PACE Talks

PACE Talk: Renew Financial + Solar City

Nation’s Most Affordable Solar Power Option for Small and Medium Businesses

August 21, 2015

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Kristina Klimovich of PACENow talks to Brad Copithorne, Vice President of Commercial PACE Programs at Renew Financial.

Kristina Klimovich: Brad, Renew Financial’s recent announcement of partnership with SolarCity is a very exciting development for small and medium sized commercial businesses.

Brad Copithorne: Thanks, Kristina. We are anticipating an eventful year at Renew Financial. This partnership with SolarCity will allow small and medium-sized businesses to take advantage of low-cost PACE financing in all communities that are part of the CaliforniaFIRST PACE program.

KK: Can you tell me more about this structure? As far as I understand, SolarCity provides the upfront funding, while CaliforniaFIRST offers a PACE-based collection and repayment mechanism?

BC: That is exactly right.  SolarCity has been looking for a solution in the SMB market for quite a while, but has had difficulty evaluating the credit of most commercial properties.  For the residential market, each homeowner has a FICO score and their credit can be quickly and cheaply evaluated.  For the Fortune 500 companies, the rating agencies monitor corporate credit. But for the rest of the commercial market – and that represents the vast majority of commercial properties – there is no simple solution.  Using PACE, however, SolarCity can rely on the property tax collection process and can therefore treat most small businesses the same as large investment-grade corporations.

Several PACE programs have offered solar PACE Lease and PPA options. Combining the security and repayment mechanism that lies at the basis of PACE financing with Lease and PPA seems to be very attractive to non-profits and small commercial property owners who do not want to own the asset outright or cannot qualify for other types of financing.

KK: Who will originate these projects and what does the business owner need to know?

BC: SolarCity is a vertically integrated company and they control all aspects of project origination and development. The key is to simplify with experience for everyone through standardized market documents. A local business, in this case, would enter into a lease or PPA agreement with SolarCity and would sign an assessment contract with CaliforniaFIRST to collect and remit the PACE assessment payment.

KK: What is your estimate of potential volume of projects that can result from offering this structure in California?

I think the impact could be significant.  Currently, most of the commercial solar market is limited to buildings owned or fully occupied by government or by very large, highly rated corporations.  When I drive around the state these types of properties seem to cover only a very small fraction of the buildings that I see.

SolarCity (and PACE leases in general) offer property owners the opportunity to lock in utility rates well below today’s level AND have the rates basically fixed for 20 years.  (Usually about a 0.5% annual increase, which is well below the likely rate increases for utility service.)  All this, and they do the right thing for the planet.

I would be surprised if the commercial solar market does not at least double in California in 2016 due to PACE and the opportunity for small and medium businesses to finally participate.

KK: How would you explain Solar City/PACE structure to a typical small business owner with sufficient roof space?

BC: This solution is very similar to the solution offered to WalMart or any other big company. The primary difference is that customer pays their solar payments as an assessment on their property tax bill. This makes investors more comfortable that they will be paid and that the payments will survive any change in ownership, which allows more credits to qualify at lower implied rates.

Would you rather pay the utility a high, rising rate for traditional power or generate your own clean power at a much lower, fixed cost? Seems like an easy choice to me.

 

KK: What types of projects will SolarCity focus on?

BC: My understanding is that they plan to work with a very wide range of small and medium businesses throughout California, including REIT-owned buildings, small owner-occupied businesses, multi-tenant properties, etc.

KK: Where is this solar financing option available? (I assume throughout CaliforniaFIRST territory?)

BC: The SolarCity PACE option is currently available in every community that has opted into CaliforniaFIRST. (You can see a list here.) We have a political team that is working closely with additional communities in California to get them to opt in to the program.  In California, most communities choose to opt in to multiple PACE programs to create competition and choice for contractors and building owners.  There is no cost or commitment for a community to opt in to CaliforniaFIRST or other programs. Together we provide local businesses with an easy option to access low-cost capital to go solar!  In the coming months we expect to work with SolarCity to expand to additional states.

KK: Thanks, Brad!

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Kristina KlimovichPACE Talk: Renew Financial + Solar City

The Power of PACE: Unlocking the Small Commercial Sector

small commercial

It does not come as a surprise that small commercial buildings (less than 50,000 square feet) comprise the vast majority of all building stock in the U.S., both by number and square footage. In fact, 94% of all buildings are classified as small commercial and all together they consume 47% of energy in the building sector, according to Preservation GreenLab and New Building Institute. While the opportunity for the energy efficiency and renewable energy market is enormous, investments in making the small commercial sector more sustainable lag behind.[1]

As the commercial PACE market grows and matures, project size trends upward. In 2015 alone, more than half of all completed projects was larger than $500,000 and most projects involved buildings larger than 50,000 square feet. Many programs across the country prefer to finance larger projects. Some go as far as setting the effective minimum project size at $250,000.  Let’s backtrack to 2010, when the commercial PACE market was just beginning to expand and programs, in Sonoma County, Palm Desert, Boulder, CO, and a few others, were successfully marketing PACE to the so-called “main street” businesses. Projects ranged from $2,000 to $400,000 (with an exception of 2 projects larger than $1.5M). Over the last five years, project size has grown as programs have learned that commercial PACE projects can involve significant transaction costs. These generally include legal fees, programmatic fees, project developer, and financing services provider fees. Overall, a PACE project should make good business sense to a property owner, which generally means that after fees and interest rate calculations, a building owner expects to save or make money. Therefore, creating a streamlined approval and underwriting process that would keep the various fees under control is imperative to continue making PACE funded projects appealing to small commercial property owners.

In fact, several programs from New York to California are making small commercial projects possible through aggregation, which minimizes legal fees, by having a dedicated funding source, and a streamlined underwriting process. For instance, Energize NY Finance recently completed a $70,000 solar project on a cheese-making farm in the Hudson Valley. The program has a warehouse line of funding available on demand and sourced the project directly. The City of Ann Arbor aggregated four small projects into a single $500,000 bond which was privately placed with Ann Arbor State Bank. In California, Figtree Financing continues to grow its portfolio of completed small to medium commercial projects ranging from $20,000 to $1.5M. To date, the Program has funded more than 30 projects across northern and southern California, which include improvements to private universities, offices, industrial buildings, golf courses, healthcare facilities and houses of worship.

Today, I’m talking to Ryan Ahearn, Vice President of Marketing at Figtree Financing.

KK: Ryan, Figtree is clearly filling a key gap in small to medium commercial PACE financing. What is it that you are doing right?

RA: There are several things that Figtree has in place to unlock the small commercial market:

  • Dedicated capital

Dedicated capital is critical for financing small projects. First and foremost the dedicated capital streamlines paperwork and provides uniform underwriting for both small and large projects. Ultimately this makes our operations more efficient and able to support any size project. The Federal Reserve Bank of New York finds that small business borrowers often spend almost 25 hours of their time on paperwork for bank loans and approach multiple banks during the application process.[2] We are committed to a financing process that makes it easier on small and medium businesses to get capital for money saving energy and water property upgrades.

With our streamlined process and underwriting, the committed capital allows for easy grouping of small projects, as small as $5,000. It also provides the flexibility to quote terms and pricing for small projects. All of this stems from a uniform capital and legal infrastructure to bring an efficient and easy backend to enable small projects.

Our uniform underwriting and small project flexibility ultimately translates into broad availability for a variety of business types:  franchise hotels, gas stations, restaurants, houses of worship, and other small commercial properties that often rely on specialty lenders or may have difficulties accessing other types of financing.

  • Efficient sales cycle

Commercial projects can take a while to develop. It’s very critical to find the right financing early on to make sure the project can be executed. Figtree Financing has made it easy to quickly identify if PACE financing is a good fit for the property early in the sales cycle; we provide quick turnaround on pricing and project analysis. We recognize that contractors, installers, and finance companies all need to be efficient and it’s not possible to dedicate the same number of hours to a $50,000 project as to a $1,000,000 project. As a result more often than not, smaller projects are being ignored in the marketplace. However, we are able to service this market segment efficiently.

KK: Ryan, is it possible to compare a PACE project approval process with a small business loan process? I would imagine that banks are facing similar constraints when it comes to traditional small loans.

