If you’re a commercial tenant, the notion of embracing solar power might seem as distant as the sun itself. Convincing your landlord to invest in expensive building upgrades can seem like an impossible task. Meanwhile, if you’re a landlord, you might be cautious about the associated risks or fail to see the advantages of these upgrades since you’re not responsible for the power bill.
But what if I told you that there is a middle ground that guarantees benefits for both parties – a situation where everyone wins?
For tenants, this presents a golden opportunity to slash operational costs, giving you more cash flow to grow your business while also accomplishing sustainability objectives. Landlords, on the other hand, can add value to their property, offer an attractive incentive for tenants to remain or attract new renters, achieve ESG objectives, and secure a long-lasting income stream that provides a high rate of return.
This article explores the mutual benefits of solar adoption, provides actionable steps proven to lead to solar partnership success, and offers examples of scenarios that succeed and those that don’t.
The Mutual Benefits of Commercial Solar Adoption
There are many benefits to installing a commercial solar system for both commercial landlords and tenants. Understanding the viewpoints of all parties involved and striking the right balance between your respective commercial goals paves the way for productive discussions about commercial solar initiatives with your tenant or landlord.
Commercial Solar Benefits for Tenants
For many businesses, electricity costs are a major financial burden. Even if you’re leasing your premises, opting for a commercial solar system with landlord consent can offer substantial financial benefits, including:
Ownership Advantage: If your lease is for 5 years or more, then you will see the benefits of purchasing a commercial solar system yourself. With an average payback period of 3-5 years and savings often surpassing repayments, it delivers a solid return on investment and can potentially be a positive cash flow right from the outset. Once recouped, the savings continue for the life of the system (25-30 years), and an added advantage is that solar can be dismantled, removed, and relocated to a comparable site if you ever choose to move.
Reduced Operational Expenditure: Opting for solar under arrangements where the landlord or a third party is responsible still yields lower electricity expenses. This reduction in operating costs not only improves your bottom line but also aligns with your environmental, social, and governance (ESG) goals.
Sheltering Against Energy Price Volatility: Shield your enterprise from fluctuations in electricity prices, contributing to enhanced financial stability and predictability.
Significant Operating Cost Reduction: Electricity bills often form a substantial portion of a business’s monthly expenses. Integrating solar power significantly reduces this cost, allowing you to allocate resources to other critical areas of your business.
Government-Backed Incentives: If you decide to take ownership of the solar system, numerous government incentives, grants, and tax benefits are available. These incentives further decrease your initial investment, accelerating your return on investment and enhancing the financial attractiveness of the solar solution.
ESG Alignment and Brand Enhancement: In today’s landscape, businesses are increasingly conscious of the societal and competitive pressures to implement ESG strategies. By embracing solar energy, you not only align with global climate change objectives but also improve your brand’s perception, attracting customers who share similar values.
Commercial Solar Benefits for Landlords
If you are a landlord, you might not fully realise the value of your roof as an asset. The installation of a commercial solar solution offers a range of compelling advantages, including:
Enhanced Property Value: Adding a commercial solar system to your property adds long-term value, making lease agreements more enticing for attracting and retaining high-value tenants. It also allows you to demand potentially higher rentals than non-solar properties.
Green-Focused Marketability: With growing corporate emphasis on renewable energy, having a green-focused commercial building increases its marketability among companies adopting sustainable practices.
Tenant Investment: If tenants opt to purchase solar systems, they invest in your property, improving it at no cost to you and fostering a longer tenant commitment.
Profitable Ownership: Owning the system allows you to sell electricity to tenants at a discounted rate, generating income that can exceed monthly loan payments. Once the system is paid off (typically within 5 years), it becomes a lucrative income stream. Tax benefits like asset write-offs and depreciation further sweeten the deal.
Low-Impact Alternative: Opting for a third-party-owned system through a roof lease or Power Purchase Agreement (PPA) eliminates cash flow concerns and maintenance responsibilities. Moreover, you receive roof rent income, enhancing the overall financial benefit.
Upcoming Regulatory Changes: The 2023-24 Federal Budget introduces stricter energy efficiency requirements for data centres and warehouses. Existing buildings and new construction projects will need to achieve a NABERS rating of 6, as mandated by the Green Building Council of Australia.
