The Hidden NOI Hack Multifamily Investors Are Missing: Solar Energy Value Add Strategy

Owen Barrett (00:00)

It is a substantial cost up front. It’s probably about five to six thousand dollars per unit. it generally drives about forty to fifty dollars per unit per month in NOI. you know, so from a from an IRR perspective, it’s usually high teens, low twenties from a like return on cost. It’s generally like eight, nine, ten percent. So the the metrics are strong, but if you’re not a well capitalized group, then you’re gonna have a hard time you know, affording that initial capex investment.

Dylan Silver (02:09)

Hey folks, welcome back to the show. Today we’re joined by Owen Barrett, founder and CEO of Shine, one of America’s fastest growing solar companies. Working nationwide with real estate investors, multifamily operators, and developers, he helps property owners create value through solar energy solutions that reduce operating expenses and increase asset performance. Owen, thanks for joining us here today.

Owen Barrett (02:35)

Yeah, thanks for having me.

Dylan Silver (02:36)

Now, most multifamily operators are often thinking about renovations, rent growth, and operational efficiencies when they talk about value add opportunities. At what point did you realize solar could be one of the most overlooked strategies in real estate?

Owen Barrett (02:56)

You know, surprisingly, it took me about five minutes, like my first five minutes of underwriting multifamily property, to figure out that it’s a lot easier to install solar on the roof than it is to renovate, say, 200 units. so I was honestly a little bit surprised that the industry has had such a hard time adopting the technology because it’s a way easier time to increase NOI.

Dylan Silver (03:17)

Now, when folks are looking at adding solar, is this something that they’re seeing as a huge cost up front? And that’s something that they couldn’t take into consideration if they’re trying to exit in five years? Or is it something that will have a value add to them even in a shorter timeframe, like five years?

Owen Barrett (03:36)

It is a substantial cost up front. It’s probably about five to six thousand dollars per unit. it generally drives about forty to fifty dollars per unit per month in NOI. you know, so from a from an IRR perspective, it’s usually high teens, low twenties from a like return on cost. It’s generally like eight, nine, ten percent. So the the metrics are strong, but if you’re not a well capitalized group, then you’re gonna have a hard time you know, affording that initial capex investment.

Dylan Silver (04:11)

So the ideal use case is if this is something that you’re holding over the long term, this is gonna of course stabilize your energy bills and will create efficiency over the long term.

Owen Barrett (04:24)

I we don’t really think it matters if it’s a short term or long term hold. I mean, there’s some tax implications if it’s a shorter term hold, but you know, the like the return on equity is like two to three X. So from our perspective, there’s there’s not that many ways to get a like a 20% IRR anymore in in value add multifamily. I think there used to be four or five years ago. But the landscape has sh— has shifted and changed, and so we kind of see energy as like the final frontier of how creative multifamily owners can create value.

Dylan Silver (04:57)

I’d like to get a little bit granular here. Now, in many cases, I have heard that there’s differing opinions on whether adding solar to the residential side, which is of course not the segment that we’re talking about here today, does it add value or does it limit the buyer pool? But when we’re looking at multifamily and commercial properties, I would imagine that almost always it’s gonna add value because people wanna have something that’s gonna be efficient.

Owen Barrett (06:10)

Yeah, I mean, think the reason that solar gets a bad rep or a reputation in in like single family homes is not the technology itself, but it’s how is it financed? If you have an owner of a single family home that buys solar cash, there is there’s really no question of does it add value? There’s been a million studies across different markets that show that it appraises higher buyers are willing to pay more. But the question comes in when systems are third party owned. So you have like a Sunrun or Solar City or somebody else that owns the equipment on your roof and has a lien on the property. And that can oftentimes get in the way of refinancing your property or selling it. And so that’s what’s sort of triggered this I think negative connotation in like single family home investors’ minds and real estate agents’ minds. And it’s the same thing with multifamily. If you pay cash for it, you’re not gonna have any issues. If you do third party financing, you— there could be situations down the road where if you don’t pay attention to how that 30 page document is drafted, it might bite you in the ass.

Dylan Silver (07:16)

Now, when we talk specifically about where the best use case is for adding solar to one of these properties, is it gonna be a property that’s already an efficient property that has everything else in place to to make it an energy efficient property? Or can you add it to, you know, a forty year old B or C class property?

