Many commercial real estate landlords hear the word "green" and think green, as in a potential way to save money. There is no doubting that there are myriad benefits to the potential harnessing of alternative energy for commercial landlords.

Whether it is the installation of solar panels on commercial rooftops, the monetization of backup generators or the lowered energy costs through the installation of more efficient equipment--like LED lighting or capacitors used to harness more power from the electricity that is naturally fed to your building--there are definitive ways to increase your property level NOI through the reduction of expenses and the increase in non-traditional tenant income.

But before we all jump on the bandwagon, it is important to understand the drawbacks that some of these products carry with them, especially the differences between the same product available to a property located in Philadelphia versus one in Cherry Hill, NJ. While only the Ben Franklin Bridge and a short trip through Camden may separate the two locations, there is a world of difference when it comes to solar energy.

With PECO rate caps set to expire in January 2011, Pennsylvanians can expect to see a rise in their utility bills. This would seemingly make demand for solar energy much stronger in Pennsylvania compared to New Jersey. Yet, while demand may increase, we have to take into account the supply side as well.

As a rough benchmark, it takes a 100,000-square-foot rooftop footprint on a commercial building (net of rooftop equipment) to generate one megawatt of electricity through solar rooftop panels. The cost of installing such a sizable system, however, is approximately $6.5 million. Considering that most landlords do not have the requisite capital to outlay for the sake of saving some money on their utility bills, this becomes an issue.

While some banks' interest in financing solar rooftop projects have been piqued recently, the dilemma for them seems to be collateral. Usually, the underlying commercial asset is already encumbered with debt via a first mortgage.

If you are a banker and your only recourse is to threaten to rip off the solar panels from a landlord's roof, how comfortable would you be doing that deal? So instead, they may want additional recourse in the form of a personal guarantee, but that brings us back to the issue of weak balance sheets and a lack of available capital from the landlord.

There are state and federal grants which can bridge the equity gap to fund such a project. In Pennsylvania, there is a state grant that can help finance a project up front. There is an additional federal grant which can also be applied for--and is generally obtained more easily that the state grant--but it is only applicable once the project is completed, thus creating a necessary layer of bridge financing in the amount of the federal grant to be obtained before starting such a project. And usually, after both grants, there still remains an equity shortfall.

There are a number of solar energy companies that offer landlords the ability to install, operate and monitor the solar panel systems, soup-to-nuts. In addition, they will finance the entire cost of the implementation and pay you rent to utilize your rooftop space, much like cell towers of the 1990s. Sound too good to be true? Well, there are a few caveats.

First, they only like to do projects with newer roofs. If you have a roof that is older than seven years, that is an immediate deal-killer due to the potential for water leaks from the added weight of the systems. More importantly, they require an off-taker of the energy being produced by the solar panels over a long period of time. These companies are self-financed by investors who understand the business model, but they also want to ensure that there will be a long-term buyer for the end product. This requires such an off-taker to be a credit entity, which rules out most landlords by nature of their lack of a credit rating.

Certain tenants may have the credit required as well as the need for the energy--think, grocery chain anchoring a shopping center. But then there is the issue of the length of such a commitment. Most power purchase agreements that such a company would want the off-taker to sign are 20 to 25 years in length.

Not only would the tenant need to have a lease in place for that period of time--not very common, especially with retailers of the necessary size--but they would also be speculating about a market in which they are not experts. This makes it difficult to find the right off-taker and then convince them the cost savings will be worth the trouble over the long haul.

In addition to the spread between what the solar panels produce and the price the company then charges the off-taker, solar energy companies can also make money by investing in solar renewable energy credits--commonly known as SRECs. The market for SRECs in Pennsylvania is not nearly as strong as the market in New Jersey due to legislative decisions and differences between the states.

While I won't go into the particulars here, I will say that politics and industry regulation are huge components of how profitable such a platform can be in both the short- and long-term. This means that while Pennsylvania is lagging compared to its neighbor, things can certainly change for the better.

The bottom line is that in order to take advantage of solar rooftop panels in the greater Philadelphia region, you not only need to have the right components of a deal lined up, but you also better be partnered with the right company who knows the ins and outs of the business. They should have experience and a track record, but most importantly, they need to have the ability to communicate these issues clearly in real estate-speak to landlords. After all, they are the customer.

But there are also less complex ways to go green and save green. The monetization of backup generators provides landlords with fewer management responsibilities and allows them to free up equity. A landlord may separately elect to perform an energy audit on their property, and allow a specialized company to offer a multitude of products that will reduce their energy consumption, and thus their expenses. By reducing your expenses, you can effectively increase the value of your property by increasing the net operating income. After all, that's the name of the game for every landlord.