Scott: Hi, everybody, my name is Scott Holstein, Director of Marketing and Business Development for Computrols and this is the Building Technology Podcast where we talk about all things Smart Buildings. Today, I’m joined by Lucas Dixon of Plug Smart. Lucas has been with Plug Smart for 10 years where he is currently the Controls Business Leader, he’s also worked in the engineering team, he’s done outside sales, so he has a large breadth of experience. Welcome to the podcast, Lucas.
Lucas: Well, thank you, thanks for having me. It’s exciting.
Scott: Yeah, happy to have you here. Where are you coming to us from today?
Lucas: I am in beautiful Northern Michigan today, working at a client site and some sales.
Scott: Very nice. And Lucas, you are uniquely qualified to talk to us about this topic that we’re really gonna focus on today, which is incentives and financing programs that you can leverage for smart building type projects. Can you tell us a little bit about Plug Smart, what you all do there and then your role there over the past 10 years or so?
Lucas: Sure can. So, at Plug Smart, we identify and build projects that finance themselves with the energy savings they create, and that’s our elevator pitch. I like to add to that saying that we are problem solvers and we help building owners accomplish things they didn’t know they could do…solve problems that they have been pulling their hair out over for a long time and we really help the mechanical and energy systems in a building and help reposition a building for the next 20 to 25 years of its life. So, we often do a lot of stuff that no one sees: boilers, chillers, roofs, windows, doors, elevators, things like that…finance them with building automation systems and LED lighting, but we pride ourselves on both being energy efficiency geeks and building geeks, helping improve the built environment.
Scott: That’s great. So it sounds like you all kinda come in and you ask, “What are your problems?” and you do your best to address everything that you can. You guys have a lot of different, it sounds like, departments over there in terms of doing access control, it sounds like, some elevators as well as the mechanical side. Do you guys have a specific focus? Is part of the business more mechanical-focused or more focused in any other particular area?
Lucas: So Plug Smart is built around four different types of people, so we have… At least, I call them four pillars of different people… We have energy engineers, they are primarily mechanical engineers and they’re the people that come in and both help redesign mechanical systems or do the engineering work to replace mechanical systems, and do all the energy efficiency calcs to say how much each individual measure can fix. And these are our problem solvers. This is the real creative part of our business, in terms of putting together bundles of projects that both finance themselves in energy savings, but solve real problems in that building. Maybe it’s a comfort or a humidity issue that has been there since the day it was built. At 25 years, 30 years into its life, finally addressing that problem by adding a reheat coil in the right spot and controlling it the right way. So that’s one group.
We have business development people. Every problem, every project gets sold, we have business development professionals, most of them, myself excluded, have a technical or engineering background. We aren’t just empty suits out shaking hands, we’re doing active work in that project, but every project gets sold and we need business development people.
Then we have project managers. So we end up as the general contractor on the majority of the projects we do. So we’re not your general contractor to build your building or do your addition, or do your office remodel, but if it’s a mechanical system or if you need a number of different things, maybe your roof, your elevator, your boiler and your chiller, and your building automation system and lighting all replaced at one time, and that exceeds your capacity to internally project manage and you need someone to help you do all that work in an orderly fashion, we’re a good partner to do that and be the project manager for that.
We do not self-install roofs, elevators, lighting, boilers, chillers, etcetera. Our model is very similar to Ameresco, NORESCO, Willdan and some of the bigger, I would call non-equipment vendor or manufacturing energy services companies, we fall into that same category, where we often end up as the general contractor, buy out the major equipment, but then hire local labor to do the install. The one exclusion and the next pillar and the fourth pillar is our low voltage services teams, so we have both an access controls and security team, and we have a building automation team. So we self-perform both the engineering, the tech-ing and the installing of those systems. So low voltage is something we do in-house.
