This is a highlight from the Building Priorities Briefing.

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Aaron G. Binkley is Director, Sustainability Programs for AMB Property Corporation. (AMB photo)

Transcript

Denis Du Bois:
So for one of your warehouses in Rialto, California, you just entered into an unusual lease with an unusual tenant. You leased the roof to Southern California Edison...

Aaron Binkley:
One of my associates here refers to it as, leasing the top bunk of our buildings, as a way to think about it. And we have, as you may imagine, a very large portfolio of unused rooftop real estate.

The Southern California Edison utility has a very aggressive program that is spurring, I'd say, the region, and even parts of the entire country, to really refocus on renewable energy and, in particular, rooftop solar. And we are one of the participants in the early pilot program that's rolling out rooftop solar installations for that Southern California Edison program.

Denis:
Tell me about the kinds of sustainability initiatives you have going on at AMB.

Aaron:
We have had a number of sustainability initiatives active for the last several years. In terms of the major areas of focus, we have a very strong energy conservation program that works with our customers that are already in our buildings to make sure that they're operating efficiently and conserving energy and lowering their operating costs.

We do a lot of that through things like lighting retrofits, within our buildings, where we're able to consistently save easily 30 percent to 50 percent of the total energy costs for the building operators, on a year-to-year comparison basis.

We also, on new construction, build to green standards. So, in the U.S., that would be the LEED standard -- and, last year, we certified more than a million square feet of properties in Japan to CASBEE standards.

Denis:
Have you had tenants asking you for solar?

Aaron:
We have had some tenants that have asked us for solar. We've seen a few that have looked at it from an energy cost reduction standpoint. These would tend to be users that maybe have 24/7 operations or have large energy needs, that would not necessarily be typical across our portfolio.

The operational requirements that would allow us to facilitate that for them have, unfortunately, been very complex.

Denis:
Is that complexity mostly because they're leasing the space?

Aaron:
Yes, that's a big part of the equation. Most solar projects require at least a 20-year operable life and most of our tenants are in our buildings for five to six years. We have a limited ability to finance projects when we don't have an energy off-taker.

In other words, we don't have a tenant guaranteed for that full 20-year period. That's one of the major complications associated with that model.

Denis:
Why not buy your own solar array or enter into a third party financing, like a power purchase agreement, and sell that power yourselves?

Aaron:
There are a few reasons why -- and we have spent a significant amount of time looking at that as an option -- there are several reasons why we have not pursued that path at this point.

One of them has to do with the alignment that I talked about before of having an energy off-taker that is in the building for a comparable period of time because that directly speaks to the ability to finance the solar facility itself; whether it is a project we would pay for and finance or whether it's a third party solar developer that would be seeking outside financing.

Without having a very high credit rated tenant with a very long power purchase agreement, projects are very difficult to finance. We've had very few situations where that financing has become feasible from a standpoint of AMB as a REIT seeking to purchase and install these facilities ourselves.

As a REIT, we have some difficulties through our tax structure to capture the federal tax benefits that are available. As you probably know, that's a very large portion of the total available incentive for renewable energy. Without that, we've had difficulty economically making the projects pencil.

When we look at either a PPA model or the roof lease model that we are proceeding with, with Southern California Edison, a lot of the complexities were taken out of the picture.

The utility is, as you know, financing the entire solar project and then we're simply leasing rooftop space to them. All the complexity of us having to capture the incentives, whether they are at the federal level or through the utility, has been removed, as well as any sort of credit risks or power purchase risks.

Denis:
What's your advice to other owners and REIT managers looking to participate in programs like Southern California Edison rooftop solar program?

Aaron:
Do your homework. There's a lot of complexity in these sorts of deals. I think a lot of the initial screens or the initial due diligence that you would go through are very important, but they're not the full picture.

Along the way, there are a lot of little roadside obstructions that could come along and derail a project pretty quickly. Some of those may be large and obvious things like if the roof is old and you need a new roof that might be an automatic no-go.

Down the road, you might come to a realization that you have a tenant inside that building and that tenant simply is a finicky tenant. They have no interest in you doing a construction project atop their building and that might, from an operational standpoint, be a no-go -- even though the building itself in all other aspects would be feasible.

The only other aspect of this, and this is maybe a higher level discussion outside simply this one project, is an opportunity for us to look down the road and see a future where these sorts of projects can be planned from the outset on construction and development projects.

That we can know with some certainty that there is a revenue opportunity or there is an opportunity to sell power to the tenants in our buildings that we can capitalize through the development process, that would allow us to actually plan for solar on buildings.

I think until that happens, we will always be playing a little bit of catch-up to make sure that a building that was never intended for solar can somehow be retrofitted to fit solar. I think the holy grail is where we can plan for it from the beginning and actually see solar on the building from the start.