PHILADELPHIA-Welcome to the Philly 411, our monthly columnon real estate happenings in the Metro area supplied with intelfrom David Jacobs, a director at Llenrock Group, alocal commercial real estate investment-banking firm. You can alsofollow their bloghere. Opinions are the author's own.

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Many commercial real estate landlords hear the word “green” andthink green, as in a potential way to save money. There isno doubting that there are myriad benefits to the potentialharnessing of alternative energy for commercial landlords.

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Whether it is the installation of solar panels on commercialrooftops, the monetization of backup generators or the loweredenergy costs through the installation of more efficientequipment--like LED lighting or capacitors used to harness morepower from the electricity that is naturally fed to yourbuilding--there are definitive ways to increase your property levelNOI through the reduction of expenses and the increase innon-traditional tenant income.

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

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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 inPennsylvania compared to New Jersey. Yet, while demand mayincrease, we have to take into account the supply side as well.

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As a rough benchmark, it takes a 100,000-square-foot rooftopfootprint on a commercial building (net of rooftop equipment) togenerate one megawatt of electricity through solar rooftop panels.The cost of installing such a sizable system, however, isapproximately $6.5 million. Considering that most landlords do nothave the requisite capital to outlay for the sake of saving somemoney on their utility bills, this becomes an issue.

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While some banks' interest in financing solar rooftop projectshave been piqued recently, the dilemma for them seems to becollateral. Usually, the underlying commercial asset is alreadyencumbered with debt via a first mortgage.

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If you are a banker and your only recourse is to threaten to ripoff the solar panels from a landlord’s roof, how comfortable wouldyou be doing that deal? So instead, they may want additionalrecourse in the form of a personal guarantee, but that brings usback to the issue of weak balance sheets and a lack of availablecapital from the landlord.

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There are state and federal grants which can bridge the equitygap to fund such a project. In Pennsylvania, there is a state grantthat can help finance a project up front. There is an additionalfederal grant which can also be applied for--and is generallyobtained more easily that the state grant--but it is onlyapplicable once the project is completed, thus creating a necessarylayer of bridge financing in the amount of the federal grant to beobtained before starting such a project. And usually, after bothgrants, there still remains an equity shortfall.

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

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First, they only like to do projects with newer roofs. If youhave a roof that is older than seven years, that is an immediatedeal-killer due to the potential for water leaks from the addedweight of the systems. More importantly, they require an off-takerof the energy being produced by the solar panels over a long periodof time. These companies are self-financed by investors whounderstand the business model, but they also want to ensure thatthere will be a long-term buyer for the end product. This requiressuch an off-taker to be a credit entity, which rules out mostlandlords by nature of their lack of a credit rating.

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Certain tenants may have the credit required as well as the needfor 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 theoff-taker to sign are 20 to 25 years in length.

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

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In addition to the spread between what the solar panels produceand the price the company then charges the off-taker, solar energycompanies can also make money by investing in solar renewableenergy credits--commonly known as SRECs. The market for SRECs inPennsylvania is not nearly as strong as the market in New Jerseydue to legislative decisions and differences between thestates.

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

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The bottom line is that in order to take advantage of solarrooftop panels in the greater Philadelphia region, you not onlyneed to have the right components of a deal lined up, but you alsobetter be partnered with the right company who knows the ins andouts of the business. They should have experience and a trackrecord, but most importantly, they need to have the ability tocommunicate these issues clearly in real estate-speak to landlords.After all, they are the customer.

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

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