Scott: That’s great. It’s great to have all of those different services under one roof. So, wanna jump into our topic here today, and to start off, I know that you’re really familiar with the PACE program, and I was hoping you could give our audience a little introduction. I think a lot of people are aware the program exists. I’m not sure that there’s a lot of historical knowledge or even in-depth knowledge of the PACE program. Would you mind giving us a little bit of background there, and what that all entails?
Lucas: Sure. And so, when I talk about PACE, I’m going to be talking about C-PACE or Commercial PACE. And as a reminder, PACE stands for Property Assessed Clean Energy. Most of the PACE projects that get done in the country do not finance renewable energy, but they finance energy efficiency and building improvements. PACE is a financing mechanism that it attaches itself to a property via a Property Tax Assessment. And that mechanism allows for a couple advantages that solve some problems and enables more energy efficiency projects to be done or projects that otherwise wouldn’t have gotten done to be accomplished. So I’ll go through a couple of those advantages, and they vary based on the customer and they vary based on the individual financial situation of a buyer. PACE is not a magic bean, a silver bullet, it certainly doesn’t work for every owner, it doesn’t make sense for every owner and it is not a perfect tool. But it is a dynamic tool, and it has some really interesting features, and it’s growing incredibly quickly right now, especially in the commercial property sector.
PACE is not available in every state in the country. It is a state-by-state legislation that gets passed. It was built in California and has been spreading out across the country. It is built and kinda pioneered in California in the early 2000s. So it’s not that old of a mechanism. But it’s modeled after a very old mechanism, which is kind of the property tax-based improvement district special, which are often known as Special Improvement District or TIF, Tax Increment Financing, and draws some similarities to those. So it is a model that’s well-known and used. When you compare it to a SID or a Special Improvement District, that’s often used in commercial districts or around malls to make infrastructure improvements, the difference between that and PACE, is that PACE is assessed to a single person, so a single property owner can self-assess themselves rather than the whole neighborhood having to get together and self-assess themselves. So, talking… So yeah, not available in every state. I believe it’s about 38 states.
The best place to get information on your program and see if your state is… PACE is a tool for you, is PACENation. PACENation is a trade organization for PACE programs, and PACE contractors. I believe it is pacenation.us. You can go there, go to the Commercial PACE tab and there’s a map, it will give you updates on all the program statuses across the country.
So what makes PACE special or different from other financing mechanisms is, there’s a couple of things. So one, the term, PACE financing is long-term fixed rates. So it can go out 25 years, most deals that get done are between 20 and 25 years. Some can even go out to 30, but that’s pretty rare. So a long-term fixed-rate amortization is a really powerful thing for an energy project. When you can spread out that amortization, you can get a lot more done inside of an energy efficiency project. Fixed-rate. So it’s a fixed rate and a relatively competitive rate. It is not the cheapest money in the world, but it is far from the most expensive.
Depending on the asset type and the customer type, we see between 5.5% and 6%, 7% interest rates for this and that’s fixed over the amortization. So, often, that’s better and certainly better for the term than what most owners could get, especially in the commercial property space. Now, some school districts, governments, they may say, “That’s crazy. That’s well above what I pay now.” And they’re right. So it is not the right tool for every situation, but for commercial property owners and for not-for-profit entities that own their own building, it is something that is a unique financial vehicle.
What else? So it gets assessed on your property taxes. So you pay it at the same time you pay your property taxes, and that assessment stays with the property. So if you sell that property, the responsibility for that assessment can be passed to the new owner. This is powerful for commercial property owners that have often have a unknown or short time horizon. And when making a decision about investing in capital equipment, they’re going to often do the lowest cost if they don’t have a time horizon where they could realize the benefits of investing in more energy-efficient equipment. Now if they can pay for it and then pass the payments on to the next owner, they now don’t have that same incentive problem. So it enables people that are considering selling their buildings to still make improvements, still buy the more efficient equipment and then pass those costs on to the new owners. The next advantage is around the split incentive problem that commercial property owners often face.
