runs around the clock will absorb more. Once the load exceeds the roof, export limits take over, and export income is worth far less per kWh than avoided grid cost.