Multifamily developers face tremendous challenges in the current market. With elevated interest rates, limited capital availability, rising construction costs and increased energy regulations, there are many ways that multifamily developments can stall before they even start.

To make the financial equation of a project work, multifamily developers must think outside of the box. One creative way developers and owners alike can proactively respond to both rising costs and increased regulation is through the utilization of a triple net energy lease. Through a triple net energy lease, multifamily developers can lower development costs, comply with energy regulations and enhance cash flow after the property’s delivery.

Here is a closer look at triple net energy leases, how they work and why developers should consider utilizing one on their next multifamily project.

What is a triple net lease?

A triple net lease (NNN) is a type of lease structure where the tenant, rather than the operator or property owner, is responsible for all property expenses on the space they are renting, including the buildout, property taxes, insurance, maintenance and repairs. The lease structure is common for retail and industrial tenants, but it may be unfamiliar for many multifamily owners and operators. In the multifamily sector, residents typically operate on a full-service lease, in which the owner covers all expenses and collects one rent payment each month.

A multifamily developer might typically explore a triple net lease structure to add retail tenants to the ground floor of a multifamily property, though retail tenants can introduce risk to the property through increased vacancy and added tenant maintenance. There is another option rising in popularity with NNN leases: energy tenants.

Much like a retail tenant, many clean energy service providers also operate on a triple net lease. Energy infrastructure and capital companies like PearlX, alongside solar power providers and EV charging companies, are the most common energy lease tenants. In a NNN lease model with PearlX for example, PearlX would pay for the installation of the energy infrastructure, utilities, all property expenses and monthly rent. While this model is most often seen with retail tenants, by partnering with an PearlX through a NNN lease, there is less risk than with a typical retail tenant, since the energy infrastructure is installed on otherwise unoccupied space on a property (such as the roof of the building or carport), and PearlX covers the upkeep, meaning that added tenant maintenance doesn’t show up on the owner’s balance sheet.

A shortcut to regulatory compliance

Climate regulations are intensifying, and developers are on the front lines of compliance. As government agencies at both the state and federal level implement new regulations in an effort to combat climate change, developers are often among the first required to comply to these new, and often daunting, laws. California’s Title 24 sets ambitious energy efficiency standards for California’s building code for multifamily properties, including the incorporation of solar power and battery infrastructure for all new residential developments; an example of the type of regulation that is being adopted by states across the country. Although sustainable building practices are important and necessary, they can also be intimidating and expensive, creating an additional burden for developers. Triple net energy leases simplify compliance.

First, the energy provider pays for the installation of the energy infrastructure. A solar installation costs upwards of $2.5 million, so this is an immediate cost savings for multifamily developers, owners and operators. Additionally, owners engaging in a triple-net energy lease get a trusted energy partner to manage the system and regulatory nuances, giving the management team back valuable time to focus on operating the property itself. A triple-net energy lease can help ensure the property is compliant with all federal and local regulations with little burden on the owner.

A solution to stagnant cash flow

Multifamily owners rely on high occupancy and increasing rents—but with the increased cost of capital and operating costs on the rise, the current market isn’t providing the same cash flow they have enjoyed for the last decade. This combined with slowing or declining rent growth in many markets across the country has resulted in significant volatility, even with a housing shortage. While rent growth is averaging .9% year-over-year nationally, according to data from Yardi Matrix, operating expenses are growing at more than 7% annually. Multifamily owners are having trouble keeping up, and NNN leases can help.

As developers establish proforma rents when underwriting a new project, stagnant cashflow can significantly impact the viability of a project. A triple net energy lease provides an opportunity to unlock additional monthly income and boost NOI. A PearlX solar lease can generate several hundred thousand dollars annually in revenue, and that figure can go a long way to helping solidify strong cashflow for the property, even as rent growth slows. In addition, triple net energy leases have a 30-year term, securing long-term cash flow for the property as business cycles ebb and flow.

When should a developer sign a NNN?

When partnering with a stable, reputable energy partner that’s well capitalized and able to perform, a triple net energy lease can be a great solution to many challenges multifamily developers face in the current market. To make the deal worthwhile, the NNN lease holder must be able to seamlessly install and conduct ongoing maintenance on its energy assets. For example, PearlX handles all the installation and long-term maintenance on the solar panels it installs at multifamily properties, which means that the owners and developers of those buildings don’t need to worry about shouldering the cost or the responsibility of upkeep on those assets.

As the country faces a housing shortage of at least 3.5 million units, multifamily developers will need to produce a minimum of 1.8 million units annually for the next 10 years—a volume that is significantly above the historic average of 1.1 million units produced annually, according to analysis from Kingbird Investment Management. This will take commitment from both the public and private sector but there are significant challenges to bringing new housing to the market, including a more stringent regulatory environment, construction labor shortage, rising materials costs and the increased cost of capital.

Triple net energy leases help developers bridge gaps and push projects forward. It is a simple solution to a big problem. It really is that easy.