Anthony Martin, PE, LEED AP Business Development Manager - Texas

Anthony Martin, PE, LEED AP Business Development Manager - Texas

CONTEXT FOR DISCUSSION

ENGINEERING BEGINNING 3

ENGINEERING BEGINNING 4

BRIDGING THE GAP Learn the METRICS that mattered to Owners Net Income Return on Investment Cash Return on Investment Total Return on Investment Net Operating Income Capitalization Ratio Debt Service Coverage Ratio Turnover Ratio Gross Rent Multiplier Operating Ratio Break-Even Ratio Operating Expenses Net Operating Income (NOI) Rent or Income 5

ROADMAP PACE BASICS Why PACE? What is PACE? BENEFITS OF PACE Why do owners love PACE? Why do mortgage lenders agree to PACE? Where and what can I PACE?. NUTS AND BOLTS How do PACE projects get approved? How does PACE help me? Where has PACE been done? 6

PACE BASICS

WHY PACE?

Energy Sector Consumption 9

Energy in Texas Today Texas leads the nation in energy consumption, accounting for 12% of the nation s energy use and is the fifth largest energy consumer in the world Demand for electricity has increased 20% since 2000 10

COMMERCIAL MARKET LAGGING 50% Locked in the Commercial / Industrial Building stock <5% Commercial Proactive Energy Efficiency Spend 11

OPPORTUNITY IS EVERYWHERE What you PITCH Strong ROI will save $5.6M over system life Innovative groundbreaking efficient technology 20-year warranties, proven expertise Hedge against rising energy prices Unparalleled tenant comfort 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Sample $2M, Multi-Measure Project w/ ~6 Year Simple Payback 12

BUT COMMERCIAL OWNERS NEED NOW What the CFO/Owner HEARS X X X X X Where will I get the funding? What if I sell the building in 5 years? We only do 3-Year payback projects Good technology but my tenant pays the energy bills Are these savings even real? I ve been burned before If it ain t broke 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Sample $2M, Multi-Measure Project w/ ~6 Year Simple Payback 13

CHANGING THE STORY What if you could develop a solution that 1. Provides 100% up front funding of all hard and soft costs? 2. Allows a 20+ Year repayment term = immediate income source 3. Allows transfer of obligation automatically on sale 4. Doesn t tie up borrowing capacity 5. Requires savings to be validated by third party review 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Sample $2M, Multi-Measure Project w/ ~6 Year Simple Payback 14

WHAT IS PACE?

WHAT IS PACE? Property Assessed Clean Energy (PACE) is a government financing policy that classifies energysaving upgrades as a public benefit like a sewer, road extension, etc. 100% of hard and soft costs are funded by private capital and repaid via a surcharge on the property tax bill. Payback periods match equipment life (often 20+ years) this makes most projects cash flow positive from day one. 16

PUBLIC SIDE OF PACE States with active PACE programs States with PACE legislation and developing programs States with proposed PACE legislation 16 States have active PACE programs 83 rd Session: SB 385, Sen. John Carona and Rep. Jim Keffer The Coalition: County Judges and Commissioners Association of Texas Independent Bankers Association of Texas Texas Association of Business Texas Association of Counties Texas Bankers Association Texas Building Owners and Managers Association Texas Combined Heat and Power Initiative Texas Conference of Urban Counties Texas Real Estate Council Texas Manufactures Association Texas Municipal League Texas Renewable Energy Industry Association US Green Building Council Dozens of other organizations and companies. GREENWORKS LENDING

PACE STRUCTURE PACE is a fixed-rate, fully amortizing ownership structure with long (~20-year) maturity. Funding comes from a private lender (ex. Greenworks) and security is provided by a nonaccelerating property tax assessment that transfers on sale. Projects are accretive to building value they replace broken/outdated equipment and improve building s net operating income PACE is a non-recourse property obligation in the event of foreclosure or sale... 1. Lender cannot accelerate note 2. Obligation transfers to new property owner 3. New owner takes possession of a more valuable asset Because PACE increases the tax burden of the property, mortgage lenders have power of the pen to approve/disapprove projects through a mandatory mortgage lender consent process 18

BENEFITS OF PACE

WHY DO OWNER S LOVE PACE?