So often, in a commercial property, in a triple net lease, a commercial property owner may be responsible for the rooftop units and the lighting, and all the mechanical, electrical equipment in the building, but the tenant pays the electric bill. So, the owner is fronting the money for the more efficient equipment, but then never seeing the benefit, their tenants are. So in triple net leases, it is possible, it’s not 100% guaranteed, and it’s not… It’s still an emerging area of the rental market, but it’s possible to pass on tax assessments to your tenants via the standard triple net lease. Now, I am not an accountant and I don’t play one on TV, and I am not a commercial property leasing expert, so every individual situation needs to be assessed but on its own merits. But it provides a vehicle where a commercial property owner could make a energy-efficient investment and then share the burden of that additional investment with the person that’s reaping the benefits, the tenants of those reduced energy bills.
So, that’s called the split incentive problem, and it’s plagued commercial property for a long time. PACE is also 100% financeable, so 100% financing, so it doesn’t require a downpayment from the owner, that is an advantage. PACE financing is nonrecourse debt, so its only recourse is the property that’s assessed to, so that’s also an advantage for commercial property owners compared to if they were to go to get a bank loan, they are often going to have to pledge other… Make a personal guarantee on that loan that would otherwise restrict them, and if everything went bad, they’re still on the hook for that loan, so they can borrow money using PACE, invest in that property and then the property is the only collateral. So yeah, those are the benefits of PACE and what make it unique. The biggest thing from just the math perspective of making an energy efficiency project work is the amortization and the relatively low fixed rate, those are things that enable you to bundle in that roof, that boiler, that chiller, something with a long payback with new LED lighting, new building automation and build a project that makes sense, that cash flows while paying for that PACE financing, that assessment cost.
Scott: Thank you for the explanation there, that was really helpful, Lucas. So, I’ll put that PACENation website (https://pacenation.us/) attached to this podcast, so our listeners can easily access that. Now, do you get the sense from your own personal experience or any other experience that you may have that property managers or building owners are aware of and taking advantage of PACE and other types of programs? What’s your sense as to the awareness in the market?
Lucas: We’re still right at the beginning of the awareness. We are still doing a lot of education. So, where it works, it works really well. And we have seen several large property developers/owners, they now put PACE in every capital stack analysis. Every time they’re looking at doing a deal with a property, they will include PACE or they’ll at least run it in their model. So once you get someone educated, they plug it in just like they would a tax abatement, a historic tax preservation, any of these other financing tools that they may use to make a deal work, they plug PACE in right along to see if it lowers the capital cost of their project. At some… You know, for building owners… Well, for commercial building owners, this really comes down to the capital stack for their project and their… What the net operating income of that building is or where it needs to be. Most commercial property owners aren’t doing projects or energy projects to feel good, they do energy projects to fund things that they were gonna have to do anyways, and I’m completely okay with that. We do a lot of work just for that reason, and I feel great about the environmental benefits we squeeze out of projects like that, but we’re solving problems for these commercial property owners that improve that building for the next 25 years.
Other building owners, like we’re doing a project on a YMCA, but they have a different time horizon, their outlook on life is completely different. They are using PACE because they need PACE money to fix a problem. This happens to be a roof problem, and PACE… Their only other option is just to keep living with their roof and patching it day-by-day, year-by-year and wasting all the money when they need is a new roof, but they only have… They only have the $15,000, they don’t have $150,000 and we see those types of problems all day, every day, and PACE solves the problem for those types of owners where it just gives them access to a piece of financing that they wouldn’t be able to otherwise access, and then there’s situations all the way in between.
But in the commercial property space, the owners are looking at it from the capital stack side, the building managers and building operators are looking at it as a finally a way to get this deferred maintenance that they’ve been going and asking for money for the last five years and keep getting told “no”, to get those projects done, because they’re bringing a new tool to their owner to solve that problem. And we see that every day that unfortunately, a lot of times, building managers or operators have just given up after five times of banging their head against the brick wall, they’re not really interested in getting slapped on again, so you gotta kinda get over that skepticism and that scar tissue, and give them a tool that they can take their owner and tell them, “Hey, this is something where you don’t have to come cash out of your pocket.” And that’s the hardest dollar to spend is that one right out of your pocket.