RA: That is true. Historically, it’s been challenging for a traditional bank to finance projects that are less than $250,000. The underwriting costs for banks are high relative to the loan sizes and the process is still a lengthy one. Plus, traditional small business loans can be riskier than PACE financing. The small commercial market is underserved, not just in energy financing. We recognize that and have created a program that makes PACE financing an attractive solution for small businesses even for projects less than $250,000 by having reasonable interest rates and fees that scale with project size. In addition, PACE funded projects do not require a personal guarantee, automatic loan payments from bank accounts, or other restrictions that can make lending difficult for customers in this market. Personal guarantees and heavy debt payments can lead to projects being stalled. Property owners have to ask themselves if they want to take on a long term payback project with a personal guarantee and additional debt burden. This can derail even the best of projects. As a result PACE can step in and offer a no personal guarantee option that can alleviate these concerns and keep the focus on projects that are cash flow positive and make money for business owners.

 

KK: It is my sense that the majority of recent projects completed by Figtree were solar. Is that right? If so, what is so attractive about PACE that these property owners can’t get through other forms of financing?

RA: Recently we have completed a number of solar projects, which reflects a growing demand for commercial solar motivated by the expiration of tax credits and increasing utility rates. There are very few programs that allow long-term financing for energy upgrades to properties, which makes 20-year fixed-interest PACE financing extremely unique in the commercial market. PACE financing allows the energy savings to offset the payments, creating projects that are cash flow positive from day one through year 20. This is attractive to small businesses for which large debt payments can cause uncertainty and stress. An additional feature that makes PACE financed solar deals attractive is the option to monetize tax credits and depreciation. Combine that with the energy savings offsetting the financing payments and you have a project that’s a must do for property owners.

Figtree has also recently introduced a Prepaid PPA with PACE Financing. This product allows us to bring in a third party to monetize tax credits on behalf of the business. This can be helpful for non-profits, but also small businesses that don’t have certainty of income to plan for tax credits or may not have huge tax liabilities. This new product is going to expand the market for small commercial PACE financing even further.

KK: Ryan, transaction costs have been a challenge as these may involve bond counsel fees and third party fees. Can you tell me a bit more about Figtree’s model and how you overcame this obstacle?

RA: Our fees are percentage based as opposed to fixed fees, and they scale with project size.  As a result Figtree makes smaller projects possible. In addition, we aggregate small projects to minimize overall burden on a single project. Project aggregation can be challenging when a program is just getting started, but with a standardized statewide legal and cost infrastructure we have been able to overcome this obstacle. The standardization is key to make it possible to keep multiple projects on the same timeline. If the program is not standardized simple details like moving a closing date or funding the project are not able to happen quickly and efficiently. With volume and steady project flow, the timelines are smoothed out. In our experience, a program needs to reach only a modest amount of volume to start making project aggregation efficient.

KK: Who can take advantage of Figtree’s financing?

RA: Figtree Commercial PACE Financing is available to all private commercial properties statewide in California. This includes non-profits, hotels, industrial, multi-family, and commercial properties. PACE is a great vehicle for a variety of property owners. PACE is a long term financing option at very reasonable rates, allowing energy projects to be cash flow positive. As a result it’s a very elegant product that is potentially off balance sheet with no personal guarantees. Small or large we recommend that every commercial property owner look at PACE Financing before moving forward.

[1] https://www.nibs.org/news/209198/Small-Commercial-Buildings-Offer-Huge-Energy-Efficiency-Retrofit-Opportunities.htm

[2] (Federal Reserve Bank of New York. “Fall 2013 Small Business Credit Survey”, September 2013)

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Kristina KlimovichThe Power of PACE: Unlocking the Small Commercial Sector

PACE Talk: Virginia is ready to tap into the power of PACE

Virginia Governor McAuliffe signing the PACE bill. Image credit:Ken Rosenfeld of  Virginia Energy Efficiency Council. 

May 15, 2015

Kristina Klimovich of PACENow talks to Bill Greenleaf, Virginia Community Capital and Abby Johnson, Abacus Property Solutions LLC.

Kristina Klimovich: Thank you both for taking part in this PACE Talk focusing on the recent successful legislative effort in VA. Abby and Bill, can you provide some background on how we got here?

Bill Greenleaf: It started out as a simple effort to build a business coalition to hire a lobbyist to make the business case to legislators to correct Virginia’s flawed PACE legislation.  But the process itself was not simple, it was rather difficult and uncertain as it required convincing companies to fund a lobbyist, overcoming opposition from bankers and persuading legislators to support PACE.  We would not have succeeded without engaging an exceptionally talented lobbyist, Preston Bryant of McGuire Woods Consulting LLC.

Abby Johnson: I’ve been involved in the PACE market for a number of years and I live in Virginia, so I always wanted to see an active PACE program in the state. I took part in the effort to amend the Virginia existing PACE law in 2014. The effort failed, so since then I was eager to find a way to make PACE happen in VA. In 2014, Cynthia Adams with the Local Energy Alliance Program (LEAP) bridged me to Bill Greenleaf, who was already deeply involved in amending PACE legislation. Bill and I have been working closely together ever since.

KKBill, what was wrong with PACE legislation in VA?

BG: The existing VA PACE law, which was passed in 2009, law did not allow for the PACE loan to have senior lien status equal to a tax lien.  One of the unintended consequences of Virginia’s flawed 2009 PACE law was that it permitted a municipal utility to offer on-bill financing.  I was involved in efforts to pass this legislation in 2011 and again in 2014, but both of those efforts failed.   After learning that PACE was passed in three conservative states, Texas, Arkansas and Utah, I decided to try again in 2015.  We succeeded in correcting the PACE law but only because we had a business coalition and a lobbyist who developed a strategic approach to legislative success.

KK: Bill, we were introduced nearly a year ago, when you began building a coalition in support of the bill. What was this process like? Can you share some insights and lessons learned? 

BG: Building the business coalition was extremely challenging and time-consuming. First, not many companies were familiar with PACE or truly understood how it would benefit them.  It often took 4 to 8 weeks to secure a phone call with the appropriate person at a company or trade association to pitch them on joining the PACE coalition.  I had the most success with national energy service companies that had experienced positive benefits from PACE programs in other states and I had the least success with Virginia based organizations. While 30 companies joined the PACE coalition only a handful of companies actually funded the lobbying effort.  Many companies viewed PACE an abstract concept and could not visualize how it would benefit them economically.

KK:Abby, in your opinion, what made this process a success?

AJ: Lobbying was essential. In Virginia, we have a heavily Republican legislature, therefore it was important that PACE was viewed as a private sector initiative. We hired Preston Bryant Jr. of McGuire Woods Consulting LLC, who was a legislator for several years and he was able to identify the sponsors and shepherded the bill through the committees. As a result, the bill passed very easily and with limited opposition. Also, the support of Larry Cummings of Trane and the Virginia Energy Efficiency Council was critical.

KK: What major opposition did you encounter and how did you work around it? 

BG: The only known opposition in the beginning was the Virginia Bankers Association. We were able to overcome their opposition by working with them to write legislation. The VBA took a neutral position on the legislation which was the best we were going to get.   The VBA was open to working with us this time because PACE legislation passed in 30 states and passed in Texas with the support of the Texas Bankers Association. We also were able to secure a PACE support letter from one of their member banks which was very beneficial.  We are very grateful to the staff of the Virginia Bankers Association for their willingness to sit down with us and negotiate legislation that works for both parties.

AJ: In fact, in order to get the sponsors for the bill we had to make sure that the VBA was neutral. We worked closely with the Southern Environmental Law Center, who pro bono helped us draft the legislation, which we shared with the VBA throughout the process.

KK: Abby and Bill, looking forward, what are some of the next steps to make PACE available to commercial property owners in VA? Who will take lead on putting a program in place and which jurisdictions are first to join?

BG: This summer we will be conducting PACE implementation planning for the most cost-effective way to launch PACE in Virginia. We are not expecting many localities to voluntarily start their own PACE programs and we are not expecting the Commonwealth of Virginia to fund a statewide PACE program similar to Connecticut.   We know a few localities are interested in developing PACE programs but I am not free to name those yet.

AJ: The bill explicitly calls for the stakeholder coalition to devise an implementation plan by the end of 2015. So we will be working on bringing the coalition together consisting of: VBA, VA Municipal League, VA Association of league of  of Counties, VA Association of Realtors, VA chambers of commerce, private sector project developers, ESCOs, engineers, law firms, and lenders.

KK: Abby, the process you are describing sounds similar to Texas’ PACE in a Box. Will there be VA in a box?

AJ: The PACE in a Box process in Texas was very useful. In Virginia, since we have to have the underwriting guidelines defined by the end of the year, we will strive to make it an accelerated PACE in a Box process! As Bill noted, there are no resources or bandwidth for a state agency-led effort. However, since VA is so tied to Maryland and D.C. there are some discussions about putting in place cohesive marketing for the private sector in all three jurisdictions.