TYPICAL CAPITAL PROJECT DECISION Limited Capital = Limited Approvals GREENWORKS LENDING

TYPICAL CAPITAL PROJECT DECISION Split Incentive = Limited Returns Triple Net Base Lease + Elec Gross Lease Net Lease NN Modified Gross Lease GREENWORKS LENDING

PACE REMOVES BARRIERS Lack of funding? Plan to sell building? Payback period too long? Tenant pays energy bills? Unsure if savings will appear? 100% upfront, 20+ year financing Obligation transfers with property Positive cash flow in year 1 Assessment/savings pass to tenants Third party technical review GREENWORKS LENDING

THE DAY 1 PAYBACK Sample $2M, Multi-Measure Project w/ ~6.25 Year Simple Payback Cash Bank Loan PACE Assessment Down payment amount ($2,000,000) 15% - ($300,000) $0 Loan amount $0 $1,700,000 $2,000,000 Loan term NA 5 yrs 20 yrs Interest rate NA 4.00% 6.25% Annual Cash Flow Annual payment NA ($382,295) ($180,978) Annual energy savings $320,000 $320,000 $320,000 Net annual cash flow $320,000 ($62,295) $139,022 5-Year Financial Performance 5-Year Net Cash Flow ($400,000) ($611,475) $695,110 5-Year NPV @ 6% ($258,430) ($530,574) $585,611 5-Year IRR -7% NA Infinite 1 Assumes no utility cost escalation and no performance degradation to simplify case study 24

WHY DO MORTGAGE LENDERS AGREE TO PACE?

ACCESSIBILITY TO GREEN FINANCING Example Loan Agreement Each of the following shall constitute an Event Of Default under the Loan: 10.3. Sale, Encumbrance, Etc. The sale, transfer, conveyance, pledge, mortgage or assignment of any part or all of the (Mortgaged Property) or any interest therein, or of any interest in Borrower, including any Transfer as defined in the Mortgage, in violation of the terms of the Mortgage or this Agreement. 10.6. Other Encumbrances. Any default under any document or instrument other than the Loan Documents, evidencing or creating a Lien on the (Mortgaged Property) or any part thereof, not cured within an applicable grace or cure period therein. 10.9. Taxes. Any of the Taxes are not paid when due and payable. GREENWORKS LENDING

PACE IMPROVES MORTGAGE SECURITY Improved Debt Service Coverage Ratio: All PACE projects have a project DSCR (SIR) >1 and often significantly enhance the building s overall Net Operating Income (NOI). Improved Debt to Value Ratio: PACE structure ensures value increase far outweighs the debt increase. Only Currently Due Amount Adds to Debt: As a property tax, the annual PACE payment becomes liability in the year it is due. Mortgage lenders typically add one year s payment to the property debt. a Full Project Adds to Value: Projects are accretive to the property value either via improved cash flow or completion of capital improvements/deferred maintenance projects. Defuse the Deferred Maintenance Time Bomb PACE reduces the mortgage holder s risk from surprise costs that could harm a borrower s ability to pay. GREENWORKS LENDING

PACE IMPROVES MORTGAGE SECURITY 120+ MORTGAGE LENDERS HAVE CONSENTED NATIONWIDE Only the red line (arrears) is senior to mortgage Energy Savings PACE Payments 0 5 10 15 20 25 PACE project makes the building the lender s collateral more valuable Only PACE assessment in arrears is senior future assessments do not accelerate Underwriting, mortgage consent, and technical review ensure projects are appropriate GREENWORKS LENDING 28

WHERE AND WHAT CAN I PACE?