Scott: Right. So as we’re coming into budget season for a lot of commercial property management companies, I’m curious, what is the timeline if you wanna get this project potentially financed through PACE? Is this something you should have started six months ago, or is this something that you still have time to get in on?
Lucas: Unfortunately, PACE projects are not the quickest thing to get done, so we normally say that it takes between three and nine months to have a PACE project baby, and that is inclusive of doing a energy efficiency assessment or audit, those would normally take between two and six weeks, depending on how much data logging is required and how much time it takes to get utility bills, things like that. Then there’s an underwriting stage, very similar to most commercial lending processes, so a couple of weeks there. Then there’s just a closing process, closing the loan where some things only happen once a month or twice a month that you gotta get on the right people’s calendars and legal review has to happen, things like that. So it is in the shortest amount of time, we say about three months and then sometimes it just takes longer if Joe’s on vacation and then things just don’t line up. So it is a process, it’s also, PACE’s use is most useful for larger projects. There are incremental costs for legal, for closing, for the audit and assessment. You don’t do a PACE project to replace one air handler, you don’t do a PACE project for something that’s 75,000 bucks.
You do a PACE project, generally, we say, the real bottom edge case is $300,000-$500,000 and most of the projects that we’re doing are 750k and up, and you can do PACE projects up to… The financiers will tell us infinity, it’s based on your property value. So PACE underwriting requirements are based on a percentage of your property’s value ’cause that’s the collateral and total indebtedness on that property. So if you have a mortgage, that may limit how much you can borrow additionally on that property. So multi-million dollar projects, no big deal. I think the biggest I’ve seen is somewhere in the $25 or $30 million PACE project on a large multi-use redevelopment project. While I say that it triggers a note that PACE can be used in two different ways, we say the traditional retrofit project, which is what we’ve been talking about so far, existing building, replacing individual systems in that building and then it can be used in the gut rehab new construction space as well. So gut rehab would be taking a building down to its kind of shell, ripping everything out and starting new, or ground-up new construction. So PACE has a place in all different types of construction projects.
Scott: So beyond PACE, I know that there are a lot of incentive programs out there, I’ve seen things that are offered by individual states. I spend a lot of time out in California who I think is probably on the cutting edge of all of that. And then you also have some utility companies who are incentivizing energy efficiency projects. Can you talk a little bit about what else is out there in a general sense? And maybe where property managers, facility managers can go and find out what’s available to them in their local area?
Lucas: Yeah, so, let’s talk going large to small. So federal tax. First, EPAct, pretty well-known tax credit for energy efficiency improvements. It has been in purgatory, and in and out of purgatory for the last several years. It keeps being renewed and then delayed, and then projects that were done are grandfathered in. So if you have a commercial property or a government building, you can assign that credit to your installers or designers. That is a mechanism for a tax credit for doing energy efficiency work. The problem is, is that it’s so darn up and down, approved, not approved, renewed, not renewed, that it’s hard to count on. But you should use it if it applies to you, tax credit never hurt anybody. And I’m sorry, it’s a deduction, excuse me. It’s a federal tax deduction not a credit. It’s an important distinction. So a tax deduction never hurt anybody. So if you do a project, you should always check to find the status of EPAct at that time.
Then going down to the state level, the best resource is a resource called DISRE, D-I-S-R-E, I believe. It is a web database from the University of North Carolina, I believe it is or NC State, maybe. It is a compilation, state by state, of renewable portfolio standards, feed-in tariff rules for solar and wind, and with the incentive programs for different utilities. So that’s a great resource you should go check out (https://www.dsireusa.org/). And at the state level, it will also highlight known grant programs.
