Interview with Aaron Kraus - June 2017

ERCG continues its ABC leadership interview series with Aaron Kraus, Director of Market Activation and Policy at Greenworks Lending. We sat down with Aaron and discussed several topics, including --

• The relatively untapped mid-market opportunity and why
• The primary barrier for customer adoption of energy savings measures
• Developing partnership opportunities with interested suppliers

ERCG: Commercial PACE financing is a relatively new concept – for those unfamiliar with the program, can you please explain what it is and how it works? How is commercial PACE different from residential?

Aaron Kraus: Commercial PACE is a public/private partnership that classifies building energy and water improvement upgrades as a public benefit – like a sewer or road extension. Due to this classification, a commercial, industrial or multi-family property owner can finance these upgrades through their property tax as a special assessment. In turn, the local taxing authority takes those funds collected through the property tax and remits them back to the capital provider. By sending the payment through the property tax bill, this financing is viewed as extremely secure by the capital markets. Therefore, we can provide terms that are not possible to be found through any other financing vehicles. For example, Commercial PACE enables:

• Long term financing with fixed rates up to 20 year terms.
• Extremely low cost of capital
• 100% financing - No capital outlay required from property owner (hard or soft costs)
• With no capital outlay and long financing term, projects generally cashflow and generate NOI starting day 1
• Non-recourse – no corporate or personal guarantees required
• Non-accelerating, even in the event of sale of property
• Does not consume credit capacity as this is not considered debt
• Can be structured to pass through costs with tenants for NNN leases
• Fast-tracked underwriting can lead to quick close

Commercial PACE is authorized by state statute in more than 30 states. Commercial and residential PACE share the same name but they are different programs. With Commercial PACE, we underwrite all projects and receive mortgage lender consent on all deals. Again, Commercial PACE can apply to all commercial, industrial and multi-family (5+ units) facilities.

ERCG: How did Greenworks Lending get its start?

AK: Our co-founders Jessica Bailey and Alexandra Cooley scaled the first large Commercial PACE program in the country in Connecticut. In fact, Jessica was appointed by Governor Malloy to the Green Bank to turn the Commercial PACE concept into a workable financing tool. She was successful and spun off the effort into Greenworks Lending, the largest Commercial PACE capital provider in the nation. She has led more than $125 million of Commercial PACE transactions.

ERCG: Which markets are you currently in, and what role do you play in the market?

AK: As of today, we can currently finance deals in CT, RI, MD, DC, OH, MO and TX and expect to be in several new states by the end of the year. We have an ambition to be a 50-state capital provider.

We finance any measure than can improve energy or water performance for a commercial building. Often that involves replacing existing capital equipment like HVACs, roofs and windows, piping, building controls, etc. But we can also fund very ambitious and sophisticated deals. Here is a video case study of a project we did that included a microgrid, solar, a fuel cell and energy efficiency measures. 

ERCG: For a standard retrofit project, what is the primary barrier for the customer and how do you overcome that?

AK: Historically, the primary barrier for the C&I world has been financing and an easy and predictable process to get funding dispersed.  For the more standard retrofit project, we want to make sure the process is seamless and easy. We strive to avoid complication and headaches. To that point, the primary challenge is similar to the challenges present with any other type of commercial financing. Sometimes there are hurdles and complexities we will have to overcome. 

ERCG: What trends are you seeing in the energy supplier market and how does Greenworks Lending fit in?

AK: We would like to partner with suppliers by providing highly valuable capital to their clients. Suppliers are increasingly becoming a one-stop shop for all things energy management for their C&I book. Where applicable, we can provide the financing to get projects done. Suppliers can act as an owner’s agent and receive benefits for tapping into our capital. 

ERCG: Greenworks Lending has access to capital, and suppliers have access to interested customers. What qualities would you look for in an ideal supplier partner?

AK: We are looking for suppliers with a footprint in states that we operate in and ones that have a C&I business or are interested in breaking into that space. We are looking to develop long-term relationship with partners that can yield benefit to all parties. We can be an important value-add for a supplier as they both attract new clients and strive to bring more service to their pre-existing book.

ERCG: Cash is king, but does Greenworks Lending have access to implementation firms (contractors, installers, servicers, etc) that suppliers can also tap into?

AK: We do. We work very closely with contractors and energy service firms in all of our markets. At the end of the day, the men and women of those firms are the ones doing the work and so we think they are natural partners. We are happy to work with a property owner’s desired contractor. However, we are happy to provide a list of trusted firms we have worked with as well.

ERCG: While new buildings and developments have the benefit of the latest standards and codes, we still have a lot of inefficiency in the built environment throughout the country. Do you have a perspective on how big the market opportunity is?

AK: One of the reasons Commercial PACE was developed was to finance upgrades for the mid-market. This is a market that is relatively untouched by ESCOs and contractors since projects are so hard to finance (no commercial credit rating). We are looking less to the Fortune 500 firms (although we can, of course do these deals) and more to the basic office building or warehouse down the street. Commercial buildings represent 43% of building energy use in the United States but only represent 5% of the energy efficiency spend. One of the reasons is that 87% of these owners have no access to third-party financing options.  Commercial PACE solves this problem by allowing contractors and suppliers to service this relatively untouched part of the market.