Property Management: Is Solar Power the Answer?

Spencer Tucker is a tax partner at the public accounting/business advisory firm of Gaines, Goldenfarb & Luongo LLC in Matawan. He can be reached at STucker@gglcpa.com.

Utility costs are hurting most companies' bottom lines, and it might be time to analyze the benefits of looking skyward.

Owners and operators of commercial properties are always looking for ways to reduce their operating costs. And with the price of oil staying near or above the $70 a barrel mark (even with the recent drop in prices), owners see their utility costs going in the opposite direction.

Although much of these costs have the potential for being passed on to the tenants of these properties, an operating advantage is obtained by reducing or eliminating them. In addition, depending on how a lease is worded, any reduction in energy costs sponsored by the owners may go directly into their pockets.

Although most real estate people have certainly heard about the benefits of solar power, it can be difficult to ascertain the costs and evaluate whether it's worthwhile to go forward. The problem is the variety of factors that come into play.

Energy savings alone won't justify the cost, but combine the Federal Tax Credit (FTC) and the New Jersey State Rebates that are available and it's a completely different game. There is an additional benefit in the form of renewable energy certificates (RECs) derived from operation.

The benefits:

• New Jersey State Rebate—may be as much as 50% of cost.
• Federal Tax Credit (FTC)—30% if placed in service by 12/31/07 (subject to taxable income limitations as well as recapture if sold within five years—20% per year).
• Energy savings varying on usage.
• Renewable Energy Certificates—commodity exchangeable as currency.
• Increase in NOI, increasing the value of the property.
• Benefits to the environment.

The costs and risks:

• Upfront costs.
• Concern that the New Jersey fiscal crisis will affect rebates.
• Uncertainty of when costs will be recovered.
• Timing of completion.

In many solar power scenarios, the recovery of costs will be between four and five years, not considering the time value of money. However, everyone's situation will most likely be different. The Federal Tax Credit cannot reduce a taxpayer's liability by more than 25% of the tax prior to reduction. Therefore, to utilize the deduction completely, the taxpayer must have large taxable income.

For example, if the system would cost $3 million, providing a $900,000 FTC, the taxpayer must have a tax liability of $3.6 million to fully utilize the credit. Any unused credit is carried back one year and forward 20 years. This provides the advantage that if a year with large gains occurred in, say, 2006, the credit can still be utilized if the property is placed in service in 2007.

The State of New Jersey rebate, meanwhile, is currently based on the watt output of the system proposed. This rebate is apparently being reduced over time with demand.In addition, due to New Jersey's fiscal crisis, there is always a question of funding in the future. The good news on this particular front is that the solar power providers are very aware of the rebate and are amenable for the contract not to be effective until the state approves the rebate application, guaranteeing the funds. The bad news is that the demand is so great that rebate applications are on hold until the funds become available.

If the rebate applications stay "on hold" too long, the job may not be able to be completed by 12/31/07, which would lose the FTC (you would still be eligible for a 10% FTC). Therefore, this should be taken into account in the contract negotiations. The most important step is to get the application in immediately.

There is still some caution on my part, that even though the funds may be guaranteed, the field could be changed to halt or delay the rebates for a period of time. Most of the solar power providers are willing to contract on a net basis, and thus the rebate can be assigned to the provider reducing the risk. This will reduce the FTC, but the state rebate will not be reported in income as well. This will be a much more preferable position for someone with less of a tax liability that may be limited in their use of the FTC.

There are several other restrictions and concerns to be considered in this scenario. Any non-recourse financing should be from commercial lenders and should not be more than 80% of the total cost, for example. In addition, the taxpayer's Alternative Minimum Tax (AMT) situation must be reviewed to make sure the FTC benefits will still be obtained.

Finally, taxpayers need to do their homework on the solar panels and providers themselves. There are certain Solar Panels that may not be as good as others. There are certain "inverters" (they're the main units running the solar panels) which may not have warranties as good as others. And there are certain questions about whether extended maintenance contracts are available or not.

Currently, there is a very high demand for the product, and as with high demand, the suppliers may be taking advantage and reducing their risks by reducing their warranties. In recent negotiations with one provider, their extended warranties changed, as did the manufacturer warranties, before we finalized the deal. In addition, the price of solar panels seemed to be rising by the minute.

Even with all the risks associated with solar power, the benefits still seem to outweigh the costs, currently, by a tremendous amount. However, each candidate should consult their professionals to make sure the benefits are available for their individual situation. If the benefits are available, anyone utilizing the solar panels will certainly have a cost advantage over those who miss this opportunity.

The views expressed here are those of the author and not of Real Estate Media or its publications.