Whether the landlord should own the panels or rent out the roof turns on one number: the share of the power the tenant will buy, for longer than its lease.
It pays if the tenant buys most of the power. An illustrative 2.4 MWp array on a 20,000 m² warehouse roof, funded by the landlord for 1,800,000 and selling 70 per cent of its output to the tenant, returns 9.7 per cent over 25 years, an NPV of 465,490 at 7 per cent, after the inverter and a strip-and-refit when the roof is recovered. Simply leasing the roof to an operator is worth 502,358, so owning wins only above 71.6 per cent offtake.
Worked in full in Logistics and Industrial Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A big flat roof with an occupier underneath that runs conveyor belts, chillers and electric forklifts looks like the ideal solar site, and often is. The question for the owner is which of two contracts to sign: own the panels and sell the power, or rent the roof to someone else who does.
| Input | Value |
|---|---|
| Roof area / usable share / panel density | 20,000 m² / 60% / 0.20 kWp per m² |
| Installed cost per kWp | 750 |
| Generation per kWp, year one / degradation a year | 950 kWh / 0.5% |
| Share bought by the tenant / price per kWh, indexed | 70% / 0.12 |
| Export price per kWh, flat | 0.05 |
| Operation and maintenance per kWp a year, indexed | 15 |
| Inverter replacement, year 13, per kWp | 60 |
| Roof recovering in year 12: strip-and-refit per kWp / output lost that year | 70 / 25% |
| Alternative: roof lease per m² of panel area, indexed | 3.0 |
| Indexation / discount rate / life | 2% / 7% / 25 years |
All prices are illustrative and do not describe any market. Subsidies, tax allowances and grid connection costs are left out because they vary by country and change often; add them where they apply.
Step 1. Size the array. 20,000 × 60% = 12,000 m² of panels, × 0.20 = 2,400 kWp, costing 2,400 × 750 = 1,800,000.
Step 2. Year-one income.
Generation = 2,400 × 950 = 2,280,000 kWh
Tenant: 1,596,000 kWh × 0.12 = 191,520; export: 684,000 kWh × 0.05 = 34,200
Revenue = 225,720, a blended 0.099 per kWh; less 36,000 of maintenance = 189,720
Simple yield = 189,720 / 1,800,000 = 10.5%; simple payback 9.5 years
Step 3. The 25-year cash flow. Generation falls 0.5 per cent a year; the tenant price and maintenance rise 2 per cent; the inverter costs 144,000 in year 13. In year 12 the roof is recovered: the panels come off and go back on for 168,000, and the array loses a quarter of that year's output, about 64,430 of revenue, 232,430 in all.
NPV at 7% = 465,490; IRR = 9.7%
Excel: =NPV(7%,C2:AA2)+B2 and =IRR(B2:AA2), with −1,800,000 in B2
Without the roof refit the IRR would be 10.2 per cent. The refit costs 103,202 of present value. The new roof itself is due with or without panels and is not charged to the array; only the strip-and-refit and the lost output are, because the panels cause them.
A roof lease at 3.0 per m² of panel area pays 36,000 in year one, indexed, for 25 years. The operator funds the array, maintains it, takes the generation risk and pays for its own strip-and-refit. Discounted at the same 7 per cent it is worth 502,358, more than the 465,490 of owning, before any allowance for the lower risk.
| Share bought by the tenant | Revenue, year one | NPV at 7% | IRR |
|---|---|---|---|
| 100% | 273,600 | 1,168,881 | 13.2% |
| 70% | 225,720 | 465,490 | 9.7% |
| 40% | 177,840 | -237,901 | 5.5% |
| 0%, export only | 114,000 | -1,175,756 | -3.2% |
Owning beats the roof lease above 71.6 per cent offtake and earns less than the 7 per cent discount rate below 50.1 per cent. The tenant price matters less than the volume: at 0.10 per kWh the NPV is 44,838, at 0.14 it is 886,142. The spread between the tenant price and the export price is the whole business, and the export price is what the landlord gets for every kWh the tenant does not want.
The power purchase agreement is only as long as the occupational lease, and a warehouse lease is usually far shorter than the array's life. When the tenant leaves, the array exports at 0.05 until the next occupier signs, and the next occupier may run a less power-hungry operation. An appraisal that holds 70 per cent offtake for 25 years is underwriting two re-lettings at the same energy profile. Test the NPV with offtake falling to the export case for a void at each lease event, and the roof lease usually wins for multi-let or short-let assets. For a long single-let lease to an energy-intensive occupier, owning can win clearly: at 100 per cent offtake the NPV is 1,168,881.
The tenant has its own reason to agree: at an illustrative grid price of 0.20 per kWh, buying 1,596,000 kWh at 0.12 saves it 127,680 in year one, 6.38 per m² of warehouse, which is part of the rent the building can command.
The book prices a roof lease against the roof's own replacement cycle, and the free workbook for this case carries that chapter and a case on whether to recover the roof first. Indexation on the tenant price works as in fixed uplifts against capped CPI.
On an illustrative 2.4 MWp array generating 2,280 MWh a year, selling 70 per cent to the tenant at 0.12 per kWh and exporting the rest at 0.05 earns 225,720 in year one, 189,720 after operation and maintenance: a 10.5 per cent simple yield on 1,800,000, or 9.7 per cent IRR over 25 years after the inverter and the roof refit.
It depends on how much power the tenant takes. At 3.0 per m² of panel area, indexed at 2 per cent, a roof lease is worth 502,358 at 7 per cent with the operator carrying the risk. Owning the panels is worth 465,490 at 70 per cent offtake, 1,168,881 at 100 per cent and minus 237,901 at 40 per cent. Owning only wins above 71.6 per cent.
The panels have to come off and go back on, and the array stops generating while the roof is done. On the illustrative 2.4 MWp array a year-12 recovering costs 168,000 of strip-and-refit plus about 64,430 of lost revenue, 232,430 in all, and cuts the array's NPV by 103,202. Align the array's life with the roof's, or price the refit in from the start.
This article is one calculation from Logistics and Industrial Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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