Commercial real estate property owners are facing difficult times. While they experience uphill pressure to reposition or update their properties to attract new tenants or respond to regulation, capital for those improvements has been difficult to source. CBRE recently reported their CRE Lending Index was down 33% in the first quarter, and the Mortgage Bankers Association saw a 42% drop for the same period.
With lending tight and conversations with lenders difficult, CRE owners are turning to alternative sources to increase their liquidity. Among them is a source of which many may not know: solar power purchase agreements.
As Coast Energy CEO Blair Herbert notes, leveraging a solar power purchase agreement (PPA) to generate capital can seem "too good to be true" to some property owners, but it's a creative option that can open new capital and investment opportunities.
A Creative Structure with Big Benefits
With a PPA, Coast Energy installs a solar system on a building, and, in turn, the building owner purchases solar electricity from Coast Energy at a rate that is lower than the current utility rate. Herbert notes that often companies enter this type of agreement to decrease energy-related expenses over the long term, to hedge against rising energy costs and to meet ESG goals.
The PPA can also serve as a capital source to fund other unrelated building improvements, Herbert says. For example, an office building owner may want to fund $3 million in capital improvements. They could use cash on hand or borrow the funds from their bank, but those funds may not be used towards income producing purposes and would need to be repaid from the buildings cash flow.
Alternatively, CRE owners could accelerate the benefits of their PPA, receiving an upfront lump sum from Coast Energy in exchange for an agreement to purchase power for a set period, typically 25 years. Herbert notes that "the structure is fundamentally different than what one would get from a bank: instead of using free cash flow to repay a loan, the building simply purchases solar electricity from Coast, at a rate that is lower than the rate their utility charges." The PPA is also transferable if the owner sells to an unrelated party before the term is up.
New Possibilities in Acquisitions
Other CRE partners have used Coast Energy as part of an acquisition strategy, Herbert says. For instance, a buyer and seller may not be able to meet on price given low cap rates or market conditions. However, an analysis of the roof may uncover the opportunity to increase post-acquisition NOI through a solar system, increasing the likelihood the deal will pencil out.
"I think it's important to think of us as component in the toolkit for driving value in a property, even pre-acquisition," Herbert says.
So while a PPA may seem too good to be true, it can be a useful tool in today's tight market. As Coast Energy's Herbert notes, "Once we inform CRE owners and walk them through how it works and why it is achievable, then it's more just a determination of the best use of the capital that they can get from our solar system."
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