Revenue and Cash Flow
Different areas of Ontario generate different levels of solar electricity, as shown in the accompanying chart. Taller buildings or trees in the surrounding environment will create shading and reduce the production of electricity. If a roof is sloped, only the south facing surfaces are preferred for solar-electricity generation.
Technology and design will help maximize system efficiency. Generally, the performance of solar panel may degrade by 0.5 percent each year.
As an example, let’s consider the previously mentioned 50 kW system in Toronto. For the sake of prudence, let’s say it may cost about $400,000, or $78 per net square foot. The payback period will be around 9 years, with a 6.5 percent internal rate of return per year, on an after-tax basis (assuming a 30 percent tax rate). It will generate net cash inflow of $299,000 (or $131,000 discounted to today’s value).
When financed with debt, the payback scenario can be quite different, depending on interest rates and loan terms. For example, a loan of longer duration usually has faster payback but a smaller cash inflow. Investors should note the dynamic relationship between loan terms and payback.
The accompanying charts show the trends of after-tax cash-flow accumulation, before discounting, for two scenarios: owner financing and loan financing (70 percent loan, 10 years, at 8 percent interest). The analysis shows that investing in a PV is financially viable. In the case of other Ontario locations, or lower system costs, the return may be even better.
A self-storage operator is recommended to approach his own bank first, providing it with relevant technical and quality financial information. If a lender’s concerns on various risks are addressed, there’s good chance an operator can arrange a longer-term loan with a good rate.
Finance lease is a feasible option. The embedded interest rate tends to be higher than that of conventional bank loans, and it demands full repayment in a shorter timeframe. Several investors could pull together for joint investment. The challenge is the exit clause has to be carefully drafted beforehand.
Leasing the space is a prudent approach, as long as the property owner is satisfied with the lease terms, and the responsibilities during and after the lease period.
Among the various renewable-energy sources, solar PV is the simplest, and small enough to integrate into buildings. It also has significant impact on greenhouse-gas reduction. For example, a 50 kW system reduces more than 1,300 tons of carbon dioxide over 25 years. Having a PV system on the property is a statement of support to a sustainable future. It creates a green image for the self-storage facility.
The FIT program aims to motivate the early adopters with a reasonable return. With careful financing arrangements and the service of a suitable system developer, it can be an opportunity for self-storage owners to capture the return and the intangible benefits of installing a PV system on their property.
Isabel Chan is a certified management accountant of Canada and was the director of finance for a self-storage group of companies in British Columbia. Prior to that, she was the financial controller for iCable Communication Group and Xerox Corp. She is the co-founder of SIS Solar Ventures Ltd. in Toronto, an Ontario-based developer of solar photovoltaic systems, offering complete solutions to property owners. For more information, e-mail firstname.lastname@example.org; visit www.sissolarventures.com.