It’s time for the modified gross leasing with additional renewable energy revenue
Historically, commercial real estate investors have overlooked one of the most valuable assets embedded within their properties - energy revenue. They have intentionally transferred the utilities to the tenant thinking it was a liability they did not want to be burdened with. But both technology and economics have changed, and what was once a cost, grid-purchased energy, is now a potential profit center for enterprising landlords. CRE investors can turbocharge their portfolios return metrics and create an entirely new asset class of sustainable, Zero Net Energy, resilient buildings.
The new paradigm in commercial real estate is that a tenant utility bill can be transformed into new income for the property owner. With decreasing renewable energy equipment prices and new tax incentives - on site solar and storage energy systems are very compelling. Owners can also leverage them for new incremental income.
Instead of the traditional gross lease, solar energy combined with automated tenant billing eliminate the previous complications and billing burdens on the owner. Instead, the property owner becomes both the landlord and clean energy utility with no additional resource demand. Applying a modified gross lease addendum to a new or existing tenant generates new revenue for the owner, but also stabilizes and greens the tenants energy bill. This creates a happier, sticker, and healthier tenant while still maintaining incredibly strong returns on their investment in the Solar and Battery system.
New energy metering and billing software has the ability to track and monitor not only the tenants energy consumption but also the production of the solar system and the deployment of stored energy in the battery to create another layer of utility cost arbitrage. Some of these new software packages will even auto generate a bill that gets sent directly to the tenant showing them what they would have paid the utility company and what they’re paying the landlord instead, with a preset discount. The tenant billing and investment recouping process has been automated, creating transparency for the tenants and convenience for the owner/manager.
All of this has led fund managers, real estate investment firms, regional landlords, and asset managers to reconsider their current strategy for renewable energy and lease structures. Certainly, a modified gross lease (or Renewable Lease) will be taking the place of triple net leases, but even in a NNN lease situation, well vetted lease addendum language exists that allows owners to create a net benefit for People, Planet and Profit.
The increased property value that comes with these types of projects can be staggering and at the very least it paves a new path for commercial real estate owners to drive sustainability while doing what they do best, invest in the buildings which house the businesses and services that spur our economy.
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