REAL ESTATE NEWS

California energy rates are expected to increase significantly, with experts predicting a rise of 10% to 50% over the next few years. Yet less than 1% of multifamily properties in California have installed solar and other sustainability-friendly methods.

In part, this is due to recent federal and state regulatory shifts posing a threat to multifamily owners' core business, as well as general economic uncertainty, which makes extracting value from clean-energy projects potentially more critical.

One of the biggest challenges for clean energy projects is navigating these potential barriers, according to Jack McKee, vice president of origination at PearlX.

Additionally, the recent One Big Beautiful Bill Act, California’s changing Net Energy Metering (NEM) benefits, resident protection laws, Self-Generation Incentive Program (SGIP), California Solar on Multifamily Affordable Housing (SOMAH), tax equity and more, all impact various aspects of a clean energy program.

“Accessing capital is another major issue for owners interested in monetizing clean energy, particularly given the current high-interest-rate environment and locked-up equity,” McKee told GlobeSt.com.

Solar, storage, and other infrastructure projects, such as electric vehicle charging stations, demand substantial capital expenditures (CapEx).

“Owners and operators seeking to capitalize on these opportunities must either draw from existing cash flow or modify their capital stack by borrowing from traditional lenders or equity, each with its own set of challenges,” he said.

After owners solve the CapEx problem, their next challenge is to figure out how to design and build. Roof and other physical constraints, energy load calculations and sizing, equipment evaluation and purchase, as well as existing electrical and other structural limitations, can all weigh on the success of a project.

Moreover, working with local utilities on system interconnection and panel and meter upgrades is a technical specialty. Finally, once the system is up and operating, owners must invest in operational maintenance and, if they wish to monetize their assets, engage in resident billing.

State’s Title 24 Compliance

For projects, Title 24 requires all new development in California to comply with clean energy standards, particularly with respect to on-site solar generation and electric vehicle readiness.

“Some multifamily developers have found that the reduction in CapEx and increase in NOI realized through infrastructure partnerships has allowed deals to achieve hurdle rates that would have otherwise been out of reach,” McKee said.

Developers can offload the cost of solar design and installation, as well as access recurring cash flows from on-site energy generation.

It’s crucial for multifamily owners to first distinguish microgrids from more conventional solar/battery installations with which they may be familiar, he said. Microgrids are essentially mini on-site power grids dedicated solely to a multifamily community.

McKee said the main issue for multifamily owners is that they currently require a master-metered property (i.e., the landlord pays the bill and distributes charges via RUBS).

“This is particularly challenging in multifamily settings with microgrids, as current regulations make residential billing for on-site microgrid generation difficult from a legal standpoint,” according to McKee.

“The benefit of microgrids is that they allow owners to dodge (arbitrage) peak energy pricing from the utility and provide backup power during grid outages (resilience), which is very beneficial in certain areas.”

The Benefits of Virtual Net Metering

A more effective approach for multifamily owners with properties in Pacific Gas and Electric Company (PGE), Southern California Edison (SCE), or San Diego Gas & Electric (SDG&E) territory is to utilize Virtual Net Metering (VNEM).

VNEM allows owners to generate solar energy on-site and allocate generation to residents based on their usage. VNEM provides for a much more flexible alignment between energy supply and demand on a multifamily property, maximizing economics in a post-NEM-2 environment.

“Where it makes sense, VNEM systems can be paired with battery systems to provide resilience as a resident amenity,” McKee said.

“With batteries as an amenity, owners and operators should consider on-site space (as batteries can be large) as well as the potential value from a rent increase that residents would receive.”

In some cases, prioritizing backup in common areas over community-wide systems (for phone charging, climate control, etc.) can be beneficial, resulting in a smaller financial impact. Partnerships with energy infrastructure companies that specialize in these considerations help owners with their decisions.

Existing multifamily owners have a significant opportunity to monetize their roofs and carports by receiving no-cost CapEx to upgrade roofs and carports and leasing the space for on-site solar generation, he said.

In turn, residents can receive between a 7.5% and 12.5% discount on electricity and owners who have adopted this strategy can also benefit from lower common area electricity bills, as energy prices in California are predicted to continue increasing.

Source: GlobeSt/ALM