Time-Sensitive Incentives: Financial incentives are diminishing over time, so now is the time to act. Currently, in August 2023 with the small-scale technology certificates available, you will save $42,000 on a 100kW system.
3 Steps to Navigating Successful Landlord-Tenant Solar Partnerships
Although commercial solar offers evident advantages for landlords and tenants, many partnerships fail due to overlooked factors, undersold shared benefits, and limited awareness of financing and ownership choices that could align both sides’ commercial goals. With a track record of successful landlord-tenant solar partnerships, we’ve refined a three-step, proven approach that assists both parties in exploiting renewable energy’s potential while confidently navigating any challenges that arise.
Step One: Laying the Groundwork for Success
Navigating commercial solar for leased buildings requires understanding overlooked factors that can impede initial tenant-landlord discussions. Early awareness of these factors is crucial for fostering efficient communication and collaboration.
The Dynamics of the Tenant-Landlord Relationship
Successfully navigating solar for a leased commercial asset requires understanding the tenant-landlord dynamics. Effective communication is key, especially if you maintain a positive connection with your landlord or tenant. Leveraging this rapport can open doors to discussions about integrating solar solutions and how they benefit both parties. If the relationship is less favourable, experienced renewable energy providers like Spinifex Energy can help. We can present, on your behalf, comprehensive proposals that highlight advantages and address concerns when approaching either party. During discussions, it’s important to review existing lease agreements to gauge the potential impact of solar and determine necessary adjustments. Collaborating on shared benefits, transparent financial arrangements, and clarifying roles for maintenance and insurance lay the groundwork for a thriving solar partnership.
Evaluating Lease Term and Tenant Mix
As a tenant, it’s essential to thoroughly review your tenancy agreement before making any alterations to your property or its services. These agreements often contain clauses that stipulate the property must be returned to its original state when the lease ends, which might require undoing any changes made. Additionally, seeking permission for modifications is typically necessary, and obtaining landlord approval is not guaranteed. Developing a strong rapport with your landlord and initiating open and early communication can help overcome obstacles to implementing energy-efficient upgrades.
If you’re in the process of selecting a new property or renegotiating a lease, analyse how the terms could impact your ability to manage energy consumption and implement energy efficiency measures. Engaging in an open dialogue with your landlord about the rationale behind seeking access to data and the freedom to make improvements can be beneficial. If your landlord hesitates, there are strategies you can employ. You might consider offering a longer-term contract or agreeing to a slightly higher rent in exchange for their cooperation. Exploring a ‘green lease’ arrangement is also an option, allowing tenant-initiated eco-friendly improvements that align with lease requirements.
As a landlord, it’s crucial to evaluate the long-term prospects of your tenant’s business. Factors such as the tenant’s industry, financial stability, and growth potential should be carefully considered. This assessment can provide insights into whether the tenant is likely to remain in the space for an extended period.
The specific circumstances of your tenant arrangement also hold significance. For instance, if you’re dealing with a single-tenant building with only a short time remaining on the lease, you’ll need to assess the potential risks associated with investing in energy solutions. Conversely, a building with multiple tenants and leases expiring at different times provides a more diversified risk profile.
Your primary goal is to ensure a consistent purchaser for the generated power. Elements such as tenant stability and the ongoing demand for the electricity produced are critical factors that can directly influence the profitability of such projects.
Age of Building
In the coming twenty years, landlords should be mindful that newer buildings incorporating advanced features and sustainable designs will carry elevated property value and rental returns, along with a competitive edge in appealing to high-value tenants due to companies prioritising sustainability and cost-efficiency. Additionally, upcoming regulations, like the increased NABERS rating announced in the 23-24 Federal Budget, will impose stricter energy efficiency standards on data centres and warehouses, impacting both existing and new structures.
Businesses Size
A landlord receives greater revenue when the tenant utilises self-generated solar electricity rather than exporting it for a feed-in tariff. Consequently, your motivation could be limited unless your tenant’s business looks likely to consume a significant portion of solar energy. The ideal situation arises for businesses with a daily average consumption of over 150kWh. The closer the alignment between energy consumption and solar output throughout the day, the more advantageous it becomes.
