Promus Commercial Real Estate News

April 2011

Net Absorption Turns Positive

With net absorption during Q1 of 286,000 square feet, the local commercial market is finally on the right track. Vacancy is down almost a half point from the high of 2010, and tenants are increasingly signing long-term leases in an effort to lock in savings from the economic downturn.

Overall leasing activity is currently up roughly 25% from this time last year. Rents are flattening out instead of decreasing. Demand has increased in several industries, including iotech, light manufacturing, and retail distribution. This demand has led employers to add 20,000 jobs year over year, with 5,200 in February alone.

All of which points to improving conditions and spells opportunity. Forecasts show demand improving a bit in 2011 and getting stronger in 2012 as businesses gain confidence in the economic recovery.
How will shifts in the market impact you?

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Have You Invested Yet?

U.S. commercial property prices slipped in January and February, as distressed real estate sales weighed on values, according to Moody’s Investors Service. This was even as the U.S. economy grew at a 2.8 percent annual rate in the fourth quarter, helping boost demand for office, retail and industrial space and apartments. Yet with sub-10 percent vacancies in top office markets like Del Mar Heights, Rancho Bernardo and Sorrento Valley (the regional figure is 20 percent), industry experts are cautiously optimistic about the local CRE market, according to the San Diego Union Tribune.

Jump in – the water’s fine!

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Water Up 67% in Four Years

Speaking of water, you’ve probably noticed the PUC has raised water rates to $3.757 per hundred cubic feet (approx. 748 gallons). With rates now 67% higher than they were in 2007, we at Promus are increasingly looking for ways to save our clients money from energy and utilities. From aerators and government rebates to light bulbs and bulk purchasing, we’re watching every nickel as if it were our own.

And with state action imminent to require commercial building operators to disclose their properties’ energy usage to prospective tenants, we figure it’s the smart move to get those landscape surveys and energy audits under our belt sooner rather than later.

See why the Business Journal recommends replacing your toilets…

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“Green” Now Means Even More Than Money…

Harlan A. Friedman, Lightning Commercial Funding

Solar, Photovoltaic, Fuel Cells, Electric Vehicle Car Chargers, Wind Farms, Solar Farms, what do they all have in common? The answer: they all need to be financed in one way or another.

There are of course many variables while working on renewable energy projects throughout the United States, and each state will have their own financial incentives. In many circumstances these can be treated as equity towards the transaction.

The financing incentives for going “green” can vary from a simple tax rebate to an investment tax credit to accelerated depreciation. Many of the incentives can also be sold to participating lenders to “sweeten” the deal, but more about those later.

There are also many financing tools available as well to meet the capital needs of a project. They can be as simple as a straight loan or a lease to as complicated as a power purchase agreement to layered equity and debt programs.

And, of course, there’s always cash.

If you’re involved with a municipal or quasi municipal project, you’ll have the opportunity to utilize various forms of tax-exempt financing, from municipal leases to municipal bonds to name the more common financing vehicles for public projects.

With this as our background we’ll explore in greater detail the available loan products for solar and wind farms and even waste to energy projects.

A typical residential solar project is about a 5KW system which runs anywhere between $6.00 to $8.00 per watt, depending on where in the United States you are located. At 5KWs the cost would translate to between $28,500 to $45,000 on average With the advent of Solar leases many companies are now offering no upfront costs and financing the project over a term of ten to twenty years. At the conclusion of the lease the lessee (the property owner) has usually three options.

The first option is that he/she can buy out the system at its fair market value, and with the cost of technology going down every day the cost to purchase the system will be substantially reduced from the original cost. This option will most likely be adopted by the non-Green advocate, who has the funds to purchase the system and want the energy savings but is not set on utilizing the newest technology. They know their electric costs are substantially lower with the system in place and they want to keep them that way.

The second option is that they can elect to extend the term for a new monthly lease payment or at the same existing payment, depending on the terms of the original lease document. This option will be adopted by an individual that does not have the funds to buy out the system, but wants to keep the lower energy costs. Under most leases the lease can have the system removed at no cost to them.

