Most retail tenants, restaurants and many hotel operators don’t own the roof they’d put solar on, and most landlords don’t pay the electric bills underneath it. Here’s how leased buildings get past that standoff in California.
Key takeaways
- In a leased building, the landlord owns the roof and the tenants pay the bills. About 52 percent of U.S. commercial space is leased, so this split incentive is the norm.
- California’s Virtual Net Billing lets a property owner install one system and assign shares of its export credits to individual tenant meters.
- Landlords and tenants can also write solar into a green lease, or a tenant with a long lease can install solar with the landlord’s consent.
- Restaurants and hotels use more power in the evening, so a battery that stores midday solar for the expensive hours adds value.
- Settle ownership, tax benefits, credit allocation, lease terms and the federal deadline before anyone signs.
Frequently asked questions
Can a commercial landlord install solar and share the savings with tenants?
Yes. Under California’s Virtual Net Billing, the owner of a multi-tenant property can install one solar system and assign percentages of its export credits to individual tenant meters on the same or contiguous parcels. SDG&E calls its version the Virtual Solar Billing Plan.
Who pays for solar on a leased commercial building?
It depends on the deal. Often the landlord owns the system, claims the federal tax benefits and recovers value through the lease. A tenant with a long lease and a single-tenant building can sometimes install solar directly with the landlord’s consent.
What is a green lease?
A green lease includes language that aligns landlord and tenant interests on energy improvements such as solar. The Institute for Market Transformation and the U.S. Department of Energy’s Better Buildings Alliance launched the Green Lease Leaders program in 2014 to promote it.
Is solar worth it for restaurants and hotels?
It can be, especially with a battery. Restaurants and hotels use much of their power in the evening, when the most expensive utility hours fall, so storing midday solar for those hours beats exporting it at low value under California’s current solar billing rules.
Can a landlord bill tenants directly for solar electricity?
That raises legal and utility-rule questions in California. Virtual Net Billing exists so most properties don’t have to go there, and anything more creative should go past your attorney first.
Solar on an owner-occupied building is simple: the owner pays for the system and the owner’s bill goes down. Leased commercial space is where it gets complicated. The landlord owns the roof. The tenants pay for the electricity. Each side looks at solar and sees the other side getting the benefit.
That standoff has a name, and California has a tool built for it.
The split incentive
The Institute for Market Transformation describes the split incentive simply: the cost of an improvement is borne by one party while the other experiences the benefit. In commercial real estate, that usually means a landlord would pay for solar while tenants enjoy the lower bills. IMT notes that about 52 percent of U.S. commercial space is leased, so this isn’t an edge case. It’s the norm for strip centers, multi-tenant retail and many restaurants and hotels.
Option 1: the landlord installs solar and shares the credits
California’s solar billing rules include Virtual Net Billing, adopted by the CPUC in decision D.23-11-068 for applications after February 14, 2024. It lets the owner of a multi-tenant property install one solar system and assign percentages of its export credits to individual tenant meters on the same or contiguous parcels.
In practice:
- The landlord owns the system, claims the federal tax benefits, and can recover value through the lease.
- The tenants see credits on their own utility bills, without anyone rewiring their meters.
- The utility handles the credit allocation.
SDG&E calls its version the Virtual Solar Billing Plan and lists office buildings among eligible properties. In SCE territory, Schedule NBT-V lets non-residential tenants stay on whatever rate fits their business.
Option 2: write it into the lease
How the landlord recovers the investment depends on the lease. In many triple-net leases, tenants already pay a share of operating costs, and some leases allow certain capital improvements to be passed through. Whether solar can be recovered that way depends entirely on the lease language, which is why landlords and tenants increasingly negotiate solar into the lease itself.
These are often called green leases. The Institute for Market Transformation and the U.S. Department of Energy’s Better Buildings Alliance launched the Green Lease Leaders program in 2014 to promote lease language that aligns landlord and tenant interests on energy improvements.
Option 3: the tenant installs solar
A tenant with a long lease and a single-tenant building, such as a freestanding restaurant or a hotel operator on a ground lease, can sometimes install solar directly with the landlord’s consent. The key is matching the system’s life to the lease: the lease term, renewal options and what happens to the system at the end all need to be settled before installation.
Restaurants and hotels use power differently
Retail stores use most of their power during business hours, which is why commercial solar for retail centers lines up so well with the sun. Restaurants and hotels skew later, and that shapes any restaurant or hotel solar installation:
- Restaurants run kitchens, refrigeration and HVAC through the dinner rush, well after peak solar production.
- Hotels carry overnight loads for rooms, laundry, pools and common areas.
Under California’s current solar billing rules, solar energy exported to the grid during the day earns less than energy used on site, and the most expensive utility hours fall in the late afternoon and evening. That’s why batteries matter more for evening-heavy businesses: they store midday solar and use it during the expensive hours instead of exporting it cheaply.
Supermarkets are a special case
Grocery stores combine long hours with refrigeration that never stops, which makes them strong solar and storage candidates even in leased centers. Large refrigeration loads also mean demand charges, which batteries can help shave.
Questions to settle before anyone signs
- Who owns the system, and who claims the federal tax benefits?
- How will credits or savings be allocated among tenants?
- Does the lease allow recovery of the investment, and how?
- What happens at lease renewal, sale of the property, or the end of the system’s life?
- Does the timeline meet the federal deadline? Commercial solar that begins construction after July 4, 2026 must be placed in service by December 31, 2027 to claim the credit, per IRS Notice 2025-42, and new rules restrict equipment sourced from certain foreign entities.
Some arrangements, like a landlord billing tenants directly for solar electricity, raise legal and utility-rule questions in California. Virtual Net Billing exists so most properties don’t have to go there, and anything more creative should go past your attorney first.
Make the numbers work for both sides
Whether you own a retail center or lease space in one, Stellar Solar can model how a system would perform, how credits would flow to tenants, and what each side stands to gain. Stellar Solar has engineered and installed commercial solar, carports and storage across Southern California since 1998, A+ rated with the BBB and a repeat winner of San Diego’s Best Solar in the Union-Tribune Readers Poll. Call 866.787.6527 for a free commercial evaluation, or visit stellarsolarcommercial.com.
Sources & further reading
Virtual Net Billing & rates
- CPUC: Net Billing Tariff revisit and Virtual Net Billing
- SDG&E Virtual Solar Billing Plan
- SCE Schedule NBT-V
Leasing & tax
- Institute for Market Transformation: green leasing and the split incentive
- Green Lease Leaders
- IRS Notice 2025-42: beginning of construction
Stellar Solar credibility