Other Energy Efficiency Initiatives
Outdated interior lighting, old or inadequately maintained equipment, and poor operational control over energy consumption can result in unnecessarily elevated electricity bills. When looking to reduce energy costs and achieve sustainability goals, tenants and landlords must holistically assess all avenues for minimising energy usage and not just look to solar as the entire solution.
A range of financing solutions and government business incentives are available that are geared towards modernising and boosting energy efficiency in your existing property. In addition to solar, financing solutions can also support upgrades like LED lighting, providing landlords with a cost-effective method to access capital that enhances property value while simultaneously lowering operational expenses for tenants.
The recently announced Small Business Energy Incentive is also available to help small and medium businesses save on energy bills by incentivising investments in electrification and energy-efficient assets.
Daytime vs. Nighttime Usage
When considering commercial solar, it’s essential to evaluate your peak energy consumption periods and assess whether this will match your system’s generation cycle. Tenants and landlords are advised to collaborate with their solar provider and factor in their daytime and nighttime energy consumption patterns to ensure the system will be financially viable and if non-standard battery storage provisions are required.
Roof Responsibility and Maintenance
In commercial landlord-tenant solar scenarios, a key consideration is determining roof control, whether it lies with the landlord or tenant. Ground leases often grant tenants roof control because they lease the entire property and building. In single-tenant setups, roof responsibility varies based on lease terms, which might distinguish between structural and non-structural elements. Additionally, examining reciprocal operating agreements and “shadow anchors” is crucial. These agreements could restrict rooftop use, demand equipment screening, and set building height limits.
Once solar panels are installed, ongoing roof maintenance requires careful planning, particularly for tenant-installed systems that become part of the tenancy setup. If building structure maintenance arises, landlords typically require temporary panel removal, posing potential ongoing costs for tenants. An operational plan established before installation outlines responsibilities in such cases. As for landlord apprehensions about potential property damage from solar panel installation, it’s vital to note that the process employs robust aluminium railings attached to existing roof beams via established screw holes and lines. The procedure involves unscrewing, bracket placement, and re-screwing, seamlessly integrating the system into the main switchboard while preserving existing elements. Contrary to misconceptions, solar panels are retrofit solutions that do not cause lasting property damage.
Step Two: Initiating the Solar Conversation
Effective Communication Strategies
Effective communication strategies play a pivotal role in the discussions between landlords and tenants concerning commercial solar. To ensure productive conversations, the approaching party should have a solid understanding of the lease agreements, solar benefits, and challenges, enabling them to engage the other party with well-informed propositions. By highlighting benefits such as cost savings, contributions to achieving sustainability objectives, and potential financial gains, you can emphasise the project’s value proposition. Transparent dialogue is crucial, with both parties openly expressing their expectations, concerns, and long-term objectives.
Engaging solar experts like Spinifex can bridge technical gaps, provide unbiased insights, and facilitate smoother discussions. A considered approach, maintaining flexibility in the terms of the negotiations, clear documentation of the terms and obligations in the form of a letter of consent and lease amendment, and a pre-established dispute resolution procedure all help to avoid misunderstandings and conflicts and foster a conducive atmosphere. Approaching discussions as a win-win scenario and emphasising collaboration and partnership will set you up for success.
Selling the Benefits
The art of advocating for commercial solar hinges on the strategic presentation of benefits, ensuring a win-win scenario for all parties involved. Here are a few approaches:
Increased Property Value: Spotlight the compelling impact of enhanced energy efficiency on property value. As businesses increasingly embrace sustainability and energy efficiency, a solar-powered property stands out as an attractive asset, aligning with modern business aspirations.
Cost Savings: Highlight the tangible reduction in operating costs for the tenant as a direct outcome of integrating solar power. The substantial cutback in electricity bills translates into freed-up resources that can be channelled into crucial business operations, enhancing the overall financial health of the business.
Diversify Revenue Streams: Clearly outline the avenues that solar opens for landlord revenue diversification. Owning a solar system translates to the possibility of selling electricity to tenants at a discounted rate, generating income that can surpass monthly loan payments. As the system’s cost is typically recouped within five years, it subsequently evolves into a profitable income stream. It is also financially advantageous if a third party owns the system, as landlords also stand to receive roof rent income.
Regulatory Alignment: Leverage the regulatory landscape to bolster your case. A property with subpar energy performance may necessitate mandatory improvements soon. You can cite the recent 2023-24 Federal Budget’s mandates for data centres and warehouses.
