How going solar raises commercial property value

Introduction

Are you interested in installing solar, but unsure how it’ll affect the resale value of your commercial property?

Every year, more and more businesses are installing solar. New findings have shown that buildings with solar power have increased property values by over 4 percent.

It’s easy to see why so many commercial building owners have turned to solar energy. Energy costs continue to rise, and as they do, owners have looked to find ways to reduce overhead costs and save on utility bills. Whether you want to boost the value of your building or just cut costs, solar panels can help you increase your businesses’ bottom line while having a positive impact on the environment.

Switching to solar power for your commercial building enables you to invest in renewable, clean energy. Solar power is an infinite resource. It doesn’t run out, increases the value of your commercial property, saves your business money, and helps you gain a reputation as a sustainable, environmentally conscious business owner.

Uncovering commercial property’s secret value

It’s not a secret that industrial and commercial properties deeply influence how much energy is used. These types of properties account for an astonishing 72 percent of all energy consumed in the United States of America!

Building owners have struggled with high overhead costs and energy bills, which have impacted their bottom line. The goal of any business should be to increase revenue while decreasing costs. This will help increase profit margins, allowing for higher income and greater levels of success as a business owner.

Solar energy is a great way to save money. Commercial real estate owners can expect to save more than 40% on utilities by converting to solar energy. Furthermore, property values can skyrocket by changing the way that they buy power as business demand increases and the economics of large scale solar energy changes.

According to several reports, homes and commercial property with solar panels have higher property values and sell faster than those without. That isn’t going to change anytime soon. With the solar revolution gaining traction, adding commercial solar panels to your commercial might make it more appealing. Lowering your electric bills is a huge plus for any business owner.

If your commercial solar panels are installed and connected to the electricity grid, you’ll notice a reduction in your monthly energy bills. You’ll have more cash on hand once your panels are paid off because less money goes to the power company.

What happens to real estate values when you put solar on a commercial property? When it comes time to sell your building, you’re selling a building that comes with its own power plant. Naturally, rooftop solar lowers utility bills. Whether owner-occupied or leasing, the energy generated on-site reduces how much the occupant will tap into demand charges and higher base rates during peak hours.

Determining the added value of solar panels

Commercial buildings equipped with high quality solar panels are much more valuable than a facility that only relies on energy driven from fossil fuels. Determining how much more valuable, however, can be complicated.

There are several factors that go into determining how much value solar panels add to a commercial property.

These include:

• The income approach
• The cost approach
• The comparable sales approach

Let’s take a closer look.

The income approach

This approach takes a look at how reduced operating expenses directly translate to higher market value for your property.

What do utility bills have to do with property values? Utility bills are an operating expense. As solar slashes utility expenses, net operating income (NOI) goes up. How so?

Revenues - Operating Expenses = Net Operating Income

In commercial real estate, bankers and brokers use net operating income to determine the fair market value (FMV) of a property. Fair market value is also influenced by the capitalization rate (cap rate) that is the rate of return that the property is expected to generate.

Cap rate is simply the ratio of a rental property’s NOI to its purchase price plus any necessary improvements or repairs. When monthly bills are lower, more cash passes through to your NOI, which in turn props up the FMV of the property. Just how much can solar raise NOI and consequently FMV? In general, FMV is the NOI divided by the cap rate. Let’s look at an example.

Let’s say a commercial building has a net operating income of $200,000 without solar. If we assume a reasonable cap rate of 7%, this translates into a fair market value of $2,857,142.

But what if you decide to go solar with Lumen Energy? A conservative example of how solar might slash operating expenses would be a $10,000 annual reduction in utility bills. So now, our NOI increased by $10,000 to $210,000. Plug our new NOI into the formula for estimating FMV, and see how solar really shines. At the same assumed cap rate of 7%, solar brings the fair market value up to $3,000,000, an increase in property value of $142,858 simply by going solar.

How can solar benefit the bottom line for property owners who lease to tenants?

