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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!