The third option which is for the Green advocate individual is to replace the old system with a new system with no termination fees. They can then decide on the newest technology and various methods to pay for it.

All of the above options other than extending the lease are an opportunity for the mortgage broker to be able to assist in the pursuit of capital. With the lenders “starting” to ease there may be equity lines available again to assist homeowners with capital needs.

Larger projects typically need incentives, such as state and local rebates and a federal income tax credit of 30% of the system cost minus any rebates. However the key question is who gets them. In a lease situation all the rebates and the tax credit inure to the benefit of the system owner, not the system user (the homeowner). The incentives will be applied by the leasing company to lower the effective cost, but they are the holders of the incentives. Another incentive the leasing company receives is depreciation.

There is also the Green Benefit with all solar installations. The benefit can be known as Green Tags, Solar Renewable Energy Certificates ( SREC’s) or other names depending on what state you live in. The system owner in the lease gets the benefit, not the system user. That is unless they buy the system then they can own the “green” value of the KWh’s.

In a purchase all the above incentives and benefits belong to the purchaser. The rebates can be applied to lower their out of pocket cost for the system. The SREC’s are there’s to keep or sell. Also capital appreciation will be to the benefit of the homeowner. There are numerous studies that show that after a solar installation the underlying property increases in value. For every $1000 of energy savings, it adds approximately $20,000 in equity to the property Energy efficient mortgages through FHA are another way that a homeowner can finance solar systems as well.

Within the commercial, government and quasi-governmental arena there are many more financing options as well as incentives offered due to the larger project size.

As we increase from Kilo watt hours to Mega watt hours the cost of the systems also increase proportionately. With the more expensive systems the lenders are more willing to lend as the size of the capital investment is greater. With a greater capital investment the loans or financing vehicles can be pooled and sold off to private investors. Typically once the size gets around 1 megawatt a Power Purchase Agreement (PPA) can be utilized.

A PPA is a contractual arrangement that minimizes a system user’s up-front costs for solar electricity. In essence it is an alternative method to financing and owning a system. It offers the end user the ability to install solar power at their facility without the need to pay up-front costs or worrying about system operations.

The structure for a Solar Power Purchase agreement is as follows. The client contacts with a solar service provider that is responsible for the financing, designing, installing, monitoring and maintaining the system. The client does not pay for any installation, but instead buys electricity the system generates. The system owner determines the level of payment in advance, so the client knows what his cost will be over the life of the PPA which is usually between 15 to 20 years. By having a fixed cost of electricity the commercial user has now fixed his electrical expenses and does not have to worry about escalating energy costs. The PPA is becoming a very popular option for buying solar electricity.

Also available to the commercial owner of a building are SBA loans, for owner occupied users. The SBA 7A loan as well as the SBA 504 loan can be used for acquisition of a building as well as for additional energy efficient products and or services such as monitoring equipment. The SBA even allows for a larger loan amount authorization for “Green Projects.”

For municipal projects, municipal bond financing, and tax-exempt lease financing is a great option. The agency that wants the Green product or service is able to float municipal bonds or leases known as Certificates of Participation, which are supported by the underlying revenue. A source for that revenue can be the projected savings in energy costs. Obviously different municipalities will have different revenue streams and as such will be able to issue various types of bond offerings. For example a Water District can issue a revenue bond supported by the water and sewer fees paid by the users of the District; while a City may have to sell General Obligation bonds to pay for solar which would obligate the cities’ General Fund for repayment.

As the world continues on its increasingly green path there are going to be many opportunities to provide financing vehicles and tools for the renewable energy consumer. Though you may consider yourself far from expert on the subject, my hope is now you won’t be quite as green as you were an hour ago.

Harlan A. Friedman, Esq., is President of Lightning Commercial Funding, a California financial broker specializing in commercial project financing. A student of the renewable energy industry, he can be reached online at www.loanforbiz.com.

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