MOST COMMERCIAL BUILDINGS QUALIFY Building Requirements Financial Requirements Commercial, Industrial, Non-Profit, Multi- Family >5 Units Does NOT work for residential, government Located within operational PACE municipality Current on property taxes Financed amount generally limited to 35% of property value up to 20% in some cases. Total property debt (mortgage + PACE) cannot exceed 95% of property value also may vary by state. Not in bankruptcy Meets other state statutory requirements 30

MOST ENERGY AND WATER PROJECTS QUALIFY High efficiency lighting Automated building and HVAC controls Variable speed drives (VSDs) on motors fans and pumps High efficiency chillers, boilers, and furnaces High efficiency hot water heating systems Combustion and burner upgrades Fuel switching (ex. oil to gas conversions) Water conservation Heat recovery and steam traps Building enclosure/envelope improvements Building management systems Renewable energy systems Associated permitting and other soft costs Etc 31

NUTS AND BOLTS

HOW DO PACE PROJECTS GET APPROVED?

GREENWORKS LENDING Greenworks is a rapidly growing company that finances energy-saving upgrades in commercial, industrial, non-profit and multi-family buildings. Our mission is to improve the energy efficiency of our country by creating a new normal for financing energy upgrades in buildings. GREENWORKS LENDING 34

THE PACE APPROVAL PROCESS PRESCREEN Is the property eligible? How much can we finance? DEVELOPMENT AND UNDERWRITING Financial underwriting Mortgage lender consent Technical review APPROVAL AND CLOSING PACE administrator approval Closing Construction! 35

PRESCREEN You Need To Submit as much info as you have (at least an address) to: www.greenworkslending.com/apply-for-financing We Look For Is property in a PACE eligible municipality? Commercial property (including industrial, multi-family >5 units)? How much financing is available? In most markets 35% for standard property types (office, retail, manufacturing, hospitality, etc.) 20% for special use properties (ex. non-profits, farms, ice rinks, sports complexes, etc.) Check for tax delinquencies, severe environmental issues, or other disqualifiers We Help You Verify project is eligible - allowing you to pitch PACE with confidence Create a cash flow calculator on request Point out potential potholes or nuances 36

PRESCREEN 37

PRESCREEN 38

FINANCIAL UNDERWRITE You Need To Connect us with the building owner for a 30-minute conference call as soon as your evaluation gets real. We Look For Recent property appraisal (less than 5 years old) if available Two years of reviewed financials or two years of tax returns for the building owner Most recent mortgage statement with mortgage holder and principal clearly displayed Rent roll (if tenant occupied); if there is an anchor tenant (>50% square footage) we ll also need their financials Recent environmental site assessment (ESA) Phase 1 for high risk properties We ll Also Gain Mortgage Lender Consent Mortgage holders must sign a consent form. We ll ask the owner to introduce us to their bank and we ll talk the bank through the consent process. We have many banking relationships that can speed up the consent process, but it s best to start early! 39

TECHNICAL REVIEW You Need To Send Greenworks Energy Audit or solar Feasibility Study List of energy conservation measures (ECM s) Estimated savings We Look For Greenworks will engage our third party technical reviewer (review takes 5 business days) to verify that the project s savings outweigh the investment (SIR >1) over the weighted average life of the measures. How We Help PACE technical requirements vary by state and sometimes locally. We help you navigate the requirements and avoid surprises. 40

APPROVAL AND CLOSING You Need To Send Greenworks Final construction contract and draw schedule We Collect Each PACE project must be approved by the program administrator. We ll submit the technical review, a title search, a borrower disclosure, lender consent form, etc. Administrator approval takes ~10 business days. We close on financing as soon as the project is approved by the administrator! How We Help Navigate the approval process Compile and submit package for approval Gather and prepare closing documents 41

CONSTRUCTION What You Need to Do Submit lien waivers consistent with construction schedule How We Help Fund project at request of owner or contractor through construction 24 hour turnaround time for advances Simple, easy to use draw schedule 42

HOW DOES PACE HELP ME?

