Property Assessed Clean Energy financing, also known as PACE, is becoming an increasingly popular way to finance solar PV projects. This is especially true in the commercial and industrial (C&I) segment, as PACE offers some unique advantages not available via traditional loans, leases, or PPA’s. PACE can finance many different types of renewable energy projects. In addition to solar PV and energy storage systems, PACE can finance energy efficiency projects such as cool roofing systems, LED lighting, HVAC upgrades, co-generation systems, and many other technologies.
In this blog, we interview Steve Tsu, Co-Founder and Managing Director of K2 Clean Energy Capital, a leading provider of commercial PACE financing services for developers, contractors, and property owners. Steve and his co-founder Jonathan Pickering each have almost a decade of experience originating and financing commercial solar projects. In this Q&A interview, Steve shares insights on the current state of PACE financing, it’s impact on the evolving commercial solar market, and the benefits of K2’s recent integration on the Energy Toolbase platform.
Please provide a little background on PACE financing.
PACE is a government legislated program to support local economic development in the energy efficiency, renewable energy, and water conservation spaces. PACE legislation has been passed in 32 states to date, and 16 of those states have active commercial PACE programs established. The PACE program enables long-term financing up to 25 years of projects through a special assessment on property taxes. PACE bonds are funded from private equity sources and administered through local counties that manage property tax payments. The financing is collateralized against the property, and the available funding is based primarily on the equity in the property rather than the financial standing of the business or owner. As such, no personal or corporate guarantees are required. A nice benefit of PACE is that it provides 100% financing for a project, which includes planning, permits, engineering, materials, and installation costs.
Tell us about K2 Clean Energy Capital and the company’s founding.
The concept for K2 CEC started when Jonathan Pickering was President of JA Solar USA, and I was developing commercial solar PV projects. Jonathan was co-hosting a financing forum when he learned about PACE financing. Given that financing projects was a prime challenge of the small- to mid-sized C&I market, the fit became apparent.
We recognized a huge opportunity to provide a much-needed service in this area. We founded K2 CEC in early 2013 when commercial PACE financing was just being re-established as a financing vehicle in California and other states across the U.S. We have since closed one of the largest PACE financed projects in the US and will have originated over $20M of deals by the end of 2017.
Please describe the main services that K2 provides.
We work with commercial property owners to reduce their net operating expenses by developing, financing, and executing energy efficiency and renewable energy projects. We serve as an owner’s representative and implement initial energy audits, recommend cost-saving technologies, develop project RFP’s, manage contractor bidding and negotiation, provide the PACE financing solution for the project, and oversee project execution. We focus our efforts on the hospitality, industrial, and retail industries for both retrofit and new construction projects. In addition to PACE financing we offer commercial loans and leases from multiple funding sources. This helps our dealer partners to close more projects and obtain the best deals possible for their customers.
What is the process of funding a PACE-financed project?
Once the contractor or developer has executed a construction contract with the property owner, we will expedite the process to close the financing so construction can start. We bring in multiple financing offers then review and lock in the financing terms for the client, coordinate property due diligence, complete the required PACE documentation, obtain lender consent if needed, negotiate construction progress payments with the funders, and then work with the county program administrator and funder for closing.
What are a few of the benefits of PACE over other financing options?
The key difference is that PACE financing offers customers long-term financing up to 25 years which usually results in a completely cash flow positive project for the property owner. Additionally, most commercial loans and leases only cover solar PV systems whereas PACE can finance many technologies, including cool roofing, LED lighting, HVAC upgrades, energy storage, cogeneration systems and fuel cells. Also, unlike a solar PPA or lease, with PACE the owner keeps all the energy cost savings, tax credit, and depreciation benefits. Loans and leases also require some form of a personal guarantee and the business owner must qualify for the financing. PACE financing is based on property value and is typically viewed as off-balance sheet as property taxes are paid from operating expenses.
What are some of the benefits of your integration with Energy Toolbase?
Our integration with Energy Toolbase enables us to instantaneously calculate indicative pricing quotes for our dealers, which they can then package into a comprehensive customer-facing proposal. Being able to directly communicate with our dealer partners via the platform brings a lot more efficiency to the sales process. We continue to directly support and interact with our partners throughout the entire lifecycle of the sales process. This includes pre-project qualification and analysis, underwriting and financing due diligence, contract close and final funding of the project. This combination of automated quoting, personalized support, and customer education provides a lot of value to our dealers. Furthermore, since K2 works with several funding groups, we ensure our partners obtain the most competitive rates for their deals.
“Our goal at K2 is to make deals powerful for customers, and Energy Toolbase helps facilitate that process.”
– Steve Tsu, Managing Director, K2 Clean Energy Capital
What qualities of Energy Toolbase do you feel made a good fit with your company?
It was important we integrated with a platform that we trusted for avoided cost analysis. When solar developers go to obtain funding for their project, it’s critical that they accurately estimate the potential savings of a project. It’s part of the financier’s job to scrutinize all aspects of the deal during the diligence process, and mitigate any risks. Therefore, before presenting a deal for financing, it’s important for solar developers to optimize the size of the project for savings, factoring in things like rate switching scenarios, NEM 2.0 assumptions, or future proposed rate changes. Energy Toolbase does a great job on this, utilizing their comprehensive in-house utility rate database.
When I was working in commercial project development six years ago, savings analysis was done manually on Excel sheets and would take hours per project. In addition to the process being time consuming, the analysis that we presented to the customer would often go over their head. Energy Toolbase enables solar developers to clearly and logically present savings analysis in a customer-facing proposal. Our goal at K2 is to make deals powerful for customers, and Energy Toolbase helps facilitate that process.
