Solar Power Heating Up in Commercial Real Estate

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solarThe cost of installing solar panels has been in steady decline since 2010, and the residential market for solar panel installations on home roofs is experiencing rapid growth. With growing demand and several policy incentives for solar installations, incorporating solar power into real estate development projects can be an attractive option for investors.

Incorporating Solar into Commercial Real Estate Development

In commercial real estate projects, solar panels are typically installed on rooftops or in parking lots. Building-integrated photovoltaics (BIPV), a newer technology, allows developers to integrate solar cells directly into a structure’s outer layer. BIPV is best suited for new development projects, as replacing traditional building materials like glass windows with semi-transparent thin solar panels can bring savings in construction materials costs.

Municipalities and investors interested in pursuing solar power have several options when it comes to structuring a project. A private investor can own and maintain their solar installation, they can choose to lease solar panels, or they can “enter into a power purchasing agreement with a third party to own, operate and maintain an installation.” Local governments and other public agencies interested in renewable energy and looking to incorporate solar into their properties can form partnerships with private investors in order to get solar panel projects off the ground.

Benefits to Investors

The primary benefit to investors is a federal tax credit program available to offset solar installation costs. The tax credit program “allows investors in solar energy systems to claim up to 30 percent of their solar installation costs as a credit on their taxes.” Originally set to expire at the end of 2016, Congress last year extended the federal solar investment tax credit for an additional five years. This extension of the tax credit is expected to lead to a “flood of new projects coming online.”

North Carolina previously offered a similar state tax credit, equal to 35% of the cost of eligible renewable energy projects. This was the most generous solar state tax credit in the country, helping make North Carolina one of the top solar energy producers—at the end of 2015, North Carolina ranked third in the nation based on total cumulative solar electric capacity. However, the state tax credit expired at the end of 2015.

If the commercial development involves a historic property, the federal solar investment tax credit can be twinned with the historic rehabilitation tax credit. Developers can claim the cost of solar installation as a qualifying rehabilitation expense under the rehabilitation tax credit if the solar panels “are essential to the operation or maintenance of the rehabilitated historic building”. If the electricity produced by the solar panels is fed back into the power grid, the solar costs no longer qualify.

In addition to tax credits, private investment in solar is also driven by benefits available under the Modified Accelerated Cost Recovery System (MACRS). MACRS is a method of depreciation in which a “business’ investments in certain tangible property are recovered, for tax purposes, over a specified time period through annual deductions.” Under MACRS, the purchase of qualifying solar energy equipment is eligible for a cost recovery period of five years. This accelerated depreciation helps investors reduce their tax liability and brings quicker returns on their solar investment.

North Carolina Case Study: Solar Parking Deck in Concord

The City of Concord forged an innovative public-private partnership to bring 247 lightweight solar panels to the roof of a municipal owned parking deck. Organized into three canopies, the solar panels shade 32 parking spaces and since their installation in 2012, they have generated close to 400,000 kilowatt hours of energy.

Hyperion Energy LLC, a private partner, owns and maintains the solar array, and leases the parking spaces from the City of Concord. Hyperion sells the electricity generated by the solar panels back to the city for around six cents per kilowatt, and sells the corresponding renewable energy certificates to Duke Energy.

Total project costs for the solar panels and their installation were just under $500,000. The North Carolina Energy Office, in partnership with the Department of Commerce, funded half the project’s cost using federal funds available under the American Recovery and Reinvestment Act (ARRA). Hyperion provided the remaining project funds. The North Carolina State Energy program received over $100 million in ARRA funds, which were disbursed to energy efficiency and renewable energy projects across the state, including Concord’s parking deck, from 2009 through 2012.

Both the public and private partners involved are reaping benefits from this solar project. Hyperion is satisfied with its investment and the tax benefits it brings. Their successful investment may encourage other potential investors to consider similar solar power projects. For the City of Concord, they now have “an easy-access solar display for students,” allowing new educational opportunities.

Elizabeth Packer is a second year Master’s student in the Department of City and Regional Planning at UNC Chapel Hill and a Community Revitalization Fellow with the Development Finance Initiative.

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