Owen Barrett (07:39)

it doesn’t really matter. So the challenge that energy has with the multifamily space is the split incentive problem. So whether it’s solar or more efficient lighting or more efficient efficient HVAC, ultimately it’s the owner that has to pay for the upgrade and it’s the tenants that benefit via lower utility bills. We have figured out how to solve this split incentive problem for solar. I can’t say the same thing has been done for like more traditional energy efficiency projects. So for us, it doesn’t matter if it’s an inefficient building from the 80s or a hyper-efficient building you know, from a couple of years ago. But I think for us, the best use case is a garden style LIHTC property, so low-income housing tax credit property. And that’s because the interaction between utility allowances and rent. We can actually use solar to decrease utility allowances, which increases rent in an otherwise rent regulated environment. so we found an interesting sort of niche within the LIHTC space.

Dylan Silver (08:42)

Now, when we look at these tax credit properties, this is something that there needs to be more of. And we see this a lot, particularly in the Sun Belt. I’m in Texas. And there’s an abundance of these class A luxury apartment complexes where you’ll have two pools and a gym or multiple gyms and a nice office center. But then that becomes challenging from an affordable housing standpoint because if folks are looking for truly workforce affordable housing, there’s not enough of that. So as someone who’s looking at this space, do you think that solar and related technologies can help facilitate potentially more investor interest in these tax credit sectors?

Owen Barrett (09:26)

Maybe. I think from our experience, the LPs in market rate deals are not the LPs in tax credit affordable deals. They’re sort of like totally different institutions or totally different syndication groups. And I think that’s because the the return profile is different. It’s a different time horizon. I think you have more upside in market rate properties, but you have lower risk in LIHTC properties. So I don’t know that we can that solar will necessarily help proliferate affordable housing. I do think what’s interesting though is because of the one big big beautiful bill, the volume of both new construction and preservation projects is gonna double. So it’s kind of an interesting output of the of the Big Beautiful Bill.

Dylan Silver (10:47)

Now, when we look at the overall impact that solar is going to have immediately, is this something that the investor will benefit from immediately, or is this something that more so the tenants will benefit from immediately? Cause I know you earlier mentioned the the rents can be increased, but also that savings do get passed down to the tenant. Am I wrong there?

Owen Barrett (11:10)

Normally what we see is five percent of the aggregate savings is passed down to tenants and the nine the remaining ninety-five percent goes back to the ownership and so you know vis-a-vis investors. so it is a win-win-win from the perspective, I guess, of the the planet, the residents and the investors, but the bulk of the of the benefit does go to the investors or the operator.

Dylan Silver (11:35)

Now, pivoting here, Owen, are you seeing that more of these LIHTC properties are interested in solar technology and things that they can do to increase rents? Are they even aware of this type of value add for themselves? Or are you having to come to folks and present them with this opportunity?

Owen Barrett (11:57)

They have no idea until we talk to them. But it’s it’s fascinating because once they understand what we’re talking about, like you can see the wheels start to turn. so I think we’re at the very beginning of like a long adoption cycle. I think it’s gonna start in the LIHTC space, but you know, what the market rate space is gonna understand relatively quickly is as electricity rates increase, you know, 10, 20, 30, 40 percent per year across the country, that means that residents are less able to afford rent increases. So even in the market rate space, I think as you see electricity rates climb, owners should be paying more attention to what they what can they do to stabilize that for the residents because that will help them capture rent increases on the other side.

Dylan Silver (12:42)

You know, one of the challenges that you mentioned earlier is this split incentive, right? And so if people have shorter time horizons on the traditional side, not the tax credit side, right? They’re looking at, well, if I have this big cash outlay to install a solar array on our roof, and then I’m not seeing that myself until you know I go ahead and and sell the property. And that’s if we get more for having the array on it, there can be that duality there, that that conflict there. Do you think potentially that longer time horizons, like if people were to hold these deals instead of for three to five years, but for seven to ten years or or potentially longer, that that would have an impact on the way that they underwrite adding these types of technologies to their properties?