Ultimately, the stakeholder coalition will help determine which PACE model is best for Virginia. We are calling out to anyone in VA who wants to join us and participate!

KK: Thank you both! Please reach out to Bill or Abby if you would like to join the stakeholder coalition!

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Kristina KlimovichPACE Talk: Virginia is ready to tap into the power of PACE

PACE Talk: PACE Power Purchase Agreements (PPA) Is a Game Changer for Connecticut and Beyond

Kristina Klimovich of PACENow talks to Bert Hunter, the Connecticut Green Bank’s Executive Vice President and Chief Investment Officer and Ben Healey, the Connecticut Green Bank’s Assistant Director, Clean Energy Finance.

Kristina Klimovich: Bert and Ben, thank you for joining me today to talk about the PACE PPA product developed by the Connecticut Green Bank. Let’s start with a brief introduction and a general overview of the C-PACE program.

Ben Healey: Thanks, Kristina. Bert is our Chief Investment Officer, leading the finance function for the Green Bank, and I am an Assistant Director on our Clean Energy Finance team. We both joined the organization as the C-PACE program, under Jessica Bailey’s leadership, was getting off the ground in 2012. The program has been very successful, and since its launch over $70 million worth of energy efficiency and renewable energy (EE/RE) projects have been approved. The majority of these projects have already been closed and are either complete or in construction now. On the financing side, the Green Bank provided the initial warehouse capital for the program, and then accessed the private capital markets for the first time last year, via a $30 million securitization that closed in May 2014. CT’s C-PACE program continues to be driven by private capital and will use other private capital sources to continue originating deals.

Kristina Klimovich: Ben, how does the PPA structure fit within the C-PACE program?

Ben Healey: Under Bert’s leadership, the Green Bank team put together a solar tax equity fund –CT Solar Lease 2, which is a follow-on program to the original CT Solar LeaseTM, a residential tax equity fund that our predecessor organization, the Connecticut Clean Energy Fund, ran from 2008 through 2011. For CT Solar Lease 2, we worked with a leading national tax equity partner and brought in a cohort of regional banks, led by First Niagara Financial Group, to provide debt to the facility. Today, CT Solar Lease 2 is open to commercial, municipal and non-profit clients for small to medium (< 1 MW) solar projects.  What is special about this fund is that the Green Bank received approval to finance otherwise non-creditworthy projects by making use of a C-PACE benefit assessment lien as a credit enhancing, thus providing investors with the security they need. Now we can serve the mid–tier commercial and non-profit market in Connecticut and offer lease and PPA products to properties that couldn’t access this type of financing before. We have seen a lot of initial uptake.

Kristina Klimovich: Thanks, Ben. Sounds like Connecticut is leading the way on the PACE PPA front.

Bert Hunter: We consider this development nothing short of a game changer. The commercial solar PV sector is a challenging space. Now with a PACE PPA option on the table, we have really opened up a totally new market segment. It is important that the tax equity provider and the lending banks understood the concept and followed the Green Bank’s leadership. Our purpose is to innovate and to continue demonstrating what can be done to take advantage of this market.

KK: I like the concept of opening up a new market. Is there an asset class that is a natural fit for PACE PPAs?

Ben Healey: My guess would have been that a PACE PPA would have been a natural fit for non-profit entities, and it is, but I’m surprised and pleased to see a number of commercial and industrial clients using the structure as well. On the non-profit side, we have some great examples, such as the JCC of Greater New Haven, which is doing 750 KW carport project in their parking lot. This is a community institution that existed for decades and has already done some EE work on its building and was looking for ways to finance a solar project. Annual PACE PPA payments will be below what the JCC is paying for utility costs. The same is true about the Waterbury Boys and Girls project – their electric bill savings should reach nearly 60% as a result of the PACE PPA rate and the state’s ZREC program (a Renewable Energy Certificate purchase program from the local utility company). The Boys and Girls Club is undertaking a 111 KW project that will produce 130,000 KWh a year. Waterbury CT is a distressed community and the Club is serving low and moderate income population. So, it is both an economic story and a community story around going green. These projects show that entities that otherwise would not be able to pay for solar PV, now have access to a well-understood tool – the solar PPA.

As for the business entities, in Bloomfield CT, a manufacturing facility is undertaking a 1 megawatt sized project, which is in the final stages of closing. It is an energy hungry consumer that doesn’t want to tie up its resources with owning the asset and doesn’t want to deal with the tax complications. This family-owned business found a PACE PPA option very attractive.

Kristina Klimovich: Is the PPA structure specifically enabled in the Connecticut PACE statute? If not, how did you go around it to set this program up and what would be your advice for those states that are now in the midst of a legislative effort?

Ben Healey:  In Connecticut, our statute doesn’t directly address the PPA structure, but at the same time there is no preclusion. CT’s PACE statute states that eligible improvements must be permanently fixed to the property, so, in consultation with our legal team, we interpreted that legislation to come up with a programmatic solution, such that a contract of a certain minimum length (in our case, 15 years) with a buy-out provision, would fit the statutory intent. For states that are in the process of putting their PACE laws in place, it is important to make sure that the door is open for PPAs and there is no explicit preclusion.

Bert Hunter: In fact, it would be better to include PACE PPA language in the statute because that would allow for a more flexible lease term, as opposed to 15 years that was deemed appropriate by our legal department.

Kristina Klimovich: Ben and Bert, can you explain how PACE PPA is different from a typical PPA agreement? What are the advantages for the owners and investors?

Ben Healey: It isn’t that complicated –the agreement is a property level agreement like a traditional C-PACE structure, but instead of paying back your C-PACE debt financing, a building owner is simply making PPA payments through municipal property taxes. In other words, building owners are paying their energy costs directly to a municipality. From the perspective of the owner of the system, PACE PPA is very similar to PPAs offered by the national solar companies (e.g. Solar City, Sun Run, etc.). The difference is that PACE PPA has to have a term of at least 15 years and a buy-out provision (both of which are standard in the industry already), and the repayment has to be done through property taxes. From the investor point of view, PACE PPA payments are a senior benefit assessment lien on the property, and in the event of a default, the remedies are much stronger compared to a typical PPA.  And, as you know, should ownership of the property change, the new owner inherits the solar PV benefits and the PPA payment obligation though our PACE program.  Overall, linking PPA and PACE world together can revolutionize and open up a new segment of the market.

Burt Hunter: I echo that, we want to emphasize that C-PACE is a security and a collection mechanism. We are using the power of C-PACE to open up the capital markets.

Kristina Klimovich: Are PACE PPAs applicable to solar projects only?

Ben Healey: No, in fact, we see the possibilities outside of the solar context. PPAs could be applied to finance fuel cells, CHPs, and other non-solar improvements.

Kristina Klimovich: Who is marketing this program to building owners?

Ben Healey: We focus on our partnerships with local and regional installers to “sell” the mechanism to building owners. We found that 10 reliable installer partners are using PACE PPA as one of their primary selling tools. This mechanism helped them make sales that were practically impossible before. We stand behind the installers as a trusted state actor and assist with all the necessary documentation.

Kristina Klimovich: In other words, PACE helps solar installers to get more deals done?

Benn Healey: Absolutely. Outside of the PACE PPA structure these installers wouldn’t be selling to the customers who can’t pay for these deals out of pocket and for one reason or another either couldn’t or wouldn’t benefit most from owning these systems outright

Kristina Klimovich: Are there any specific training sessions?

Ben Healey: We did a special webinar when we launched the program, which we’re happy to share (along with all of our template documentation), and we now walk new contractor partners through on a one-on-one basis. It is a specialized training, and we don’t include it as part of the basic, more general C-PACE training we do.

Kristina Klimovich: I want to touch upon the applicability outside Connecticut.

Ben Healey: In CA and FL there seems to be a lot of opportunity. The recent addition to the CA statute (AB 1883) will allow PPAs to be implemented in the state. If you are already in the environment where third party ownership is allowed and you are thinking of enabling PACE financing, adding a PPA option is a low lift that can create a huge return.

KK: Thanks for taking the time to talk to me! I think the Connecticut story can be an inspiration for the rest of the country!

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Kristina KlimovichPACE Talk: PACE Power Purchase Agreements (PPA) Is a Game Changer for Connecticut and Beyond

PACE Talk: Missouri Clean Energy District Completed Its First PACE Financing: A Closer Look at the $670,000 Wornall Plaza Project

Kristina Klimovich of PACENow talks to Matt Hunt and Michael Cox, VP and CFO of BluePath Finance, David Pickerill, CEO and founder of Missouri Clean Energy Funding, and Jeff Flathman, Co-founder and president of Energy Solutions Professionals.