Before I forget, let’s go back up to the federal level. One that I wanna plug because it gets underutilized, is the US Ag department has a REAP, R-E-A-P Grant program for energy efficiency and renewable energy. It has rolling submissions two times a year, I believe. You have to meet some qualifications, so not everybody does. And geographically, you have to meet some requirements, you have to be in “rural areas,” but a lot of the country falls into that area, that designation, so that’s another federal program. You should always check to see if there’s a REAP grant available. REAP grants are best utilized for kind of unique and generation-heavy projects. You see a lot of manufacturers go for co-generation or projects that you don’t have to do, that are holding up projects. ‘Cause with any federal grant, there’s a lot of hoops to jump through. But anyway, it’s out there. Check it out.
Then on the state level, I would recommend everybody go to their state energy office if they have or figure out where the department or office, or whatever it is, that handles energy-related issues for your state. The DOE gives money to those offices to fund various different programs. This is how, in the residential space, like the HWAP and home weatherization, that’s how these programs get funded and administered out, but they also often have some industrial energy efficiency monies to do audits or maybe do studies, or other things like that. In the state of Ohio, which is where we are primarily doing business, they also do commercial building audits. And have a small grant program to actually help fund implementation, so we’re really lucky to… We have that program, but that money exists for pretty much every state if they go and apply for it and run a program.
So go to your state energy office, find out who that people is, and try to make friends with them ’cause sometimes those monies or those programs aren’t real well-advertised. You’ve gotta dig. It’s one of those dig to find versus being pushed at you. And then going to utility side. So utility rebate programs, people are generally pretty familiar with them for light bulb incentives, and motors and VFDs, and HVAC systems, things like that. But there are often also custom incentives to do building automation.
There are all sorts of unique programs that we’re familiar with, ones in various different states, and they’re run by the… Often run by the utility company and approved though the utility commission. So they all… All have different nuances, there’s retro-commissioning programs, there’s funds to do audits, there’s all sorts of different channels and programs out there, but you gotta go dig through your utility company’s website. Often, they’ll say, it’ll be a link, it says, you choose first if you’re a commercial customer, and then “save money” or something like that, is often the header on that website. And then it’ll say program, rebate program, and just read through those headers to see the different programs, ’cause everybody knows about the lighting, but there’s often some hidden gems in there to help do some more advanced stuff.
Scott: Well, that’s all really helpful information, Lucas, and we really appreciate it. As we’re wrapping up here, I’m kinda curious, do you have any just general tips for our listeners on things to keep in mind when they’re considering utilizing some of these programs?
Lucas: So on the incentive side, if you’re a property manager or building operator, even an owner, we often say that nobody wakes up in the middle of the night just dying to replace their light bulbs with LEDs, right?
Lucas: You wake up in the middle of the night, sweating, when your roof’s leaking, your chiller is on the fritz or your boiler is about to fail, or your elevator is not working. And you don’t wanna come out of pocket to pay for those things, you’re better… That cost, that opportunity cost of the capital in your pocket to do the next project or work on the program for your not-for-profit or whatever, is really high. So using incentives to lower the project cost is always the first thing you should look at. And then using innovative financing tools to offset the need to come out of pocket can be a really, really powerful tool. It’s not the right tool for everybody, but when it works, it can really work, and we’re seeing this market really explode. I think the C-PACE marketplace will cross a billion dollars this year, and it’s in a hockey stick growth right now, so it’s working for a lot of people.
Scott: Awesome. That’s awesome information, Lucas. And I’m sure this is really valuable to a lot of our listeners here. We appreciate you joining us for the podcast today, and would love to have you back at some point, but thank you again for taking the time to share all of this information with us.
Lucas: Yeah, thanks for having me. Thanks for providing a channel to get the information out. Everybody, we’re all passionate building and energy efficiency geeks, and this helps educate. So thank you.
Scott: Well, thank you again to Lucas Dixon from Plug Smart for joining us for the Building Technology Podcast, this is Scott Holstein with Computrols signing off, we hope to see at our next episode.