Why CFO’s Love C-PACE

How Building Owners Can Benefit From A Revolutionary Financing Tool

Presented by Larry Derrett, CEO, EnFlux Building Solutions

EnFlux Building Solutions – What We Do

We help building owners lower their energy and maintenance

costs by offering financing for efficiency projects of virtually

any size anywhere in the US.

Our financing programs are offered to building owners

directly and indirectly through contractors who provide them

services.

Smart Financial Solutions for Sustainability

What We’ll Cover Today

• Quick Overview of C-PACE & The Assessment

• What Problems Does C-PACE Solve?

• C-PACE Financing & Operational Benefits

• C-PACE for Retrofits

• C-PACE for New Construction

• Unrelated to C-PACE

• Enhanced Tax Benefits for Retrofits

• Lease Accounting in Energy Services Agreements

WHAT Is C-PACE?

"As a former CFO, I would not hesitate to

recommend C-PACE to the CEO, board or investors.

The benefits are compelling."

- Anonymous former banker and CFO

C-PACE = Commercial Property Assessed Clean Energy

• Revolutionizing the way energy efficiency equipment is financed in the US

• As of 12/31/2018, 1,934 projects funded for $883 million; $532 million in just the

past two years

• When applicable:

• Efficiency retrofits

• New Construction

• Major Renovations

• Eligible installations include:

• Energy efficiency – HVAC, lighting, controls systems, etc

• Renewables – solar, waste, etc

• Resiliency – seismic retrofits and wind/wildfire hardening (recently passed in

California)

• Other

The C-PACE Assessment • An assessment attached to the property, NOT a recourse obligation

• Financing is repaid through the assessment – paid concurrent to normally

scheduled property tax payments

• The assessment is established by statute at the state level and sponsored by the

local taxing authority

• Financing for 100% of equipment and installation costs for 20+ years

• Since the assessment is a lien attached to the property, it provides lenders with

similar protections of a property tax lien (mortgage holder consent to be

discussed in the next presentation)

• Underwriting approach is different from that of traditional credit

• Lender risk is based more on the viability of the building - as long as the

building stands and is operated, payment of the assessment is required

What Problems Does C-PACE Solve? For retrofits

• many lenders have shied away from retrofits for HVAC, lighting, controls due to the

abundance of soft costs and their inability to foreclose and resell the equipment

For new construction and major renovations

• if mortgage lenders advance 60 – 65% for new construction, owners were left with

large capital requirements

• expensive mezzanine debt is recourse and requires a highly negotiated

intercreditor agreement

C-PACE can solve many of these problems!

• No up-front out of pocket costs - 100% financing

• Financing terms of over 20+ years minimize annual payments

• Quiet financing:

• no acceleration rights – lender is entitled only to that

portion of the assessment which has been billed, not the

entire amount

• no personal or parent guarantees required

• no traditional lender requirements such as quarterly

financials, limitation on investments and financial covenants

Financing and Operational Benefits

Financing and Operational Benefits

• Owners can optimize their holdings

• the building can be sold without lender approval

• the assessment becomes an obligation of the new owner

• Can help solve the historical misalignment between commercial building

owners and tenants related to the risks and rewards of efficiency retrofits

• owners bear the risk of financing retrofits while tenants benefit from

lower energy and maintenance costs

• property tax payments are generally the obligation of tenants in many

triple net leases

• dialogue/negotiation still required but it is much easier to convince

tenants they will benefit from a pure retrofit - annual energy and

maintenance savings will virtually always cover the annual C-PACE

assessment

• Most large, nationally based C-PACE lenders prefer project size of at least

$250k to $500k; local providers might opt to do much smaller deals

• Generally not preferred for emergency change outs due to time required

for underwriting - however,

• Can be used to refinance projects previously closed

• For virtually any pure efficiency retrofit – where the vast majority of costs

are attributable to replacing equipment, the project will generate

immediate net cash flow because of the low annual assessments over 20

years

C-PACE for Efficiency Retrofits

Efficiency Retrofit Example: Project Cost: $500,000

Annual Savings: $70,000

Simple Payback: 7+ years

Traditional 7-Year Bank Debt C-PACE 20-Year Assessment

Annual out-of-pocket costs are ($17,654)

Cumulative out-of-pocket costs are ($123,578)

Annual net savings are $27,016

Cumulative net savings are $189,122

Annual net cash flow actually improves by using C-PACE for efficiency retrofits!

New Construction – Capital Stack Benefits Allows building owners to use C-PACE to reduce their weighted average cost of capital for new construction

Courtesy of CLEANFUND, a C-PACE Lender

Tax Advantages of HVAC Replacements HVAC Retrofits placed into service in 2019 by corporations can be expensed

100%, though certain limits apply

• The Tax Cuts and Jobs Act of 2017 expanded the definition of qualified

equipment only under Section 179 to include HVAC retrofits (existing buildings

only)

• The modified application of Section 179 also extends to rooftops and systems

related to fire detection, alarms and security

• This can substantially change the after-tax cost of efficiency projects for HVAC

• For a corporation operating under the new flat tax rate of 21%, a $500,000

HVAC retrofit could have an after-tax cost of $395,000 (500,000 * .21 =

$105,000)

• Owners of flow-through tax entities can also benefit under Section 199a but

those benefits are applied quite differently

Corporation Without Section 179 Benefit Corporation With Section 179 Benefit

Both examples, deficit Net Savings of ($17,654) for Years 2 – 7

In the example including Section 179 tax benefits:

• Net Savings are much higher starting Year 1

• Cumulative Savings are positive through ~ Year 6

Project Cost: $500,000

Annual Savings: $70,000

Simple Payback: 7+ years

Traditional 7-year financing

Tax Benefit Example

Leases Embedded in Service Agreements

• The new FASB lease accounting standard (ASC 842) takes effect 2019

• Among other things, it addresses leases embedded in service

agreements

• Certain Energy Services Agreements (“ESA”) might include a capital component related to efficiency investments (perhaps an

embedded lease?)

• If considering entering into an ESA and off-balance sheet treatment

is important, check with your accountants

• Accounting results are influenced by commercial terms in services

agreements – learn about this before entering into negotiations of

an ESA.

Summary C-PACE provides many financing and operational benefits:

• 100% financing with no lender acceleration or financial covenants

• No guarantees required by owners whether a small LLC or large corporation

• Owners are free to sell the building - assessment becomes an obligation of the

buyer

• Immediate net cash flow benefits for pure retrofits

• Reduction in weighted average cost of capital for new construction

• Tax benefits from HVAC retrofits substantially change project economics for

corporations

• Owners considering an ESA with the need to obtain off-balance sheet financing

need to understand how the new accounting rules can influence their

commercial negotiations

EnFlux Building Solutions Provides two types of financing programs offered directly to building owners and the contractors who service them

EnFlux Finance

• non-PACE program for projects of all sizes anywhere in the US

• $20,000 emergency retrofit – quick credit scoring and closing process

• Other efficiency projects of any size excluding new construction

C-PACE – retrofits and new construction in enabled areas of the US

Indirect contractor model

• Channel marketing approach with large mechanical contractors operating under a national footprint

• Provide online sales tools enabling contractor reps to generate proposals for either of our financing programs along with other sales tools

• Offer Financial Selling techniques through a subscription based

platform

EnFlux Building Solutions Contact information:

713.714.0575

lderrett@enfluxbuildingsolutions.com

www.enfluxbuildingsolutions.com

LinkedIn: https://www.linkedin.com/in/derrett/

Numerous articles published covering topics discussed herein

Smart Financial Solutions for Sustainability