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NATIONAL ASSOCIATION OF REAL ESTATE INVESTMENT MANAGERS 14 NAREIM Energy Sales Revenue It's also possible to earn revenue through selling the energy from the solar array to tenants, effectively becoming the utility for the tenants. For example, the developer of Boulder Commons—two multi-tenant mixed retail and office buildings totaling 100,000 square feet in Boulder, Colorado—directly purchased a 600 kilowatt solar array for the buildings. The developer is renting the buildings using a modified gross lease that includes a market competitive rent plus an energy charge. This energy charge allows the developer to earn an attractive return on the solar investment, while also keeping tenant energy costs at a level that is standard in the market (i.e., no net increase to tenant expense). This energy charge also creates additional tenant-based income that can be passed to a future owner upon sale and accordingly directly factors into property valuation. Rent-based Revenue In some U.S. states it's possible to lease the roof or adjacent land to a third party for the right to locate a solar array on that area. Doing so can create between 10 to 40 cents per square foot of additional income while also increasing the property's value. Roof rental income is a straightforward transaction for most any deal team or bank appraiser to include in a property valuation because it offers assured cash flows and easily transfers to new owners. For example, most of Prologis' 108 megawatts of installed solar capacity at year-end 2016 (#3 among U.S. companies) spanning tens of millions of industrial rooftop square feet was completed using this structure, increasing the overall revenue and value of its industrial properties where the solar is located. What are some of the other drivers of solar value? Other value drivers that make solar attractive over and above the financial values discussed above include tenant and investor demand and avoiding obsolescence. Tenant Demand Most high-quality tenants have sustainability goals that may include solar. These goals are driven by a combination of concerns including: energy cost reduction, employee attraction and retention, customer satisfaction, and shareholder demands. In some cases, tenants are willing to pay a premium for sustainability, as evidenced by green- certified commercial real estate in multiple markets earning rent and sales premiums (as well as occupancy rate increases). While this is most likely driven by lower life-cycle costs it can also be driven by the additional values. These sustainability-minded tenants and occupants can be a driving force for going solar: one law firm tenant in a Brookfield Office Properties space in Washington, D.C., was responsible for launching a large-scale solar project across not one but three Brookfield-owned buildings. Owners willing to support tenants in their goals create opportunities for tenant retention, increased occupancy, and even higher rent rates. Institutional Investor Demand Evidence of low-carbon emissions funds outperforming the market continues to pique the interest of institutional investors. Especially prevalent among European investors, this interest has led to the creation of rating systems for performance assessment. The Global Real Estate Sustainability Benchmark (GRESB) collects data from 850 participating global property companies and funds, representing nearly $4 trillion in assets under management, and delivers a benchmark score to each. The GRESB score, which is reported to institutional investors, spans a wide variety of sustainability topics and includes the amount of solar in the real estate portfolio as well as solar growth trends. Another similar rating system is the Carbon Disclosure Project. Participating in these systems and continuous improvement through installing solar sends a compelling signal to institutional investors. Risk of Obsolescence New buildings today are more likely than not to be green, which often includes solar, creating a risk of obsolescence for buildings built to past standards. Building professionals are experiencing an increasing share of green projects: approximately 25 percent of U.S. building professionals expected to have a majority of green projects in 2015, but by 2018 that number rose to about 40 percent. According to a 2015 U.S. Green Building Council report, the market for green construction is expected to grow from $150.6 billion in 2015 to $224.4 billion in 2018. Net-zero energy construction, a subset of green construction, is also growing rapidly. There are currently over 400 net-zero and ultra-low energy buildings in the U.S., up from less than 100 in 2012. This growth will continue: Austin, Texas requires all new homes to be net-zero energy capable, and California will require all new residential and non-residential buildings to be net zero by 2020 and