 

    

 

 

Kristina Klimovich: First off, congratulations on completing a sizable PACE project in Kansas City! Jeff, can you tell us the origination and development story behind this project?

Jeff Flathman: Energy Solutions Professionals or ESP is an energy services company based in the Kansas City area, and we help clients address energy saving opportunities and critical infrastructure needs in a budget-neutral manner. We have worked on energy related projects on several properties managed by Signature Property Management, an Overland Park, KS based real estate management company, that oversees a significant number of condos and apartment complexes. This time they asked us to look at the Wornall Plaza Condominiums. We completed an energy audit and evaluation and developed a feasible project.

 

Wornall Plaza

 

Generally, to undertake an energy project on a condominium building, the owner would have to raise the money for an upgrade from the condo owners. In this case, however, the energy savings are creating a payment stream to cover the equipment upgrades. PACE financing was a key factor that allowed this project move forward.

 

KK: Jeff, what was the project scope?

 

JF: This $670,000 project consists of a variety of conservation measures, including low-wattage LED and fluorescent lighting, heating and air conditioning upgrades, and enhanced building controls. To give you an example, in the winter the temperatures in the garage reached 85F. Now the building has new controls, which would prevent overheating and energy waste. The primary goal for the building owner was to replace the original 1960s boilers that required repairs. These old boilers were replaced with three highly efficient boilers that use 60% less gas. As a result, residents are more comfortable and the building is saving energy and money.

 

KK: This is a great example of a win-win situation! Jeff, how did you learn about PACE financing?

 

JF: We already had a working relationship with BluePath Finance and have completed projects with them in Kansas City, MO and outside. After a conversation with the BluePath Finance team we decided to pursue PACE, which resulted in a project with a positive cash flow that motivated the owners to move forward.

 

KK: Michael, can you shed some light on the project financing?

 

Michael Cox: Like many commercial energy efficiency and distributed renewable generation projects, the Wornall project had a 10-yr+ simple payback.  Standard commercial financing terms are in the 5-10 year range, which wouldn’t result in a cash flowing project.  The PACE structure allowed BluePath to stretch the financing term resulting in an expected immediate positive cash flow savings to Wornall.  This transaction was structured as a loan between the Missouri Clean Energy District and Wornall financed through a District bond issuance purchased by BluePath Finance.

 

Also, the Missouri PACE program had an allocation of QECB (qualified energy conservation bond) tax credits, which BluePath utilized to decrease the cost of financing for the borrower.

 

KK: Dave, I’d like to turn to you and see how this project fits within a larger Missouri Clean Energy District structure. I understand that you have enrolled nearly 40 municipalities in your program already. Can you tell us more about the program model and what it takes to join?

 

David Pickerill: The Missouri Clean Energy District (MCED) is a state-wide political subdivision which welcomes all local municipalities and counties as members. Our plan is to scale across the state. Kansas City saw PACE as a part of their long term strategic plan and the City Council voted unanimously to join the program this fall. It is simple to join the program and we provide cities and counties with draft ordinances and resolutions. Moreover, MCED handles the collection of PACE assessments and obviates the need for the county tax collectors to handle an additional burden. To date, MCED has over $28M in the pipeline.

 

Wornall Plaza

KK: Thanks, David. Again, congratulations on completing this first project. Jeff, what is the value proposition of PACE for your company and are you planning to use PACE on other projects in the future?

 

JF: This process was an eye-opener for us and now we are looking at several other projects where we intend to use PACE. For our clients PACE offers a lot of value since it is tied to the property and not the owner. Plus, finance companies are willing to offer longer terms which makes projects cash flow positive. In other words, PACE opened the door for us to do larger, more comprehensive, and more holistic projects.

 

KK: Michael, how does PACE fit in your model at BluePath Finance and what is your thinking in terms of expanding across the country?

 

MC: What makes us unique is that we provide a wide variety of financing products. ESP and our channel partners across the country focus on assessing and developing projects and come to BluePath to provide financing that fits the needs of each project and borrower.  PACE is another arrow in our quiver and an ideal product for commercial financings requiring longer terms.  We see a very large market opportunity for PACE and look forward to seeing PACE programs continue to develop across the country.

 

KK: Thank s everyone for taking the time! 

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Kristina KlimovichPACE Talk: Missouri Clean Energy District Completed Its First PACE Financing: A Closer Look at the $670,000 Wornall Plaza Project

PACE Talk: St. Lucie County and Inland Green Capital LLC join forces to offer PACE financing in Florida

Kristina Klimovich of PACENow talks to Mark Pikus, Senior Vice President at Inland Green Capital LLC, and Doug Coward, Executive Director of the Solar and Energy Loan Fund (SELF).

     

        

Kristina Klimovich: Thank you both for taking part in this PACE Talk. Congratulations on your recent successful launch of a PACE program in St. Lucie County! First off, I’d like to learn what brought you to the field of sustainability and, specifically, to PACE industry. Doug, you have an extensive experience as clean energy expert, small business owner, and elected official in Florida. What brought you to the PACE universe?

Doug Coward: My passion for clean energy and the lack of state programs in Florida motivated me to create new local clean energy financing options for local property owners. SELF has been lending exclusively in the residential sector for nearly 4 years, closing more than 300 home energy retrofit loans totaling $2.55 million. In order to capture the non-residential market, SELF has worked closely with St. Lucie County to customize a local Property-Assessed Clean Energy (PACE) program. SELF is the only Community Development Financial Institution (CDFI) in America (that we know of) that is also administering a PACE program. SELF is now able to offer more comprehensive clean energy financing options in our service territory through our CDFI and the new PACE program.

KK: Mark, at Inland Green Capital, you have been a voice for promoting sustainability in commercial real estate. Can you tell me a little bit more about your commitment to sustainability and how you learned about PACE financing?

Mark Pikus: We were introduced to PACE in 2012 and immediately saw the value from all sides: adding value to the property for the owner, creating jobs for the local market, lowering investor risk, and helping the environment. We are a provider of capital for PACE projects but we continue to be more involved in PACE at the grass roots level. Whether it is helping administrators starting or expanding PACE programs or purchasing private placement transactions, Inland Green Capital is committed to supporting energy efficient investment throughout the industry.

KK: Let’s turn to St. Lucie’s program structure. Can you provide a brief overview of the program you built for the County?

DC: St. Lucie’s program was customized based on best practices in Sonoma County, CA, and elsewhere. The program finances (1) energy efficiency, (2) renewable energy, (3) wind-hazard mitigation, and (4) water conservation projects. PACE assessments are available on 5, 10, 15, and 20 year terms, and the maximum amount available per project is determined by the net equity in the subject property.

KK: More specifically, do you have a loan to value test and saving to investment ratio or similar test build in as a program requirement?

DC: St. Lucie’s PACE program is built around the net-equity in the subject property, which is the collateral for the PACE assessment. Energy-related improvements need to provide reasonable payback to warrant investment and structural improvements simply need to strengthen and harden the structure against hurricanes.

KK: I heard that you have already closed a couple projects and generated a number of leads. What types of properties are you targeting? And how are you driving your outreach?

DC: Yes, we are pleased to have closed 2 PACE projects in the first 2 weeks of operation. We have another dozen projects pending or under consideration, and we are anxious to fully cultivate the PACE markets in St. Lucie County. We have just begun. So far, we have a small commercial office building that is going “net zero” (i.e., produce all of its own power from the solar panels on its roof), an active cattle ranch that is integrating solar water heaters, LED lights, and solar attic fans into their on-site ranch houses, and a church installing new high-efficiency air conditioners.

KK: Mark, can you describe what kind of arrangement you have with SELF?

MP: We have a commitment to invest in the PACE bonds generated by SELF towards PACE projects in St. Lucie County with the ability to increase as needed. We feel that there is tremendous opportunity in the County of St. Lucie and hope that our commitment is ultimately very substantial.

KK: Mark, Inland has been active in other PACE markets before working with SELF in Florida. What motivated your choice to work with SELF?

MP: Typically, We have been a more behind the scenes capital provider for other PACE programs but we always wanted to establish a long term relationship with a group that had the same enthusiasm we had in regard to PACE. After our first conference call with SELF, I remember getting off the phone and saying to myself we have to make this happen with SELF. We were instantly on the same page on how to go forward with a PACE program in St. Lucie County.

