SolarKal Quarterly

The SolarKal Quarterly #4: What’s the Sun’s Cap Rate?

David Wei


At SolarKal, we’ve seen an astronomical expansion in overall interest and adoption rates of solar within the broader real estate community over the past few years, and that’s only accelerated since the passage of the Inflation Reduction Act. For this Quarterly, we’re going to dive into the value proposition solar provides to real estate owners with some helpful insights from SolarKal’s network.

Solar installations on commercial properties – think office buildings, industrial facilities like warehouses or factories, shopping centers and storefronts, or parking lots, apartment buildings, and greenfields – can potentially increase property value by reducing operating costs, enhancing sustainability, and attracting environmentally conscious tenants or buyers.

Solar can provide additional revenue streams through net metering or selling excess electricity back to the grid, which can positively impact the financial performance of commercial properties.

Specifically, there are a few ways that adding solar boosts property values:

  1. Higher NOI for Site Leases:

Solar leases (discussed in more detail here), where the real estate owner receives a lease payment from a third-party system owner, is perhaps the most common way real estate owners go solar. These leases can be counted as rental income, like any other property lease, boosting the site’s net operating income, a key property metric.

These leases are typically fixed rate for 20+ years, and are often backed by a state-supported solar program. This significantly reduces default risk and offers property owners long-term certainty.

According to Ed McHale at RPT Realty, “Having solar on your roof for 20 years is usually a positive – it’s a high quality, long-term revenue source. Solar also falls into our ESG goals, so it’s a win-win!”

To illustrate, a property with a 5% cap rate that adds an extra $50,000 in annual lease payments would expect to see its value increase by $1 million – without purchasing the system – and properties that combine the site lease with a power purchase agreement can “have their cake and eat it too” by locking in a lower price for electricity while also receiving the long-term lease payments!

“It’s (Solar) taking advantage of a part of the building that we haven’t been able to monetize before and a great way to improve NOI,” notes McHale.

2. Lower Operating Expenses and Higher Multiples:

Solar systems are typically designed to either fit the physical capacity of the roof or the on-site load, whichever is the limiting factor. A properly-sized system can eliminate a significant portion of a building’s electrical bill, drastically reducing the site’s operating costs and increasing the property value accordingly for owners.

There is a general dearth of research on commercial solar, but reports on residential solar note that solar is often viewed as a significant upgrade, with several studies (like these from the National Renewable Energy Laboratory and Department of Energy) showing that properties with solar tend to command higher prices compared to similar properties without.

Moreover, the Appraisal Journal estimates that energy savings in residential are capitalized at a 5% cap rate, a rate that we can use to put some context from SolarKal’s database of pricing data. For example, a 100,000 sq.ft. building in NJ is estimated to net its owner between $90-$120K per year in annual savings on a Power Purchase Agreement (PPA) using SolarKal.

At a 5% cap rate, the asset’s owner would see a value increase of $2 million for no capital investment!

3. More Attractive to Tenants and Acquirers:

SolarKal’s clients, like Peter Ciganik of GTIS Partners, have repeatedly seen the proliferation of ESG, sustainability, and net-zero mandates from asset owners where the presence of solar can be “table-stakes” for any acquisition.

Often, tenants are requesting solar as a requisite for signing a lease – according to Ciganik, “We wouldn’t have some of our tenants if we weren’t providing solar,” highlighting the increasing role tenants have played as motivating factors for asset owners.

Furthermore, commercial properties may also benefit from marketing advantages and increased market competitiveness by promoting their renewable energy initiatives, which can attract environmentally conscious tenants or customers, potentially reducing turnover and elevating occupancy rates.

Ciganik notes, “We are getting interest from investors – particularly from European investors – willing to reduce return expectations meaningfully for anything renewable or carbon reducing, particularly solar.”

Yet, higher property values is just one additional benefit to the economics of the system itself – solar ownership IRRs are robust, ranging from high-single digits to 22-26% for our sample NJ property and upwards.

The combination is a compelling win-win at the heart of the acceleration in solar adoption by asset owners; solar is more and more the norm:

“We want to avoid obsolescence – the standards are being raised and solar is a big part of that” remarks Ciganik.

For more and to see how SolarKal’s marketplace drives value for clients, reach out to

Quarterly Quick Hits

  • The IRA created a 10% adder to the Investment Tax Credit for low-income properties, and we received some clarity in February.  Unexpectedly, the updated guidance introduced a lower-than-expected capacity and an associated lottery system.
  • New Jersey released the draft rules of its next Community Solar program. If you have a building in NJ, the program offers highly-attractive incentives, and SolarKal can help!  The program should open up in the late summer into fall.
  • Electricity prices grew by more than double inflation in 2022 – higher electricity prices increase the IRR of solar as the value of the power offset is higher.

What I’m Looking Out For

  • Additional guidance from the IRS on “transferability.”
  • Illinois Community Solar final results.
  • Michigan may be well on its way to launching its first Community Solar program, following in the footsteps of leaders like Illinois, New Jersey, and Maryland.
  • Rhode Island is considering mandating solar for all new construction and parking lots, following California’s new construction solar mandate and similar to a measure under consideration in Massachusetts.
  • Anything related to SVB.