Development Magazine Spring 2012

Development - Ownership

Strategically Green - Maximizing Value on a Blighted Property through Solar Development

Commercial real estate developers are constantly challenged to maximize the value of their property assets with a highest-and-best use. However, this objective can be particularly challenging with blighted sites; including those that may be contaminated or have other types of commercial development constraints (e.g., access, frontage, setbacks, etc.).

One approach gaining momentum in many regions across the country is to repurpose all or portions of underutilized properties for the development of renewable energy generation projects, such as ground-mounted solar photovoltaic (PV) arrays.

This type of land-use strategy can quickly create new revenue streams and/or convert financial liabilities into income-generating assets. Additional benefits include:

  • Potential marketing advantage and product differentiation when leasing commercial space;
  • Long-term energy security and price stability;
  • A clean energy alternative to more traditional electricity generation; and
  • Support for organizational sustainability programs and initiatives.

What’s the Opportunity?

Given the typical land and transmission constraints of available properties, a majority of solar redevelopment opportunities range from 1 megawatt (MW) to 10 MW in size. As a general rule of thumb, five acres of suitable land are required to install 1 MW of solar PV panels. Depending on the sun’s intensity in your part of the country, a 1 MW project can generate anywhere from 1,000,000 to 1,500,000 kilowatt hours of electricity per year (kWh/yr), enough electricity to power approximately 100 average American homes. While the capital cost to install a 1 MW solar project can be upwards of $4 million, these costs can be driven down significantly with local and federal incentives resulting in a favorable payback period, or covered entirely by a third-party developer (see below).

Solar PV projects can be developed as a primary site use or as an accessory use to an occupied site. Systems on the available land of an occupied property are frequently “behind-the-meter” projects that provide electricity directly to facility operations. These projects can reduce or eliminate the operational costs of electricity for a business. If a property has limited development potential (such as a brownfield, landfill or other vacant commercial or industrial parcel), the best primary use of the property may be a solar energy generation system. These sites may be well-suited for a ground-mounted solar array that generates electricity that can often be sold back to the electrical grid through “net metering” (where your meter effectively spins backwards).

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Solar development projects can transform contaminated and other low-value (low-cost) properties, providing an economically viable reuse option for sites with potentially significant cleanup costs or restrictions on more traditional use. Solar panels can be installed without penetrating the ground, thereby eliminating the cost and health risk exposure normally associated with redeveloping a contaminated property. In addition, many of these sites already offer existing infrastructure (transmission lines and roadways), appropriate zoning for a solar project and proximity to population centers with a demand for energy. Brownfields sites also typically receive public support for redevelopment, which may include less stringent clean-up criteria and streamlined permitting.

Traditional tax benefits for solar PV installations include a 30 percent investment tax credit (ITC) and accelerated depreciation of the assets. In addition, brownfields sites cannot only leverage these benefits, but also provide access to additional financial incentives including brownfields tax credits, new market tax credits and green bonds.

Third-Party Developer Model

For commercial entities that cannot leverage the tax benefits or do not want to develop and manage a solar asset, a popular alternative is to engage a third-party that will finance, install, operate and maintain the system. Often in this scenario, land is leased to a third-party and electricity is bought back at fixed rates through a power purchase agreement (PPA). This model allows for solar to be deployed at the host site without the typical upfront capital investment; allowing the owner to simply reap the rewards of a long-term lease (and discounted power).

The third-party solar development model can also be used as an interim use of a property during less favorable CRE market conditions, allowing the site to generate revenues through a land lease or power sales over time while the owner prepares for a future site use to meet anticipated market conditions.

A “buy out” provision can be structured into this model, providing an option for the host to buy the solar installation from the developer at a pre-determined price. A third-party developer typically leverages incentives and structures their payback in the first seven to 10 years. However, design life of a solar PV array is 20-25 years; therefore, a buy-out provision at a fraction of the original capital cost can be a win-win scenario.

If considering a solar energy generation solution to achieve the maximum value from a blighted property, a qualified renewable energy consultant may quickly and inexpensively assess the development potential of your property with a preliminary desktop study.

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