KK: Mark,which other PACE programs selected Inland as a capital provider and which markets are you looking to expand to? Are you planning to get involved with residential PACE as well as commercial?

MP: We have provided capital for several different programs in California and are currently on the verge of being an approved capital provider for several other PACE programs in other states. We have purchased both residential and commercial PACE bonds so we are always looking for opportunities in both segments.

KK: Thank you for taking the time to talk to me and we are looking forward to sharing your successes. 

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Kristina KlimovichPACE Talk: St. Lucie County and Inland Green Capital LLC join forces to offer PACE financing in Florida

PACE Talk: Open Market PACE Is Scaling Up

PACENow’s Kristina Klimovich talks with Mahesh Shah, CEO of Figtree Financing

June 25, 2014

 Kristina Klimovich: Mahesh, how did you get involved with PACE and Figtree?

bio-maheshMahesh Shah: I got a glimpse at the PACE financing opportunity in 2009 when I helped friends and colleagues develop a business model for Figtree. They started the company and I joined in October of 2011, first as an advisor and then quickly I became the CEO and investor in the company.

Prior to Figtree, I was not involved in sustainability ventures. PACE financing initially piqued my interest because of its unique and innovative structure along with its potential to spur energy efficiency and renewable energy projects on a large scale.  These projects in turn stimulate economic growth, create jobs and reduce the carbon footprint.  To me it was not just a business idea, but an opportunity to help cities and counties meet their sustainability goals while providing capital to the property owners.

KK: Figtree is a specialty finance company offering PACE funding to commercial property owners in California. Tell me a little bit more about your model. What sets Figtree apart?

Figtree Financing Logo_CMYKMS: Figtree Financing is a San Diego-based clean energy financing company offering capital for environmentally focused products and services. We designed the best of class Figtree PACE program to provide a turnkey, zero-cost and no-risk solution for cities and counties across California offering residential and commercial PACE financing. In order to keep the Figtree model scalable, we partnered with California Enterprise Development Authority, a statewide joint powers authority that provides the legal authority and infrastructure for the PACE transactions. The majority of cities and counties lack the resources required to launch PACE financing programs, so our primary goal is to offer a turnkey solution to municipalities that would like to provide PACE financing in their community. Part of our turnkey offering includes a very effective outreach and marketing campaign to promote PACE within a municipality. Additionally, we provide a range of services to our stakeholders including building owners, mortgage lien holders, and contractors. It’s a new financing product; and therefore, many questions arise about the PACE lien, repayment structure and project economics. To address the market needs, we provide comprehensive marketing materials, a white paper for mortgage lien holders, and specific project financial analyses. My background as a Chartered Accountant and a licensed CPA certainly helps me in running a specialty finance company. Our management team’s expertise spans energy efficiency, renewable energy, project financing, municipal relations and capital markets transactions, allowing us to address all the stakeholders’ needs and add value. Our financial team is up to speed on the available rebates, tax incentives, utility rates, and other project benefits which we factor in to demonstrate net-present-value (NPV) and savings to investment ratio (SIR) for each project.

Additionally, Figtree is committed to educating the mortgage lender community about the benefits of the PACE financed improvements. We can demonstrate that PACE is a tool to improve mortgage lenders’ portfolios by helping their customers achieve positive cash flow. We are the first private company to undertake an extensive lender engagement effort and obtain consent from eighteen different institutions.

Figtree does not shy away from smaller projects. We believe that to create a solution for a city or a county, we need to be able to take on projects starting at five thousand dollars. In fact, the smallest PACE project Figtree financed was seven thousand dollars.

KK: You’ve expanded on your outreach to lenders and building owners. What about the contractors?

MS: We identify and partner with contractors in this space and have conducted both webinars and in-person lunch-and-learn sessions to educate them about PACE and Figtree. In addition, we provide online tools that help contractors conduct a property check, estimate PACE payments, and identify eligible PACE improvements. In many instances we work directly with contractors to help them sell a project.

KK: We are seeing the PACE market gravitate towards having funding available on demand in order to offer financing to building owners once applications are received. You’ve introduced OnDemandPACE® early this year. How is this new financing model structured?

MS: Initially, we aggregated projects, structured an assessment bond and sold it in the municipal market, but it was challenging and not price-efficient because the frequency and volume of transactions were small. It was not a very elegant and predictable financing model, so we switched to the OnDemandPACE® model. Capital is now available as soon as project is approved and lender consent is obtained. Having a dedicated capital partner means that we’re committing our entire origination portfolio to them and as a result we can offer lower interest rates to building owners. Later on, our aggregated PACE loan portfolio can be rated, and securitized, which would eventually translate into an even lower interest rate to the borrower. To sum it up, OnDemandPACE® provides ready capital at a reasonable cost; securitization of a portfolio of PACE assets would further reduce the cost of PACE financing to a borrower.

KK: Today, more and more municipalities across California are adopting the so-called “open market” PACE model. You, among others seem to favor the model. What are the advantages of the open-market model for a municipality?

We like to think of it as a “non-exclusive marketplace” rather than an “open market”. Many municipalities go through an RFP process to pick a single PACE provider. However, since no one particular company has a one-size-fits-all solution, it is difficult for a municipality to select just one company with the right business model. Municipalities are benefiting by having flexibility and options. It is not in the best interest of a city or a county to issue an RFP and select just one partner because just as with any other financial product, consumers ought to have choices. For instance, having one auto finance company in the city, with their own proprietary underwriting criteria and pricing, is not in the best interest of the borrowers. Figtree has been a thought leader in the market advocating for the creation of a competitive marketplace to allow multiple PACE financing companies operate in one jurisdiction. Figtree has always provided a non-exclusive solution to the cities and counties.

KK: What are some good examples of municipalities with open PACE models?

MS: The majority of cities and counties in California are part of an open market model. Many selected Renewable Funding’s CaliforniaFIRST program back in 2009. None of the cities and counties that joined Figtree have an exclusive arrangement with us and many overlap with CaliforniaFIRST and Renovate America. In fact, in most cases when a new city adopts our program they adopt at least one other PACE provider at the same time. Even the counties that have launched their own programs are now looking at bringing in non-exclusive market solutions, including ours. A few of the larger municipalities that have adopted multiple providers, including Figtree, are: the City and County of San Diego, Alameda County, Cities of San Jose and Anaheim.

KK: What does a municipality have to do to join Figtree’s program if they are already part of another program?

MS: Cities and counties have accepted the non-exclusive PACE marketplace as the best practice. In fact, policymakers want to take advantage of Figtree’s expertise, recognized brand among contractors, dedicated funding, and statewide platform. Figtree has streamlined the adoption process for municipalities. All that is required is one council action and, in most cases, the approval occurs under a routine consent calendar.

KK: What are the advantages to commercial and residential property owners of having multiple PACE programs in the same municipality?

We know that a monopoly is bad for consumers and that competition drives excellence. Having multiple PACE programs in a municipality provides better choices, improves service, and lowers the cost of financing for consumers. Having more than one program ensures that a wider range of property and project types will be eligible for PACE. Individual programs may have different underwriting criteria. For instance, if a property owner doesn’t like a 10 percent Loan-to-Value ratio imposed by one program, he can work with another program in a non-exclusive market. Therefore, having choice can greatly benefit the consumer.

KK: Do you see cities and counties providing marketing and outreach services?

MS: We want to provide a turnkey solution which does not burden municipalities in any way. Figtree’s full service marketing department initiates outreach to contractors and property owners within each city and county as they join our program.

In addition to outreach and marketing, we also originate and underwrite projects, obtain necessary lender consent, provide capital, manage the disbursement of funds to contractors, and ultimately manage the portfolio for the capital providers.

KK: How many cities and counties are you operating in?

MS: As of July 1, 2014, we are operating in 66 cities and counties. More than a dozen cities are set to join in the next 8 weeks and the program is expanding on a weekly basis. Over the next year we see our footprint covering the majority of California.

KK: Are you planning to expand across state lines?

MS: We are evaluating several states, including Illinois, Texas and Colorado. We see a number of additional states as potential commercial PACE markets for Figtree in the near term.

KK: Where do you see the PACE market in a year from now?

MS: The PACE market is growing steadily and we are making good progress but are still nowhere near its full potential. In our program, we have seen the volume of interested PACE projects grow rapidly to over a $100M in a very short period since announcing our $60M committed capital facility.

