The whole point of commercial real estate ownership is to maximize revenue for the investors (and provide a positive tenant experience!). Once a building is fully occupied, then there’s not much more a landlord can do to drive revenue other than to either increase the cost of the base rent for the space, or to increase the operating expense burden that is passed through to the tenant. Landlords don’t have any other source of income except the tenant payments, but tenants can only afford to pay so much in rent expenses.

Ownership can also look to reduce the operating expenses, as well, through everything from shopping around for insurance , protesting real estate taxes, and making the building run more efficiently, through technology, AI and good maintenance practices. These require an investment of time and often capital, and while tenants appreciate it, owners might take years to recoup their investments.

Many commercial landlords look for alternative or additional revenue streams that can be created within the building itself, with mixed results. Landlords have experimented with adding advertising in lobbies and elevators, or repurposing lobby space to create additional revenue-generating amenities, such as a coffee kiosk, rooftop bar or gym. More space being rented means more income, but these alternative income streams aren’t always successful. The affects on current tenants need to be taken into consideration, as well as the additional costs and maintenance created by the new, less traditional tenant.

Solar energy leases are attractive to commercial real estate landlords for a variety of reasons. The owners of the commercial building don’t generally use their rooftop, except for maybe an HVAC unit or two, so repurposing these underutilized spaces for low-involvement revenue generating activities can be a big win.

Solar energy development has the advantage of creating additional net operating income, requiring little maintenance and not much else from the landlord, except for flat rooftop. These leases tend to be long-term with fixed rent payments, or a minimum guaranteed payment based on the amount of solar energy produced by the array. Direct generation solar providers, such as the ones that develop rooftop projects, tend to be low-risk tenants with high returns (and a history of timely rent payments). The landlord doesn’t generally have to make a capital-intensive investment for this tenant, other than to assure that the roof is in a condition to support the solar array. Solar leases are most popular on top of warehouses or industrial buildings, but any big clear flat roof with at least 50,000 square feet (100,000) can be a possible site.

The solar provider is the one that gets the permits, installs and maintains the solar panels, and tracks the energy production (and pays the rent!), so there’s very little administrative burden on the landlord once the project is up and running. Since the only part of the building that is being used for solar energy generation is the rooftop, the existing tenants won’t be disturbed at all. The developers will even be responsible for selling the power to the energy grid, and the interconnectivity activities to do that, so the landlord doesn’t have to get involved in non-real-estate activities.

Additionally, many states are incentivizing solar power projects. New regulations are in place that allow the solar-generated power to be either sold off-site, or used by the tenants of the building, or both. Often, the developer, after installing the solar array, will allow the landlord to offer the solar-generated power for sale to its tenants, usually at a reduced price, and the rest of the power will be sold back to the energy grid. Some markets even have incentives to promote green buildings and alternative energy use to encourage reduction in carbon emissions.

In fact, solar energy offerings could be an incentive to commercial building occupants, since they may have the option to purchase less-expensive and cleaner power for their business operations. The cost of traditional power continues to increase, while technology advances means that the cost of solar power continues to fall. Tenants that are working to reduce their carbon footprint as a company or to meet other environmental, social and governance (ESG) goals, will find access to solar power to be a benefit.

Generally, a solar generation project is divided into two relevant phases, the due diligence period, and the operational period. Solar projects tend to be capital-intensive, so the developers want to make sure they have access to the rooftop site before investing to develop the project. The lease for the rooftop will be one of the first items to be completed, but it could be a year or two or even more until the project is approved for construction and then operational.

Due diligence development activities can be extensive and heavily regulated. They include utility applications and studies, enrollment into a state incentive program, and permitting and equipment procurement. The developer will also confirm that the roof can support the system as it is designed, and will get approvals for the interconnections, which allow the power to be sold to the energy grid.

After the development period, and the system is working, then it’s in the operations period. There’s very little to do, other than periodic maintenance, which is generally the responsibility of the developer. The system pretty much operates on its own. There will need to be periodic access to the rooftop for maintenance and repair activities, but these should be addressed in the lease.

Institutional commercial real estate owners are becoming cognizant that they can maximize their real estate investment and reduce operating expenses with rooftop solar projects. Some landlords want to go beyond having a lease agreement with a solar energy development company, and are interested in doing their own development and operations in alternative energy, due to the good returns and low risk of solar power generation. There are complex tax issues for REITs to consider when there is partial or full ownership of a solar project.

Rooftop leases and alternative energy development are becoming more popular.

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