Achieving energy security is an important goal for many investors. They may prioritize renewable energy projects as part of their environmental, social and governance (ESG) strategies to help reduce greenhouse gas emissions and mitigate climate change impacts. Moreover, the investments contribute to local economies during construction and operation, and thus create jobs.
Investing in on-site energy production is an appealing proposition for real estate owners looking to increase the profitability of their buildings. However, it is not always carried out due to a number of barriers that can be overcome with innovative financing structures and solutions. For more info https://www.mobilehomedreamin.com/
One such barrier is the cost of the installation itself, which can be high. This can be reduced through a financing structure like an inverted lease, which separates the renewable energy tax credits from depreciation and allows the credit to pass through to the project company, while allowing equity investors a target return, familiarity with the structure and ease of exit when the property is sold.
The inverted lease is especially attractive to REITs that plan to sell the asset at some point, as the repayment obligation passes with ownership of the property and can be assumed by the new owner. The financing structure also offers flexibility in the timing of the investment, reducing the risk of capital loss by enabling projects to be deployed sooner than if they were installed at the end of a typical development cycle.
Furthermore, the accelerated depreciation offered by the PACE program can help lower upfront costs and shorten the payback period for the project, making it an even more attractive option for REITs. Finally, the ability to offset power demand for EV charging by on-site generation can also accelerate implementation of the technology and improve revenue accretion.
In addition to decreased operating expenses, improved sustainability also increases the value of a property by increasing its image and potentially influencing tenants’ decision-making. It is therefore a good idea to incorporate sustainability aspects into the valuation process, even for regular properties that are not considered green. Otherwise, they might lose worth against sustainable alternatives.
Our case study and the survey we commissioned with valuation professionals confirm that on-site energy production is an appealing investment when evaluated through a discounted cash flow approach. In fact, 71% of the respondents assessed that the investment would significantly increase the value of the case property. This result is higher than the proportion of respondents who expected increased vacancy rates or obsolescence as a consequence, but lower than those who anticipated increases in rent levels or rental growth rate. These findings suggest that the value increase is driven mainly by decreasing operating expenses. Nevertheless, it is essential to take into account the location of the on-site energy system in the assessment, as it is an important factor in determining whether the project would be economically feasible. Furthermore, it is vital to work closely with all stakeholders to minimize the potential social and environmental impact of an on-site energy system.