According to the McKinsey study, scaling building energy efficiency retrofits in the United States offers a $279 billion dollar investment opportunity and the energy savings over 10 years could total more than $1 trillion. And, the U.S. EIA study concluded that buildings consume approximately half (49%) of all energy used in the United States and three quarters (75%) of all electricity. These figures are staggering and eye opening. They tell us that energy efficiency and renewable energy generation measures for existing building stock represent a significant opportunity to save money, reduce climate impacts, and generate or maintain jobs. We have also seen important thought leadership regarding PACE and other innovative financing structures come from Johnson Controls, the Rockefeller Foundation, Deutsche Bank, ACEEE, PACENow and others. What we have seen is while energy efficiency is the “low hanging fruit” it has significantly underperformed relative to its potential.

PACE will play an increasingly critical role in the market place along with other financing products, e.g. OBR, ESA, MESA, EPC, PPA/Lease, etc., to overcome historical barriers and achieve scale. PACE has potential to be a large scale model, but it still requires additional regulatory support and acceptance from the mortgage industry.

We are seeing significant traction on the capital market side, but we need an additional push from large institutional real estate owners and support from the mortgage lending community. We are seeing that many mortgage lenders still have a negative impression of the PACE structure resulting in delays in obtaining lender acknowledgement of PACE liens.  Also, there have been challenges in engaging the CMBS pool governance bodies in case of securitized mortgages. We are working hard to solve these problems. Specifically there needs to be engagement with the American Bankers Association, the Mortgage Bankers Association, and the Commercial Real Estate Finance Council to demonstrate the benefits of PACE financing in improving the net operating income while reducing the carbon footprint. Maybe this is something PACENow could take on?

 I am confident that given the benefits of PACE to all stakeholders, the PACE market will grow significantly in a year.

 KK: Where will Figtree be in July, 2015?

MS: In a year from now, we see ourselves becoming a national company and expanding our product portfolio to include residential PACE and other innovative financing products in the energy efficiency and renewable energy market.

KK: Mahesh, thank you for speaking with us today, and for all that you’re doing to build a PACE marketplace.

MS: Thank you Kristina!

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Kristina KlimovichPACE Talk: Open Market PACE Is Scaling Up

PACE Talk: A closer look at Australia’s Environmental Upgrade Agreements

Kristina Klimovich is talking to Scott Bocskay, Chief Executive of Sustainable Melbourne Fund and David Gabrielson, Executive Director of PACENow.

Scott 1Kristina Klimovich: Scott, tell us what brought you to the Sustainable Melbourne Fund and what are Environmental Upgrade Agreements or EUAs?

Scott Bocskay: I came to Sustainable Melbourne Fund having led the Clinton Climate Initiative in Australia where my goal was to overcome the barriers to investment in energy efficiency and renewable energy upgrades to buildings. An Environmental Upgrade Agreement or an EUA is a financing mechanism aimed to improve performance of non-residential buildings, using a repayment mechanism similar to property taxes. Similar to PACE finance, an EUA unlocks 100 percent of the funding required for upgrade projects with repayments being collected through the local council rates (property tax bills) over terms up to 20 years. An EUA overcomes the traditional barriers to EE/RE projects by enabling tenants and landlords to share in the financial benefits of such projects. The comparative terms of an EUA supercharges the business case for energy efficiency or renewable energy projects, turning them from often marginal projects to profitable projects, directly adding to shareholder value. EUAs were invented and pioneered in Melbourne, in parallel to PACE financing, and later adopted in 5 municipalities in the New South Wales, with enabling legislation being prepared in the State of South Australia and an expansion of the legislation currently being debated in the Victorian Parliament. We have leveraged the US experience through my work at the Clinton Climate Initiative. Here in Australia, the cities are still driving the push to energy efficiency upgrades on the local level. The City of Melbourne invited me to run the Sustainable Melbourne Fund (SMF) to promote EUAs. The SMF was set up 12 years ago as a unit trust, with the city as a shareholder and has been successfully investing in this space for 12 years.

KK: The similarities between EUAs and PACE are apparent. Both offer a long term source of capital to make buildings more energy efficient and both are local in nature. David, can you provide a high level overview of the PACE market?

David Gabrielson: Very briefly, PACE is an innovative financing mechanism that offers building owners up-front funding for up to 100 percent of the cost of energy upgrades; the money is repaid with assessments added to property tax bills for as long as 20 years. A PACE assessment stays with the building upon sale and allows the owners to pass payments through to tenants who enjoy the benefits of improved energy efficiency and lower utility costs.

Today, there are over 25 PACE programs operating throughout the US in 9 states and the District of Columbia. In CT, for instance, a centralized program operated by the state’s Green Bank offers PACE financing to any participating city or town. In other states, programs operate in one city or a handful of communities. Most programs have completed at least one project and governments and private actors running the programs are learning from experience and refining their processes. Many projects are large, involving office buildings, hotels or shopping malls, requiring complex engineering solutions and these may need considerable time for project development. The good news is that nearly 300 buildings have used PACE to pay for a good mix of energy efficiency and renewable energy projects. Total funding volume is at nearly $85 million and programs report a considerable pipeline of over $300 million.

PACENow has been spearheading outreach to leading real estate companies and we have been pleasantly surprised that many are very receptive to PACE. Our sense is that PACE lets them do projects that capital committees were not approving otherwise, e.g. projects with longer pay back horizons or projects involving tenants, where the assessment is passed through to tenants.

PACE is still very much in its infancy in terms of the number of building owners who know about PACE or even have access to PACE financing. But, the market is building steadily and program administrators are learning from a growing base of experience. We’re pleased to see that PACE financing works very well for a broad range of buildings and energy upgrade projects.

KK: Scott, what property owner outreach tactics work in Australia? And how many buildings took advantage of EUAs?

SB: To put this discussion in perspective, the Australian economy is the 14th largest economy and California is the 7th largest economy in the world. We would love to see 200+ buildings being on board. EUAs are currently offered in 6 municipalities in Australia: Melbourne, Sydney and several cities in New South Wales. Nationally, A $43.6 million has been invested through EUA finance with Melbourne making up a majority of the projects (62.5%) and New South Wales delivering much larger projects. The environmental benefit of these projects amounts to 8,800 tCO2-e being abated annually.

501 Swanston St

501 Swanston Street: EUA CASE STUDY: $7m project includes upgrade of the plant room, PowerPax chillers, boilers and solar film for windows.

The fundamental difference between PACE and EUAs is that in Australia, there is no municipal bond funding, instead we have the big four banks and several second tier banks providing capital.

Energy efficiency projects are tough to put together in non-residential buildings. There are a lot of moving parts and participants involved. The complexity of these commercial projects affects the outreach strategies. We are launching a program, spearheaded by a website, www.betterbuildingfinance.com.au, supported by the federal government, in partnership ClimateWorks Australia. This initiative has involved engagement with the EUA marketplace and all its stakeholders with the ultimate aim of simplifying the key messages about the opportunities of EUAs. This program will see us run a series of webinars and events in the coming months communicating in a simple and unified message promoting EUAs.

It has been our experience that the messaging needs to be simple, while programs need to take people through the journey rather than explaining it all in the very beginning. Our goal at Sustainable Melbourne Fund is to guide the development of programs and use common language when we talk to customers across the country.

As a daily participant in energy efficiency projects, we understand the opportunity of energy efficiency, however it is often forgotten that what we see as a solution is in fact a problem for our customers. Energy efficiency is another thing that building owners or tenants need to deal with along with their ordinary course of business. There are many buildings that need to get up to the curve on EE/RE. Ultimately, we want to provide a solution as opposed to creating a problem.

Outreach and market education is a hot priority as well as enlarging the market beyond the existing 6 municipalities. As far as our outreach to the various market segments, we hope to see the uptake from the more sophisticated parties, however we understand that they may need to digest EUA mechanism as an organization. The challenge here is an institutional one: there are many people involved, from a sustainability officer, to legal departments, to accountants, to property managers. There has to be a champion within the organization who would be willing to educate all the parties.

We have seen more opportunity in B and C grade buildings and EE/RE projects that are already in the process of being developed and have institutional buy-in. Additionally, we are focusing on rooftop mounted solar for industrial and retail buildings using the EUA mechanism. This is particularly driven by the City of Melbourne which set an ambitious target for 25% of the City’s energy consumption to come from renewable sources by 2018.

The secret sauce with EUAs and PACE is sharing the benefits between landlords and tenants. In Australia, there is a slight difference in enabling legislation between Victoria and New South Wales. But the key in both states is having a positive relationship between a landlord and a tenant.

KK: David, in the US we’ve also seen B and C class buildings taking advantage of PACE, can you elaborate about the reasons?