An example can also be highly effective in making your case clear. Imagine having a 12-year lease while the solar PV system offers a 25-year warranty. This direct comparison highlights the lasting benefits for the landlord if the tenant were to leave. The system pays for itself in about four years and would provide a significant increase in value to the property, an ongoing income stream for the landlord (depending on the arrangement), reduced operating costs for the tenant, and an attractive marketable feature when renting the property in the future.
Step Three: Choosing the Right Financing Model
Once a significant hurdle, solar financing has transformed. As government subsidies for upfront installation costs decline, the industry has adapted by introducing progressive models like power purchase agreements and solar financing. Below, we’ll explore the advantages and drawbacks of each option, helping you select the arrangement best aligned with your specific needs.
Outright Cash Purchase
Under a cash model, the landlord or tenant uses its funds to buy and maintain the solar asset. This grants the system owner benefits like claiming costs, depreciation, and tax credits. Cash means full ownership with no interest costs, leading to the best return on investment and the lowest electricity cost over the asset’s life.
If the landlord owns the system, they can:
Sell Electricity to Tenants: In a landlord-owned commercial solar setup, landlords can provide tenants with cheaper renewable energy compared to the grid, forming a win-win situation. Tenants can collectively share project costs by agreeing to buy slightly discounted power, leading to increasing savings as utility rates rise. This model aligns the goals of both parties, delivering savings to the tenants and enabling landlords to earn substantial income by selling discounted electricity.
Use Electricity to Serve Common Building Load: In multi-tenant buildings, shared utility metres cover common loads such as corridor cooling and parking lot lighting. Landlords can invest in a solar system and reap the full benefits of the electricity cost savings by net metreing the system to the common electricity metre and reducing the building’s operating expenses.
Alternatively, under a tenant-owned model, the tenant purchases the commercial solar system with the consent of the landlord, aiming to fully leverage the energy savings it generates. Tenants, especially those with extended lease periods and significant daytime energy usage, gain rapid advantages through this approach. For leases over 5 years, costs can be recovered within the lease duration, reducing expenses with no long-term financial impact. The attractiveness of this model grows for leases spanning longer periods as the cumulative savings continue to accrue throughout the system’s 25-year life. In the event of needing to relocate after the lease agreement, options for a smooth transition include transferring ownership to the landlord, which can enhance property value and attract future tenants.
Advantages:
- Complete ownership with no further interest or payments.
- Fastest avenue for immediate returns and cashflow positive tipping point
- The system owner (landlord or tenant) can claim Small-Scale Technology Certificates (STC), GST, and tax depreciation.
- Landlords can choose to set up an embedded network where they sell electricity to tenants at a discounted rate, creating a lucrative income stream.
Disadvantages:
- If cash flow is king for a business, the cons of a large upfront capital expenditure may outweigh the pros.
- Improved profitability may lead to a higher tax liability.
Power Purchase Agreement (PPA)
A PPA is where a third-party solar provider owns, installs, and maintains the system for free, and the tenant simply pays for the electricity that the system generates at a much more competitive rate versus their retail electricity rates.
Under this arrangement, the third party will also pay a roof rental to the landlord for the specified duration, which offers a lucrative secondary income.
While a PPA is not technically a finance option, it is often considered in the same group. Key reasons are that there is no upfront capital expenditure from the party benefiting from the system and often an ownership transfer option at the end of the term. This arrangement works well in cases of single-tenant occupancy with long leases or multiple tenants with differing lease expirations, offering a diversified risk profile.
If a tenant holds a lease for a minimum of 15 years (potentially even 10 years in some cases) and possesses strong credit, they can directly enter into a Power Purchase Agreement (PPA), instead of the landlord. This involves taking full financial responsibility for the solar project’s obligations. This approach can be especially beneficial in scenarios with single-tenant occupancy where the landlord is cautious about assuming the financial responsibilities of the contract, but the tenant is actively advocating for solar integration. In this scenario, the tenant enters a PPA for electricity, while the landlord engages in a roof lease, earning roof rent as compensation for the use of their asset, with no obligation to buy power in the event of property vacancy.
Advantages:
- No upfront capital expenditure.
- Cash flow positive from day one.
