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