Owen Barrett (13:29)

I think that longer hold periods at large are are better sort of for society, like for the residents. I think selling every three to five years is a lot of volatility for residents. But you know, for your average million dollar solar project, you’re gonna increase cash flow to the property immediately, right? Once the system’s turned on, a hundred to like a hundred and fifty thousand dollars per year. So that’s instant cash flow. That’s a 10 to 15% cash on cash return right out of the gate. almost every value add property that we look at does not have a 10% cash on cash return out of the gate. So solar is accretive immediately to these deals. And then that million dollars will turn into, you know, two to three million dollars at sale or refi, depending on where the project’s located and what the you know, what the exit cap rate is. So hold period doesn’t really affect the the value of solar on a property. I think it affects like other has more societal impact on residents.

Dylan Silver (14:27)

Like to drill down into this idea of adding value immediately. And you mentioned the cash on cash return. Forgive me for maybe my own ignorance here, but for for our for myself and for our audience, where is that immediate return coming from? Because if they’re not selling the property, and if the we’re talking about the commercial space, right? Excuse me, the the traditional commercial space, not the tax credit space, and the savings are being passed down to the tenant, where is that additional equity coming from?

Owen Barrett (15:38)

So if you’re a resident of an apartment unit pre-solar in Texas, you may pay Oncor $100 a month for electricity. We come in, we install solar, your electricity bill is going to drop to $50 per month. So now you’re saving $50 per month. But of that $50 savings, you’re paying the owner of the property, the owner of the your solar, $45 per month. So you’re increasing cash flow $45 per unit per month once the system’s turned on.

Dylan Silver (16:07)

I see. Okay. That makes a lot of sense. Are you seeing specific areas where this strategy has been most effective? Or is there maybe more of an open mind in certain markets? I’m thinking, you know, the Sunbelt for sure. Or are you seeing some resistance because of of the the the points that we mentioned where people are looking at shorter timelines and changeover and this type of thing?

Owen Barrett (16:31)

no, I mean, I think we see fewer places that it doesn’t work than places where it does work. So it doesn’t work great in the Midwest, sort of like Iowa, Arkansas, the Dakotas. It works great everywhere else. It works really good in you know, California and New England, where electricity prices are through the roof. But we just talked to an owner in Maryland where rates for their residence went up 90% in a year. We talked to an owner in Texas where his bill went up 80% in a year. so I I mean, I think today we think about Texas has cheap electricity and Arizona has cheap electricity and California and New England have expensive electricity. I think if you fast forward three years, electricity is gonna be expensive everywhere. Like it you’re just it’s just a new reality that we live in. So it definitely works better in certain places now, but I think like over over time the value proposition is gonna get a lot stronger in the markets right now where it’s just sort of average.

Dylan Silver (17:33)

You know, this is an interesting point that you bring up about it being even more imperative to adopt this type of technology on the coast. I was having a conversation with developers on the coast talking specifically about, you know, multifamily housing in California and how it’s so difficult to get deals to underrate in a lot of markets, but specifically in California because the rents have to be so high, and then you have to factor in sometimes some unfavorable landlord tenant situations. But if you add in this type of technology, it could potentially change the arithmetic, right?

Owen Barrett (18:10)

Yeah, I mean, we’re seeing this all the time. I I get a little uneasy when when somebody decides to acquire a property because of the cash flow from solar. Like I think we feel more comfortable when a project just barely meets the return profile. And then this is like additional cash flow or additional IRR at the exit. but yeah, we’re seeing more and more owners and operators try to incorporate solar in initial underwriting. we’re calling it energy alpha, right? You have two sort of equal groups that are underwriting the same property. One is having a lens of just traditional value add, one is having a lens of value add plus energy. And nine times out of ten, the group that is factoring energy into their value add strategy is going to get higher return profiles than the other group. And so that may allow them to sharpen their pencil a little bit on the purchase price or give up certain certain concessions in you know due diligence or the PSA, but it’s just starting to happen, but I I do think it’s gonna get more more popular over time.

Dylan Silver (19:14)

We are coming up on time here, Owen. Any new projects that you’re working on? And then also anything you’d like to mention directly to our audience.

Owen Barrett (19:20)

I mean, we’re our growth is just exploding. We’re I think our like revenue is 10xing year over year as owners start to kind of see the value in in what we’re delivering. So that’s super exciting. So no particular project, I think just at large, like we’re pretty excited about what’s happening. and then yeah, just website is GetShine.com. There’s a contact form on there. We have a cool tool that owners can use to kind of estimate solar on their properties. It’s not perfect, but it it it’s pretty indicative. So yeah, feel free to reach out and and we’ll see if we can help.