- Energy costs are tax deductible.
- Management, maintenance, and monitoring of the system are the responsibility of the system owner.
- Tenants benefit from reduced electricity costs and long-term price certainty.
- Landlords generate a passive revenue stream from their rooftop space, transforming an underutilised asset into a consistent additional income source.
- System purchase options are available after the term of the PPA.
Disadvantages:
- There may be separate bills from the energy retailer and PPA provider.
- Typically, longer contract terms are required to finance (10-20 years).
- Lifetime savings are greater with landlord or tenant system ownership.
Chattel Mortgage
In the Chattel Mortgage model, a finance company funds the solar asset purchase. Regular payments by the business owner are offset by solar-generated savings. This allows the claiming of upfront benefits like interest, depreciation, and tax credits. Chattel Mortgage suits businesses steering clear of non-core investments and managing capital limits or market uncertainties.
As previously explained in the cash purchase financing model, ownership of the system can be assumed either by the tenant or the landlord, depending on what best aligns with your situation to achieve a mutually satisfactory resolution.
Advantages:
- No upfront capex requirements.
- Lock in fixed finance repayments that are even lower than the solar savings, often resulting in the system paying for itself through the energy savings generated.
- GST and an instant asset write-off on the purchase are claimable.
Disadvantages:
- Interest is payable on the loan.
- The balance sheet records the solar assets and borrowing.
- Loan repayments are not deductible
Examples of Successful and Unsuccessful Solar Collaborations
Commercial Landlord-Tenant Arrangements that Succeed
Centre Management Led Solar Adoption: Shopping Centre Management is uniquely positioned to capitalise on solar benefits given their tenants’ primary energy consumption during daylight hours. By selling discounted energy through their embedded network to retail tenants, they not only establish a profitable supplementary income channel but also fulfil their sustainability ambitions. This approach also benefits tenants by reducing their operational expenses, supporting the pursuit of their individual ESG objectives, and fostering longer lease durations.
Single-Tenant High-Energy Enterprises: High-energy businesses such as hospitality venues, childcare centres, manufacturing facilities, and supermarkets and service stations, operating under single-tenant occupancy, stand out as prime candidates for solar integration. Their substantial roof space, high daytime energy demand, and exemption from switchboard and metre upgrades not only streamline negotiations but also promise a high return on investment.
Large-Scale Retail/Industrial Operations: Large-format retail and industrial operations occupying standalone commercial structures with expansive roofs and substantial energy demands are perfectly suited for adopting solar. With sole responsibility for their electricity supply, these businesses find solar integration to be a straightforward process, offering substantial returns on investment.
Commercial Landlord-Tenant Arrangements that Succeed
Restricted Roof Space: Installing solar panels on buildings with small roofs and multiple tenants may not be practical as it can result in limited energy generation. In such cases, the costs of installation may outweigh the benefits.
Night-Oriented Tenant Hours: Leased buildings hosting tenants who primarily operate during the night encounter difficulties in effectively harnessing solar as the energy generation cycle does not align with peak usage times.
Shopping Centre Tenants: Smaller tenants within shopping centres who initiate discussions with centre management about solar often encounter rapid dismissals due to the intricate challenges associated with shared energy distribution and outgoing charge structures. Shopping Centres can reap substantial benefits from solar energy integration; however, a more successful approach involves centre management taking the lead. By offering tenants electricity at a discounted rate, this model aligns sustainability with commercial objectives, making it a more viable and mutually beneficial solution.
Optimisation in Apartment Complexes: Apartment complexes with limited rooftop space encounter the challenge of making solar systems viable. The impact of solar panels on energy generation is usually marginal unless the complex exhibits substantial energy demands for communal areas.
Spinifex offers valuable support for initiating conversations with your landlord or tenant regarding solar energy solutions.
Spinifex Energy is an established renewable energy solutions provider that specialises in the design, installation, and maintenance of solar power and battery systems for commercial, industrial, and rural sectors.
Drawing on our experience with some of Australia’s biggest brands and projects, our skilled team will assess your operations to understand your unique needs and goals, developing a solution that takes advantage of the latest renewable technologies, taps into government grants & rebates, and maximises energy production and financial returns.
Click here for an obligation-free solar assessment for your business, or to learn more, call 1300 859 765.
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