Financing beyond FICO: Using asset-backed loans, PACE to get solar deals done



A solar system as an investment for a homeowner or business has value that goes beyond a typical property improvement purchase or equipment upgrade. Because PV offers both ecological benefits and economic advantages for a property, new and unconventional financing vehicles are available — and can be offered by you to your customers.

Asset-backed loans

Commercial buildings can get a huge return from a PV system, but at a huge cost, which is obviously an impediment to installation. It’s easy for a Walmart-type business with accessible credit to fund a system, but how does a nonrated business accomplish it? Small businesses don’t exactly have Scrooge McDuck money swimming pools to dive into, and to make it all more complicated, many have a ton of debt. Conventional lending wisdom would rule them out for a loan to finance such an upgrade right there. This is why the commercial sector is lagging further behind than it should.

But remember, a PV system isn’t your typical property upgrade — it is a revenue-generating asset. This is why a company like Open Energy feels comfortable focusing on the potential of the asset itself to back its power purchase agreement (PPA) financing program.

Let’s use that supermarket as an example. It is a building that’s open all of the time, has narrow margins and high electricity bills. At a 7 percent interest rate, with no money down, this supermarket off-taker can enter into a predictable energy contract through a third-party owner and allow a developer with the appetite to invest in the asset to do so.

“We are providing a loan for the solar power plant to provide the cheaper electricity for the supermarket,” said Graham Smith, CEO of Open Energy. “In this example, we’re not saying we want to lend to supermarkets; we provide the loan to the solar power plants. We’re lending against the solar process. We’re confident that it’s going to be generating power over a period of time.”

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The sweet spot for these deals for Open Energy is the $1 million to $3 million project — 500 kW to 5 MW, with most ranging from 1 to 3 MW (Open Energy will lend up to $10 million). The PPA route bypasses traditional hurdles for your customers in this range as electricity needs are offset without incurring more debt on their end.

“Because it’s asset-backed, we’re lending ultimately to the solar project,” Smith continues. “We’re only ever lending to the individual power plants, which allows for a lot of scale for much less risk.”

If PPAs are so enticing, why isn’t everyone doing them? These deals can be a hassle and carry big transaction costs, but Open Energy’s technology-enabled underwriting, in-house legal department and standardized process allow for a streamlined path to funding and permitting at a reduced cost.

“Look at the $100 million loan needed for a coal-fired power plant; we’re just making a $1 million loan to support, say, a supermarket,” Smith notes. “We just focus on slimming that down to make it much more affordable.”

PACE Financing

PV is more than revenue generation — it is a societal good. States that are ahead of the curve are opening up new pathways for homeowners and business owners to upgrade their property while improving their commitment to sustainability.

One option gaining steam is property assessed clean energy (PACE) funding. This is a broad instrument that owners can use for a variety of energy efficiency upgrades, solar being one of them. The headline here is PACE funding isn’t exactly a loan; it’s a public/private partnership that’s essentially a lien on the property that is paid back through property taxes. Funding approval takes as little as 30 minutes.

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“The big thing is that unlike traditional credit-based financing, we don’t consider FICO scores for eligibility,” says Louis-Philippe Lalonde, chief marketing officer of Ygrene Energy Fund, one of the leaders in PACE funding. “Eligibility is based on the equity in a home or business — up to 15 percent — and not on a property owner’s credit score, proof of employment, income or financial statements.”

Now, could a lien on the property hurt a home’s value if an owner is looking to sell, similar to the problem with solar leases? PACE payments are legally transferable upon sale; however, some mortgage lenders may require full repayment of the special tax upon sale or refinance.

“With 100 percent financing and no upfront payment, PACE provides the most accessible and affordable way for property owners to pay for solar upgrades,” Lalonde says.

PACE funding can add a level of consumer protection because pricing and work quality are made consistent. This is not just a valuable tool for homeowners to install solar, but also a way for contractors new to solar to get into the game. Ygrene, for example, trains and certifies the contractors it works with.

“A significant portion of our contractors are not the largest contractors. We enable mid-sized contractors to get into the business,” Lalonde says. “They don’t have access to a lot of financing tools, and they get looked over by traditional credit-based financing programs because they don’t do as much volume. But for us it’s a really good market.”

Renovate America, which does a majority of the PACE funding in California, closed its eighth securitization of PACE bonds at the end of September — the largest such deal completed by any issuer and a designated green bond. HERO green bonds have received significant interest, in part, because they do not fund aspirational or speculative projects; the proceeds have already been invested in home energy and efficiency improvements projects whose environmental impact is verified. Since its inception in December 2011, the HERO Program has financed more than $1.83 billion of improvements in more than 75,000 homes throughout California.

The success California has had boosting its solar industry through PACE financing could be repeatable in other states that start to approve PACE funding as an option. Missouri just OK’d it, with Georgia and Arkansas close behind. Lalonde sees Florida as the next big opportunity for PACE.

“I was there when we sold the first solar lease and thought it would change everything, and it did, but now that PACE is getting off the ground, I think it will change not just solar but a broad spectrum,” Lalonde says.

Chris Crowell is the managing editor of Solar Builder.

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