PACE IS BENEFICIAL TO ALL WIN / WIN Building Owner Project Developer Energy Modeler Independent Third Party Reviewer Contractor Commissioning Agent Energy Manager 44

PACE TECHNICAL REQUIREMENTS FAST TRACK PROJECTS Single Measures Like-for-like Replacement Distributed Generation MULTIPLE MEASURE PROJECTS ASHRAE Level II Audit Energy Model Open Book Pricing WWW.EEPERFORMANCE.ORG/ 45

PACE SAVINGS REQUIREMENT SAVINGS TO INVESTMENT What can be Included? Reduction in energy & water consumption RATIO Value of produced energy Tax Savings Rebates Operational Savings 46

PACE INDEPENDENT 3 RD PARTY Can be an individual, an independent firm, or a program Must be a PE (if an individual) or have a PE on staff to oversee and approve all review efforts (if a firm) Minimum of five years of relevant energy efficiency project development experience, and three years quality assurance review experience Three references demonstrating relevant project development and quality assurance review experience Must attend the ICP Credentialed Project Developer training Must complete the ICP Credentialed Quality Assurance Provider training 47

WHERE HAS PACE BEEN DONE?

CASE STUDY: THE BUSHNELL CENTER New hot water heater, three high efficiency boilers and replacement of a single, inefficient steam boiler saved this 95,000sf theater over $1.2M. The theater was pleased with C-PACE s ability to offer an upgrade with no capital outlay at a time when they were searching ebay for spare parts. Total Project Cost: $650,000 Money Down: $0.00 Incentives: $266,000 C-PACE Financing: $384,000 Term: 20 years Annual C-Pace Assessment: $30,411 Annual Energy Cost Savings: $58,674 Lifetime Energy Cost Savings: $1,173,479 Hartford, CT GREENWORKS LENDING #

BUSHNELL CENTER FINANCIAL ANALYSIS Cash Impact Tax Impact Net Cash Flow Year PACE Payment Energy Efficiency Savings Interest Deduction* Depreciation Cash Impact Annual Cumulative 1 ($30,412) $58,674 $0 $0 $28,262 $28,262 2 ($30,412) $58,674 $0 $0 $28,262 $56,525 3 ($30,412) $58,674 $0 $0 $28,262 $84,787 4 ($30,412) $58,674 $0 $0 $28,262 $113,050 5 ($30,412) $58,674 $0 $0 $28,262 $141,312 6 ($30,412) $58,674 $0 $0 $28,262 $169,574 7 ($30,412) $58,674 $0 $0 $28,262 $197,837 8 ($30,412) $58,674 $0 $0 $28,262 $226,099 9 ($30,412) $58,674 $0 $0 $28,262 $254,362 10 ($30,412) $58,674 $0 $0 $28,262 $282,624 11 ($30,412) $58,674 $0 $0 $28,262 $310,886 12 ($30,412) $58,674 $0 $0 $28,262 $339,149 13 ($30,412) $58,674 $0 $0 $28,262 $367,411 14 ($30,412) $58,674 $0 $0 $28,262 $395,674 15 ($30,412) $58,674 $0 $0 $28,262 $423,936 16 ($30,412) $58,674 $0 $0 $28,262 $452,198 17 ($30,412) $58,674 $0 $0 $28,262 $480,461 18 ($30,412) $58,674 $0 $0 $28,262 $508,723 19 ($30,412) $58,674 $0 $0 $28,262 $536,986 20 ($30,412) $58,674 $0 $0 $28,262 $565,248 Subtotals: ($608,232) $1,173,480 $0 $0 $565,248 Sum of Income and Energy Savings: $1,173,480 Savings to Investment Ratio (SIR): 1.93 Sum of Expenses: ($608,232) Net Income + Savings: $565,248

CASE STUDY: OFFICE PARK LLC* Office building in Montgomery County seeking to lower monthly utility bills is planning a 300 kw solar energy system that would reduce their electricity bill by ~70% and result in a net cost of energy of $0.04/kWh (vs. current rate of $0.12/kWh). Total Project Cost: $660,000 Money Down: $0.00 Cash Incentives: $195,498 over 7 years (Solar REC) Tax Incentives: $507,740 Annual Energy Cost Savings: $66,274 Lifetime Benefit (Net): $1,162,135 *Pseudonym Project from Montgomery County, MD C-PACE Financing: $678,480 Term: 20 years Annual C-Pace Assessment: $59,897 GREENWORKS LENDING #