Traditionally, tenants pay utilities for the energy they consume. But what if that cash flow could be redirected to the property owner each month? That’s exactly what’s possible with commercial solar. In some states, property owners can charge tenants for energy they use. In California, the average commercial electricity bill is $905 per month. With an on-site solar power plant, cash could be flowing directly to the owner of the building rather than to the utility. This varies from state to state, so make sure to do the research to find out if you can benefit directly from charging energy to tenants.

There’s also the perception surrounding businesses and property owners that commit to clean energy. Data unequivocally show that consumers seek environmentally-conscious businesses support. A Nielsen survey of consumers around the world found that 81% of consumers around the world are strongly motivated to give their business to companies that are committed to improving environmental quality.

Willingness to pay for sustainable goods and services is on the rise. Rooftop solar is a highly visible way of showing your commitment to climate action, and connecting with like-minded customers and businesses.

Businesses are increasingly looking to green up their supply chain. By going solar, environmentally-conscious branding becomes a powerful marketing avenue. B2B companies appeal to prospective partners when low-carbon energy is at the heart of the services and products provided.

The cost approach

The cost approach analyzes the current cost to install or replace the solar panels. This reflects current pricing and installation, but also depreciation. Since solar panels have decreased dramatically, this must be taken into consideration. The cost approach analyzes the quality and age of the installation, compared to savings from energy generation.

The comparable sales approach

The comparable sales approach is used to analyze comparable properties in a given geographic area – one with solar, and one without. This appraisal method is common for real property. The more solar that is installed, the better this method works. The limitation to this method is that there may not be enough commercial installations in a given geographical area to make a proper analysis.

A conservative example of how solar might slash operating expenses would be a $10,000 annual reduction in utility bills.

Solar shines new light on existing structures

Commercial solar modernizes existing structures, making older buildings competitive with new construction. California’s 2022 Building Energy Efficiency Standards for newly constructed and renovated buildings mandates that all new commercial buildings have solar on-site beginning in 2023. By upgrading your facility’s electrical supply to include the latest in high-efficiency solar panels, the property becomes competitive with the energy savings afforded by newly built facilities on the market.

Soft benefits of going solar

There are other soft benefits that ultimately do have a minor or an indirect impact on commercial property as well.

One of these noteworthy benefits include:

Updated physical appearance

In general, updating a building’s physical appearance can increase the property value. Furthermore, giving it an update can help a property sell much quicker. A fresh look also makes your business stand out and look great to both tenants and consumers.

Improved public image

Solar power doesn’t only help your business and protect the environment. It shows your customers, employees, tenants, and community that you are environmentally friendly and socially responsible. An image of social responsbility actually has many benefits to builess. More than ever, employees are looking for socially responsible employers.

Furthermore, being socially responsible improves customers' perception of your brand.  According to a study by the National Retail Federation and IBM, almost 70 percent of all consumers in the United States of America and Canada think it’s important that a brand is eco-friendly and sustainable. The research polled over 19,000 consumers and determined that they really do care about how companies affect the environment and would be more likely to buy from eco-friendly companies.  These are incredible benefits that can drive revenue, build brand loyalty, attract tenants, and reduce your bottom line.

Cost savings of going green

For some building owners, going green may not be a top priority. Increasing revenue, driving property value up, and having a successful business are on the forefront of every commercial owner's mind.

It’s important to note that going green isn’t just about the warm and fuzzy feeling you’ll get from knowing you made a socially responsible choice that positively impacts the earth.

There are financial incentives and cost savings for going green, as well.

However, studies show that organizations that reduce energy consumption can save millions of dollars over a decade. Employees at eco-friendly companies are 16 percent more productive. Taxes can be cut by a third of the installation bills.

Decreased carbon footprint

Solar energy generates its own power- without giving off any emissions. What does zero emissions energy mean to you?

You can easily reduce how much your building has to rely on conventional utilities that produce harmful greenhouse gas emissions and burn fossil fuels. You can do your part to help reduce pollution on a grand scale simply by upgrading your roof to solar.

