By Stephen A. Kisker and Amy Howlett
If you own a building, you have a roof. If you have a roof, chances are you have considered ways to monetize it, and if you have not, you should. Common methods of roof monetization include leases for solar development and wireless communication equipment.
While at best rooftop leases can be easy money, at worst they can interfere with building tenant operations and undermine the main source of revenue from your building — rent from tenants within the building.
To avoid the so-called “tail wagging the dog,” rooftop owners can avail themselves of certain strategies in structuring rooftop lease deals to minimize risk. This article touches upon a few strategies, including reserve areas and relocation and recapture rights.
As an initial matter, the rooftop solar projects referenced in this article refer to community solar programs or other methods by which the energy is sold to offsite, third-party customers, as opposed to using the energy for the building upon which it sits. Rooftop solar projects providing energy to the building on which it sits is a separate topic that comes with its own set of guidelines and guardrails to be discussed in a future article.
Reserve areas
Many building owners, eager to maximize rent, allow the rooftop premises to include the entire roof — or more than is necessary. The more panels a solar developer can install, the more energy they can produce to sell to customers, and the more rent they are therefore willing to pay. In rooftop leases for other types of equipment, rooftop tenants may initially look to lease the entire roof, even though the equipment only requires a small footprint.
By agreeing to lease the entire roof, owners fail to recognize they may need portions of the roof to install future rooftop equipment servicing its main source of income, the building tenants. In addition, many states and municipalities require buildings to reduce carbon emissions and rooftop solar feeding the building may be an avenue to explore.
This is where the reserve area can save the day. The reserve area is a portion of the roof, not included in the leased premises to the rooftop tenant, reserved for use by the building owner and building tenants. Typical reserve areas are 10 to 20 percent of the roof area.
In a rooftop lease for smaller equipment such as a communication antenna, the building owner should consider limiting the rooftop area leased to the smallest footprint needed for the actual equipment.
Relocation rights
It is hard to predict where future rooftop equipment will need to be located, so we also recommend allowing the reserve area to be relocated.
A typical relocation provision allows a certain percentage of the leased premises to be relocated to the reserve area. Language should be added specifying which party pays for such relocation and any lost revenue resulting from downtime during the relocation process. Generally, building owners are allotted an outage budget that allows them a certain amount of downtime before being charged lost revenue by rooftop tenants in connection with relocation and more generally for repairs and maintenance to the roof.
Recapture rights
In addition to or in lieu of reserve areas and relocation rights, building owners can include a recapture right in rooftop leases. A recapture right allows the building owner to recapture a certain percentage of the rooftop premises in the event such space is needed by a building tenant.
A recapture right will initially allow the owner to receive more rent from the rooftop project and then only reduce rent in the event additional space on the roof is actually needed. The recapture right will almost certainly come with a termination payment for the portion of the premises recaptured.
Building owners should monetize their roof; however, they must be careful to protect the greater asset, the building tenants. The rooftop project just needs to be structured properly. For more information about rooftop leases and other protections building owners will want to include in rooftop leases, please reach out to the authors.
Stephen A. Kisker, a member in the firm’s Real Estate Group and chair of its Renewable Energy & Sustainability Team, advises on all facets of commercial and residential real estate acquisition, development, financing, redevelopment, management and disposition. He can be reached at [email protected] or 973-530-2074.
Amy Howlett is an associate with the firm’s Real Estate Group and its Renewable Energy & Sustainability Team. She can be reached at [email protected] or 973-530-2327.
