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A Solar-Home Rental Business Model: Capturing Synergies from Solar Energy and Single Family Rental Properties

Lutey, Robert (2013): A Solar-Home Rental Business Model: Capturing Synergies from Solar Energy and Single Family Rental Properties.

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Abstract. The credit market collapse and housing-led economic recession beginning in 2007-2008 have resulted in several million distressed homes in the U.S. that are in various stages of delinquency, default, and foreclosure. Over the past three to four years, a number of private equity investment pools have been buying large blocks of distressed residential properties at auction, in short sales, and otherwise, with the intention of renovating and renting them at attractive yields, and ultimately, profiting from their sale as prices rebound from recessionary levels. In the process, they are institutionalizing single family rental property management on an unprecedented state and regional scale. Market demographics and persistently tight credit conditions portend several years of sustained growth in both the demand for rentals and rental rates. Simultaneously, the installed cost of solar photovoltaic (PV) systems has declined over 50% in just the last three years. Among the major catalysts of the decline have been a glut of manufacturing capacity that was built in response to pre-recession demand; federal and state financial incentives including tax credits, rebates, and performance-based payments; and gradual gains from competition and efficiencies in balance-of-system costs. Together, these two trends offer the prospect of an integrated “solar-rental” investment strategy that will produce compelling returns while significantly boosting residential solar energy use. This paper encompasses three objectives: (1) to establish a framework for a solar-home rental business model in which rental incomes are enhanced via the sale of rooftop-generated solar electricity to the tenants of single-family properties; (2) to address several of the major operational elements of such a business, including installation and maintenance of the solar energy system, tenant billing, and management of the solar operation; and (3) to model the economics of the individual solar and rental operations, and the combined enterprise, in a number of markets, in order to identify those where the solar-rental strategy would produce attractive returns relative to the rental-only approach. Thirteen cases in twelve state markets were evaluated for their solar-home rental economics. All the markets have experienced high rates of distressed single family properties since the recession and they account for the majority of institutional “REO-to-rental” purchases. Of the case studies, five produced after-tax returns exceeding 7.50%, matching or exceeding standalone rental yields by up to 0.19%, and over 0.40% under an expected scenario of further cost declines. As a group, these markets are characterized by high marginal electricity rates, moderate to high solar insolation, and modest to significant upfront or performance-based incentives. It is estimated that the top institutional buyers have accumulated 40,000-50,000 distressed properties since 2009 and that they are expected to purchase upwards of 100,000 additional homes over the next two years. In comparison, the national single family rental market is estimated at 16 million homes, 2 million of which were added since 2006, while the number of U.S. residences with solar panels stood at approximately 300,000 as of the end of 2012. If half of the expected portfolio of institutional single family rentals was to be solarized, it would result in a 25% increase in the stock of residential solar installations, via the “leveraging” of actions by perhaps a dozen property buyers. As solar panel prices and, especially, balance-of-system installation costs continue to decline in the face of rising electricity rates, solar energy-rentals should prove an attractive proposition to residential rental property investors and a big assist to the country’s renewable energy usage.

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