DG: The owners of these buildings typically do not have the deep pockets of many of the A class property owners. So for them 100% PACE financing can, make all the difference in doing a project or not. We are finding that B and C grade buildings are where most of the PACE business is coming from.

KK: Scott, do you find different reactions in places around Australia? Maybe attitudes towards sustainability differ or energy prices?

SB: A lot of it is driven by market dynamics. In Sydney, there is a high proportion of listed property trusts and corporate property ownership, while Melbourne has a high proportion private companies and individual owners with different levels of appetite towards sustainability. Many public entities have shareholder obligations, while some of the private ones do not. For instance, GRESB has noted that Australia is leading the world in sustainability in commercial office space.

Also, macroeconomic issues are driving the vacancy rates, which in turn drive sustainability efforts.

KK: Scott, who is administering the program and driving the outreach to the building owner community?

SB: In Melbourne, the Sustainable Melbourne Fund is a third party administrator. In New South Wales – each local government administers the program internally. Third party administrative model has proven to be the cheapest and easiest to use. Through my role at the Clinton Foundation I learned that it is preferable to have a simple administrative model that allows large commercial real estate owners and lenders to use financing platforms equally in the various municipalities. Right now, there are slight differences among the program structures in municipalities in the New South Wales.

The Sustainable Melbourne Fund is talking to more municipalities about how to allow capital to flow to their communities. Local governments are concerned that EUA program could be costly and hard to set up. However, we are seeing that energy efficiency financing programs prevent capital leakage from the communities and help capture the value. Market making is a challenge and also a biggest opportunity, we need more assistance on this front.

KK: In the US we are seeing a varied landscape as well, there is a number of city and county administered programs as well as third party administered consortium programs that enroll several municipalities. Now I’d like to compare the two financing mechanisms. First, by looking at eligible property types and improvements. Scott and David, can you both briefly address eligibility.

KK: Let’s talk about financing in more detail now. David, what does it cost and who provides it?

DG: There are many options on the financing side. I’ll note that PACE financing is a very strong credit because it’s secured by a highly over-collateralized first claim on the property. PACE is now a rate-able asset class, attractive to investors at relatively low interest rates.

As for the financing options, we have seen PACE projects (1) bundled together and sold as taxable municipal bonds, (2) funded directly by governments (3) packaged and sold to third party investors as municipal bonds or as direct investments, or (4) funded directly without municipal bonds structures.

We certainly recommend to states that are working on PACE legislation, to craft PACE laws to allow for as much flexibility as possible in terms of financing options. Minnesota’s PACE program is a good example. There, PACE financing is available statewide through the St. Paul Port Authority, which can issue bonds. Additionally, a local bank is prepared to provide warehouse financing and any third party investor can fund projects directly. Building owners and project developers have lots of choices.

Although many funding mechanisms are being developed, the market is still very small and therefore, illiquid, which means that if you invest in a PACE project now, it could be difficult to sell it easily to a new investor. That’s the main reason that interest rates are a bit higher than they should be, given PACE’S strong credit.

KK: Scott, what financing models for EUAs are available in Australia?

SB: There is no municipal bond or local government funding, all money is provided by the private sector. There are a couple of large Australian banks offering financing and we are having discussions with several second tier banks. Banks set up special purpose vehicles or hold the EUA obligations directly on their balance sheets. EUA’s are, similar to PACE, over-collateralized obligations, while the market for them is illiquid. It is the chicken or the egg dilemma: on the one hand, demand grows when the market become more sophisticated, and, on the other hand, market becomes more sophisticated when there is more demand for this type of financing, at some stage as the addressable market grows we will reach a tipping point.

The SMF was the first investor in EUAs in the country. At the time, in 2011, investors liked the EUA mechanism but wanted to see the proof of concept. We currently hold the original EUAs on our books and I am happy to say they are performing very well.

Relative to any other form of financing, EUA is cheaper than anything else you can get on a similar term. The term allows projects to be cash flow positive or neutral on day one.

KK: What was your experience working with existing mortgage holders?

SB: We do not have a consent requirement; those consents are generally embedded into the existing finance agreements. The attitude of the commercial property lenders improved over time once they understood the superior value to a property, after seeing the data. Essentially existing mortgage holders receive the full valuation uplift as a result of the projects while never being exposed to the entire cost of the project, that is they get something for nothing.

KK: David, can you speak to the topic of lender engagement on this continent?

DG: I think many people thought that a building’s mortgage lender would be automatically opposed to PACE and that this would be a difficult issue to resolve. What we learned, however, was that we could work with lenders if we gave them a right to say “yes” or “no” to projects. Our strategy has been to educate lenders on project attributes and convince them that energy efficiency and renewable energy projects will make their collateral, the building, more valuable. The lender consent requirement certainly hasn’t made it easier to get projects done, but it hasn’t been a major impediment either. Consent from an existing lender also gives project funders comfort that the project makes sense.

PACENow tracks data on all commercial PACE projects and to date, over 80 different lenders, ranging from local and regional banks to global lenders like Citi and J.P. Morgan Chase have consented to PACE projects for their customers.

KK: Thank you, Scott and David, for taking the time to speak to me about EUAs and PACE. 

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Kristina KlimovichPACE Talk: A closer look at Australia’s Environmental Upgrade Agreements

PACE Talk: A $662,000 Retrofit of a Landmark Building in Milwaukee

Kristina Klimovich of PACENow talking to Erick Shambarger, Deputy Director of Environmental Sustainability at City of Milwaukee, and Beau Engman, CEO of PACE Equity.

Kristina Klimovich: Erick, Congratulations on completing your first commercial PACE project in Milwaukee! Tell us about the role that the City played in this project?

ErickShambargerErick Shambarger: Thanks, Kristina. The City has long been an advocate of PACE financing, and so we are excited to complete a project at the University Club.  PACE financing is a policy tool that supports our Refresh Milwaukee Sustainability Plan, our energy reduction goals in the Department of Energy Better Building Challenge, and our general economic development goals of creating local jobs and improving our buildings stock.  So the City passed a local PACE ordinance, created program policies, developed application and review processes, and promoted the program to building owners and contractors.  Credit on the political side goes to Mayor Tom Barrett and Common Council President Michael Murphy for spearheading the program. They understood the value proposition of PACE and how it mobilizes private capital to serve the public interest.  The US Department of Energy has more on our implementation model here.

KK: In the past, I’ve heard you characterize the ME2 program as “collection agent” for PACE assessments. Can you explain what this means and why the City found this role to be most effective?

ES: We wanted to create a system that truly mobilizes private capital for the program, without the City having to issue bonds. So we have a tri-party agreement between the building owner, City, and PACE lender.  Through this arrangement, the lender provides the capital to the building owner and the building owner repays the loan via the City as a Special Charge on the property tax bill.  The City then remits the payments it receives to the PACE lender and has the power to foreclose on the property if the building owner fails to make payments. That simple step of having the City collect the PACE charges can radically improve the business case for energy efficiency and renewable energy projects for the building owner.

KK: Beau, tell us a little bit more about this recent project. Specifically, why was PACE an effective mechanism for this building owner?

Beau-Engman-w-bg-recBeau Engman: From the Club’s perspective, there was both a large opportunity to reduce costs, as well as to provide needed capital toward an important renovation.   The energy savings aspect of a PACE project development process, and the long term low cost nature of the financing, were both important elements of making this an effective mechanism.   The results in the end were significantly reduced operating costs and achievement of their capital improvement goals – making PACE a very compelling source of capital.

KK: Erick, A number of municipal sustainability officers are reading our newsletter. What would you say are three benefits of having a PACE program to a municipality? 

ES: Local Jobs. Better buildings. Improved environment.

KK: Looking forward, are you seeing any particular building types interested in taking advantage of PACE financing in Milwaukee?

ES: I think commercial buildings generally, including offices, large multi-family apartments (but not condos), and even not-for profit buildings.

KK: Beau, as a private PACE project originator and developer, which asset classes are in your opinion best candidates for PACE financing?

240x240xphotoforthewebsite.jpg.pagespeed.ic.Cl72VTgmGHBE: PACE is still so new, I am still trying to determine that myself.  I see non-profits, industrials, and hospitality as being the best so far.  For PACE to be compelling to a building owner, there has to be an edge over traditional debt.  PACE offers owners of these three building types differentiated advantages over traditional debt financing.

KK: Let’s step back, and, broadly speaking, call PACE financing a tool that empowers building owners to finance certain EE/RE upgrades. We are seeing a variety of PACE implementation models across the country. What makes the Milwaukee’s program effective?

