Solar for real estate: How real estate companies benefit from photovoltaics

Did you know that there is huge solar potential on Germany's roofs? According to estimates by real estate developer Garbe, 30 billion kilowatt hours of solar power could be produced every year on German industrial and commercial roofs with an area of more than 5,000 square meters alone¹: enough to supply 10 million German households with solar power. However, only 10 percent of suitable company roofs are currently used for solar. One reason for this is that real estate funds in Germany manage a large number of suitable properties. And for them, investing in a solar system is not worthwhile in many cases due to tax hurdles. Does this sound familiar to you? Are your roof areas still empty as well? How can real estate companies benefit from photovoltaics? In this article, we would like to briefly outline the solutions.

In this article, we focus on the challenges faced by real estate funds and companies when integrating photovoltaic systems on existing roofs, while also highlighting opportunities for overcoming these hurdles. We explain the relevant regulatory requirements that apply to real estate funds and real estate investment trusts (REITs) and classify the extent to which real estate players can benefit from long-term tax advantages through solar projects. Finally, we take a look at the forthcoming “Future Financing Act 2” (ZuFinG 2), which could create groundbreaking framework conditions to make investments in renewable energies even more attractive and economically sustainable for institutional investors.

Real estate funds often structure their properties in so-called property holdings that are exclusively dedicated to asset management activities. These activities include, in particular, income from the letting and leasing of properties. This form of management is tax-privileged: Commercial tax is not applicable. The crux of the matter, however, is that if the company installs a solar system on the managed property, it is actively managing it. This is because selling the electricity generated to tenants or feeding it into the public grid is considered a commercial activity. This income is therefore subject to commercial tax. But that's not all: all other income, including the original asset management activities, is then also subject to commercial tax, resulting in significant tax disadvantages for the real estate fund.²

At the same time, the pressure on the real estate industry to switch to solar power is increasing. More and more federal states are introducing a solar obligation. Also on federal level, mandatory solar systems for new buildings are on the horizon. Sooner or later, there will be no getting around a solar system.

There are now solutions that help real estate funds to avoid commercial tax and at the same time promote sustainable projects. One of these alternatives is the so-called Sale and Lease Back solar concept. With the help of this model, PV systems are installed on commercial properties without this being classed as a commercial activity. As a result, the real estate fund remains active as an asset manager and benefits from the corresponding tax advantages.

With the Sale and Lease Back model, the property owner purchases a turnkey PV system. After commissioning, the property owner leases the solar system to a solar company for a long period of up to 30 years. This company takes over all management tasks, such as electricity sales as well as the technical and commercial management. This means that although the real estate fund is the owner, it does not carry out any active management itself and therefore continues to act only as an asset manager. This avoids any tax disadvantages.

The advantages of the Sale and Lease Back solar concept summarized:

• Ownership remains with the real estate fund

• No active management required

• Asset management activity is retained

• No tax disadvantages

The use of PV in real estate not only benefits real estate funds themselves, but also the tenants of the respective buildings, who thus gain access to cost-effective solar energy. In addition, real estate funds can contribute to the green transformation and at the same time strengthen their sustainable image and achieve a better ESG rating for their properties - a win-win situation for everyone involved.

The German government is aware of the tax challenges facing real estate funds and has been working on a solution for some time. Originally, the Future Financing Act was intended to address the commercial tax implications of operating solar installations by the end of 2023. However, despite broad political support, the corresponding passage was deleted at short notice.³ The real estate industry then hoped for the 2024 Annual Tax Act, but this draft does not tackle the changes either. Hopes are now pinned on the Future Financing Act 2.

The aim of the law is to mobilize more capital for the financing of renewable energies. The draft bill presented by the Federal Ministry of Finance is promising: an amendment to the German Capital Investment Code is intended to clear up uncertainties and eliminate tax disadvantages for real estate funds when operating renewable energy plants. ⁴

But there is still a long way to go until then. The Future Financing Act is currently at the beginning of the parliamentary process. The law is currently being discussed by associations and the federal states (as of 11/2024). In the next step, the law will be discussed in the Bundestag. It remains unclear whether the passage will be implemented this time. Until then, companies can in any case fall back on risk-free models such as sale and lease back and thus already contribute to the energy transition with solar.

For many years, a solar installation could lead to considerable additional tax burdens for real estate funds. As a result, many companies have shied away from switching to solar power. However, real estate companies can already benefit from a PV system today with sale and lease back, legally secure and without tax risks.

The principle is simple: real estate funds buy a solar installation and lease it to a solar company on a long-term basis, which takes care of the management. This means that the fund continues to act as an asset manager and there is no commercial tax liability. In addition, the legislator plans to make it easier for real estate funds to operate solar installations with the Future Financing Act 2. The risk of tax disadvantages in this scenario could even be completely eliminated under certain circumstances. This means that the time to switch to solar power has never been better.

Would you like to find out more about how real estate funds can benefit from solar power? Our experts will be happy to advise you and answer your questions about sale and lease back and the upcoming legal changes. This will keep you on the safe side in the future, supply tenants with cost-effective electricity and make a contribution to the energy transition at the same time.