Now is the perfect time to go solar

There’s never been a better time to go solar. Going with Lumen Energy is increasingly cost effective. There are several states that have direct incentive programs and many other states have target implementation goals. The price to install solar panels has gone down more than 80 percent over the past decade.

With the increased affordability and benefits of going solar, there is no time like the present to get started.

These benefits include:

Federal and state financial incentives

Going solar has the benefit of taking advantage of federal and state financial incentives. The primary federal incentive is the Investment Tax Credit, also known as the ITC. This is a credit of 30 percent of the total system cost. The system is also able to be depreciated using the 5 year Modified Accelerated Cost Recovery System (MACRS).

Many states have incentives, as well. These can include renewable energy credits, rebates, and financing programs. These incentives can really add up – covering 45 to 80 percent of the overall cost of a solar system!

Solar panels are now more affordable than ever

Solar panels used to be very expensive. However, over the last decade, the cost of installing solar panels has dropped dramatically. In fact, costs have decreased more than 70 percent! Additionally, with the Solar Investment Tax Credit, cash rebates, state tax credits and more, you can easily lower the cost of installing solar onto your commercial property.

Low maintenance, high validity

Solar panels for commercial properties are silent and offer very low maintenance. Commercial properties are typically designed in a way that panels are readily accessible when the rare need for maintenance occurs. Because solar cells are protected by non-corrosive aluminum frames and tempered glass, they can withstand the elements and weather hazards. This means they’ll work in many different conditions without requiring maintenance.

Longevity

When you make an improvement to a commercial property with the hopes of increasing property value, you want to make sure that what you are doing offers long lasting benefits. This will ensure that new buyers see the benefits of upgrades. Because a solar panel is a simple device without any moving parts, there is minimal ongoing maintenance.

They last a long time – most solar power panels have a warranty for operating for 25 to 30 years at optimum productivity. After 30 years, it’s common to see some reduction in electricity production (around 10 to 20 percent). Premium solar panels tend to last longer and they won’t stop producing energy after 30 years. The efficiency may decrease, but it will still function as an energy source that has paid for itself decades ago!

The importance of choosing high-quality solar power to raise property value

Not all solar projects are created equal. It’s important to consider the costs, installation, and quality of solar panels when determining the potential increase in property value.

Let’s look at a couple of examples.

If you install solar, and it’s finished under budget and ahead of schedule, thus saving you a ton of money, it's low quality equipment that will likely break down in a couple of years. Will you add value to your commercial real estate property?

Obviously not.

Or, if you install your solar rooftop system, but it is done incorrectly that results in property damage that actually exceeds cost savings from green energy, will you have added value to your commercial real estate property?

Again – obviously not.

By working with a properly insured, reputable solar equipment provider with resources and experience to offer a warranty to back up an extremely high quality product, you can avoid potential pitfalls that can eat into the cost of adding value to your commercial property.

About Lumen Energy

Lumen energy empowers building owners by giving them all the information they need to evaluate whether on-site clean energy will be most profitable for their buildings. We use technology to build updated and detailed profiles of buildings to find solutions quickly – saving owners money and time.

Going with Lumen Energy means you’ll enjoy:

• Immediate savings. You can upgrade your roof to solar with no upfront cost. You can also lower your energy costs, and get paid to reduce your businesses' carbon footprint
• Reduced operating costs, increasing the value for your building
• Increased freedom from blackouts since you'll be generating your own power!
• Service from experts at every step of the way. You don’t need to work with contractors or worry about the process – Lumen partners with the very best to manage your project from start to finish.

Conclusion

Owning a commercial property is a huge responsibility. With energy costs continuing to increase, commercial property owners are turning to solar more than ever to save on utility bills, reduce overhead costs, and even increase the value of the property.

Whether you’re looking to add to your property for a near future resell or just want to add value to your business, solar power helps you increase your bottom line, while making a positive impact on the environment.

Switching to solar for your commercial building allows you to invest in renewable clean energy. Since solar power is an infinite resource that can improve your commercial property’s value and your businesses’ revenue while decreasing your operating costs.