BE: Milwaukee’s program is excellent in that it’s a very low cost program AND its an “open market” that allows building owner’s to choose their own finance provider.  As a project developer, this creates an efficient environment to develop PACE projects where we, the developer, do not duplicate efforts with the program administrator.  We can also bring in a finance provider of our choosing to match the needs of the transaction – this in my view results in a lower cost of capital.  The mortgage lenders and PACE finance providers require a set of due diligence with any project, I like the fact Milwaukee does not place duplicative governance and the associated overhead on the projects.

KK: Thank you very much for taking the time to speak to me! I’m happy to announce that a detailed case study of University Club project is live on our website. 

You can learn more about Milwaukee PACE program here and discover PACE Equity here.

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Kristina KlimovichPACE Talk: A $662,000 Retrofit of a Landmark Building in Milwaukee

PACE Talk: Picking Up Solar PACE

PACENow’s Kristina Klimovich talks with Mike Wallander, Founder and President of Demeter Power and Co-founder of EcoCity Partners

mikewallanderJune 3, 2014

Kristina Klimovich: Mike, tell us about yourself and how you got involved in the PACE market?

Mike Wallander: It was confluence of events.  I was always very passionate about the environment and for many years I was trying to figure out how to do something beneficial for the environment while enabling me to earn a living. This challenge took on a real significance shortly after I got married and my wife and I started a family. I was working at a big law firm and making a transition from corporate securities law to solar and sustainable energy within the firm. In 2008, our first son, Jack, was born and I wanted more flexibility over my schedule and more control over my destiny. In 2009, I left to focus on two entrepreneurial projects: one was solar project development and the other one was PACE.  In fact, I got a phone call out of the blue from Simon Bryce with Renewable Funding, a California-based PACE service provider, who was interested in the Florida market. I have Renewable Funding to thank for introducing me to the PACE universe.

KK: You founded two organizations (EcoCity Partners and Demeter Power) focused on using PACE financing to unlock the market for commercial building retrofits. Let’s start with Florida, tell us about EcoCity Partners and the Florida Green Energy Works program.

MW: In 2009, I was introduced to Amy Elliot and Mo Eppley and together we formed EcoCity Partners L3C with the goal of establishing PACE in our home state of Florida. We teamed up with Erin Deady, who was working on PACE issues and had the knowledge of local government law and we also partnered with an existing and knowledgeable PACE provider –  Renewable Funding  –  to  bring their concept to our state. In 2010, we set up the Florida Green Energy Works Program as an “open market” program – we believe that PACE provides a public good and financing should be open to competition and not be monopolized by any single capital provider.  We launched the commercial component of the Florida Green Energy Works program in the summer of 2012. Two years later, we have the broadest PACE program in Florida that stretches across four, soon to be five, counties. We funded our first commercial PACE project in West Palm Beach.  The project is a perfect example of how powerful PACE is as a local tool – a local bank provided financing for a family-owned business, which worked with a local contractor to implement a comprehensive retrofit. Recently, we have determined that now is the right time to move forward on residential given that the residential landscape has shifted. We are partnering with Renovate America on offering the residential program and we expect it to significantly catalyze growth of the program.

KK: As president and founder of Demeter Power, a company that skillfully blends solar leasing with PACE, you pioneered two new financing instruments: PACE3P® and PACE Lease®. Please tell us a bit more about Demeter Power and these instruments.

MW: Since 2010, I have been thinking about how PACE can help a property owner who wants to buy solar panels but cannot use the tax credits to make the improvement economically competitive. Being a lawyer helped, as the laws are complicated and one has to draw from various legal disciplines, such as real estate, tax, and local government law.  I developed a structure that reconciled PACE requirements (that the solar asset be a permanent improvement) with a typical solar provider’s desire that the solar asset remain its personal property. I formed a separate company to offer a customer access to solar energy with no upfront costs, by paying for the energy via a tax assessment fee. This annual fee is structured to cost less than the anticipated utility savings. We like this concept of helping customers to spin their electric meters backwards – that is where the name “De-meter” comes from.

KK: What is the main difference between PACE Lease® and PACE3P®?

MW: PACE3P® is a platform, while PACE Lease® is a finance product offered through this platform. We view PACE as a tool for credit enhancement for a lease or PPA arrangement. With PACE Lease®, customers receive energy at a fixed price, repaid as a PACE assessment. It’s a simple and straight-forward arrangement. While, we have other products, they all have some common characteristic: the collection mechanism is always through a PACE assessment attached to a property.

KK: Is PACE3P® better suited for certain asset classes? In other words, is it addressing a specific market need?

MW: The application to the market is broader than you might think. Initially, we thought PACE3P® would be a natural fit with tax-exempt entities, such as hospitals, churches, and REIT structures that can’t use tax incentives because they simply don’t pay taxes. In addition, we realized that PACE3P® can be used by a much larger portion of the market where credit risk is either difficult to assess or customer credit risk is difficult to mitigate. Brad Copithorne with the Environmental Defense Fund recently wrote a nice blog post about application of third-party ownership PACE for the commercial space. At least 90% of commercial buildings are not credit-rated and it is difficult to get an understanding of a building owner’s personal credit. Moreover, most commercial real estate is held in Special Purpose Vehicles and often is highly leveraged. While the owners may want to switch to solar, obtaining a personal and corporate guarantee turns them off. Additionally, if they do not have sufficient rental income over and above their expenses they cannot use the tax incentives. PACE3P® ties underwriting to a building and more economically uses the tax incentives.  Therefore, many commercial real estate owners will find PACE3P® an attractive option.

KK: Does it have an application on residential side?

MW: Absolutely.  Mike Mendelsohn with NREL, who has always been at the forefront of EE/RE financing issues, wrote a great piece for RenewableEnergyWorld about challenges with financing solar on the residential front.  He points out that 50% of homeowners do not have sufficiently high credit scores to enter into a solar lease or a solar PPA agreement. If they own their homes, PACE3P® could be an ideal solution for them.  The bottom line is this – PACE is the most secure finance structure for funding building improvements that has ever been invented. Having an ability to offer a lease or PPA structure through PACE could rapidly scale the both residential and commercial markets.

KK: What are some of the basic steps for executing a PACE Lease® agreement?

MW: PACE Lease® works like a typical PPA. A customer enters into an agreement with a solar provider, but instead of doing the math to figure out how much it would cost in terms of paying for the system, we help them translate this into a bottom line cost for the energy. Customers want to know whether they are saving money through solar improvements and Demeter Power can help them with a total-cost of ownership solution expressed as a cost per kilowatt-hour like their electric bill. Then, we work with a local PACE program to arrange financing and collect the lease or a PPA fees. The customer is responsible for paying these fees, as they would have done though a basic PACE or PPA structure.

KK: Are these financing options available to building owners in California? And are you planning to expand to new markets in the future?

MW: PACE3P® can be implemented in any PACE area. In fact, Demeter Power is funded by an award from the U.S. DOE SunShot Incubator Program and one of the requirements is to fund deals in at least two states. California is our first target market; it presents a great mix of good sunshine, relatively high utility rates, and a mature and active PACE market place. Our next step is to activate the Florida market. We are also looking at CT, NY, DC, MI, and MN.

KK: Are you working with existing PACE programs?

MW: We designed our financing products to work within existing PACE programs, ideally without any major program changes and without administrative hassle. Demeter Power will help activate the solar contractor community and essentially will be a new source of deals for PACE programs. Contractors already know how to sell technologies, but they may need an explanation of how PACE works. Our goal is to make it easy for solar contractors to develop projects, after verifying basic PACE eligibility. We do that by providing software technology that can be easily used either by a solar provider or by a PACE program administrator to manage projects. We are enabling lead generation by reducing the cost of acquiring a customer. For instance, even before meeting with property owner, using our software, a contractor can find out the utility rate on a building and learn whether the owner has sufficient equity to qualify for PACE financing.  Moreover, we enable contractors to present a customizable proposal to a building owner that identifies a project’s value proposition. Basically, we are trying to close two sales: one with building owners, who want to know how much they will save on their utility expenses, and another is with contractors, who want to know what they are going to get paid for the projects.

KK: Where do you see the market in one year from now?

The marketplace is primed and ready for this solution.  A year from now this concept will be scaling rapidly since the market is huge and completely underserved. We can demonstrate that a PACE Lease® is simple to execute and offers a great value proposition to all parties. Once we complete our first project and have capital in place, it is not out of the question that we could be doing $50 million worth of projects each quarter in each market we enter. We expect 2015 to be a very big year.
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Kristina KlimovichPACE Talk: Picking Up Solar PACE