OFFICE PARK LLC DETAILED FINANCIAL ANALYSIS Cash Impact Year PACE Payment Energy Savings REC Income Pre-Tax Cash Impact REC Tax Federal Investment Tax Credit Interest Deduction* Depreciation Cash Impact 1 ($59,897) $48,600 $28,350 $17,053 ($9,923) $198,000 $14,746 $117,810 $337,686 $337,686 2 ($59,897) $49,808 $28,208 $18,119 ($9,873) $0 $14,351 $31,416 $54,013 $391,699 3 ($59,897) $51,045 $28,067 $19,215 ($9,824) $0 $13,932 $18,850 $42,173 $433,872 4 ($59,897) $52,314 $27,927 $20,343 ($9,774) $0 $13,485 $11,310 $35,364 $469,236 5 ($59,897) $53,614 $27,787 $21,504 ($9,726) $0 $13,011 $11,310 $36,098 $505,335 6 ($59,897) $54,946 $27,648 $22,697 ($9,677) $0 $12,506 $5,655 $31,181 $536,515 7 ($59,897) $56,312 $27,510 $23,924 ($9,629) $0 $11,969 $0 $26,264 $562,780 8 ($59,897) $57,711 $0 ($2,186) $0 $0 $11,398 $0 $9,211 $571,991 9 ($59,897) $59,145 $0 ($752) $0 $0 $10,790 $0 $10,038 $582,029 10 ($59,897) $60,615 $0 $717 $0 $0 $10,145 $0 $10,862 $592,892 11 ($59,897) $62,121 $0 $2,224 $0 $0 $9,458 $0 $11,682 $604,573 12 ($59,897) $63,665 $0 $3,767 $0 $0 $8,728 $0 $12,495 $617,068 13 ($59,897) $65,247 $0 $5,350 $0 $0 $7,951 $0 $13,300 $630,369 14 ($59,897) $66,868 $0 $6,971 $0 $0 $7,125 $0 $14,096 $644,464 15 ($59,897) $68,530 $0 $8,633 $0 $0 $6,246 $0 $14,879 $659,343 16 ($59,897) $70,233 $0 $10,336 $0 $0 $5,312 $0 $15,648 $674,991 17 ($59,897) $71,978 $0 $12,081 $0 $0 $4,319 $0 $16,399 $691,390 18 ($59,897) $73,767 $0 $13,869 $0 $0 $3,262 $0 $17,131 $708,522 19 ($59,897) $75,600 $0 $15,703 $0 $0 $2,138 $0 $17,841 $726,362 20 ($59,897) $77,479 $0 $17,581 $0 $0 $943 $0 $18,525 $744,887 21 $0 $79,404 $0 $79,404 $0 $0 $0 $0 $79,404 $824,291 22 $0 $81,377 $0 $81,377 $0 $0 $0 $0 $81,377 $905,668 23 $0 $83,399 $0 $83,399 $0 $0 $0 $0 $83,399 $989,068 24 $0 $85,472 $0 $85,472 $0 $0 $0 $0 $85,472 $1,074,539 25 $0 $87,596 $0 $87,596 $0 $0 $0 $0 $87,596 $1,162,135 Subtotals: ($1,197,948) $1,656,846 $195,498 $654,396 ($68,424) $198,000 $181,814 $196,350 $1,162,135 Tax Impact Annual Net Cash Flow Cumulative Sum of Income and Energy Savings: $1,852,343.85 Savings to Investment Ratio (SIR): 1.80 Cash Value of Tax Benefits: $507,739.57 Net Cost of Solar per kwh Produced: ($0.04) Avoided Costs (Roof): $0.00 Estimated Increase in Building Value**: $693,366 Sum of Expenses: Net Income + Savings: ($1,197,948.12) $1,162,135.30

QUESTIONS?