In commercial real estate, you are allowed to pass through many operating expenses, and increases in operating expenses to the tenant. Examples of such operating expenses include roads and grounds, housekeeping, security, repairs and maintenance, administrative costs, utilities, and possibly others. Anyone in commercial real estate, and many from outside the profession know this.
What you may not know, is that you can often pass-through certain capital expenditures as well. A capital cost may be passed on to the tenant if it meets one of the following criteria.
The capital improvement is mandated by government regulation.
The capital improvement is motivated by life safety concerns.
There is a reasonable expectation that the capital improvement will generate operating expense savings for all tenants, in which case the landlord could pass the capital costs through to the tenants using a reasonable amortization schedule.
How do Capital Cost Recovery and solar energy come together? Here’s two ways you may not have considered.
A solar energy system may be covered by point 3 above, as long as the improvement will generate operating expense savings for all of the tenants. The only reason I say “may be covered” is this is a decision that should be made with your lawyer, your accountant, or both. I am neither and am simply pointing out an item that may be beneficial to you.
If you are the landlord for a non-owner-occupied building and you place a solar energy system on any of your rooftop, your parking lot, or vacant land, you have the opportunity to implement point 3.
Solar energy allows you to become fully or partially energy independent with respect to the utility. You, in effect, become the utility for the building and can, in turn, sell the electricity the system produces back to the tenants at a discount. This generates savings for all tenants which means you may be able to pass all or a portion of the capital costs for the solar energy system through to the tenants. As noted above, this is where your accountant and lawyer come into the picture. They’re the ones that should help you sort this out to make sure it applies to you.
Even if you and your team of professionals decide that Capital Cost Recovery does not apply to you, solar energy may still be able to help.
Roof repairs or replacements can be very expensive. If you are installing a solar energy system, and roof work is required for the installation of the system, and the repairs/replacement are” structural” in nature, you can add the cost of the structural portion of the repairs/replacement into the overall cost of the solar energy system. This does three things for you.
You can complete your repairs or replacement with NO MONEY OUT OF POCKET! as you will be incorporating the cost of the roof work into the overall solar energy system financing package.
By adding the structural portion of your repairs/replacement to the system, you can increase the Federal Investment Tax Credit (“ITC”) you can claim on your tax return. The ITC is a dollar for dollar offset against your taxes. An ITC is no different than money in the bank if you have a large tax bill to pay.
Just like you increase the ITC you can claim based on the roof repairs/replacement, you can also increase the amount of “Modified Accelerated Cost Recovery System” or “MACRS” depreciation you can deduct against your net operating income. If you are not familiar with MACRS, it is simply one of several accelerated depreciation methods available under the IRS Tax Code. While a deduction is not as valuable as a tax credit, deductions do reduce your business income and hence, save you tax dollars.
While we believe points 1 and 2 immediately above are applicable to some, don’t forget to check with your professional team. You and they are the final decision makers in terms of how to implement the points brought forth in this article.