Uncle Sam’s tax code unwittingly sends American non-profit corporations to the back of the solar line. Arguably among the most socially-minded of our corporate organizations, those entities have had the greatest difficulty qualifying for solar financing. Many solar installation companies have chosen to ignore them, because there has not been a way to deliver them financed solutions. Fortunately for installers and their non-profit customers, we may be at a new dawn.
The Sun Hasn’t Shined for Non-Profits
About 1.5 million charitable entities operate in the US (per the National Center for Charitable Statistics). I’m talking about your neighborhood church, private schools and colleges, homeless shelters, private organizations. Many of them protect, support and uphold our rights, guide our morality and our future. Yet in the renewable energy revolution, non-profit has been a dirty word. They’re too small, too poor, without reliable revenue, and not credit worthy. Banks don’t want to lend to them, solar leasing and PPA companies don’t want to lease to them, and (since the end of the “1603 treasury grant”) the government hasn’t offered them a break equivalent to the value of tax credits and depreciation, neither of which they can use.
Adding to the challenge is the fact that non-profit solar installations are typically small to medium sized projects, because the typical institution does not need industrial-scale energy generation. Smaller installations are always challenging to fund, no matter the tax status, because the cost and time investment of the due-diligence and legal work required by most funders often dwarfs the yield of their investment. So with charitable organizations, the increased risk plus the small potential return makes investors generally disinterested.
But Times, They’re a’changin’.
A couple of structured financing methods have emerged that could apply to a considerable percentage of the non-profit sector. Mind you these are nascent, so not yet common; each applicant has different odds of being successful with them. Both of these methods involve third-party ownership via a Power Purchase Agreement (PPA), because in order to maximize the fiscal benefits of solar, there must be an entity that can absorb the significant tax benefits of the investment; a part of those cost reductions can then be passed on to the non-profit entity. In areas where PPA’s are not allowed, lease structures are often used.
But the pivotal altering factor in these financial solutions is the manner of managing the risk inherent in financing charitable entities: too little profit for too much risk. Each of the two methods below does that differently.
PPA with PACE
No hiding that I’m bullish on PACE. One of the many ways it is a game changer is for those non-profits that hold the deed to their building. Suddenly they have a construction credit line, because of their equity. So long as they are operating in the black, PACE gives them a way to leverage it. In California, this condition will pacify those PPA investors that might otherwise turn the other way; the risk is now removed. So the terms of the PPA (or lease) are negotiated first, then the PACE application is processed. Other efficiency upgrades can be done as well as part of that same assessment. The PACE administrator will then make the regular payments to the PPA capital provider (and system owner), and the non-profit property tax payer will repay the PPA through their annual assessment over the term of the contract, generally 20 years.
Commercial PACE administrators typically have a threshold of deal size that is higher than most non-profits need. But a few administrators have developed partnerships with capital providers that are now ready to engage in these smaller transactions. This allows the administrator to make revenue both from the PPA and the PACE contract. Smaller contracts can then make business sense for them, even projects as low as 30kW solar systems or about $100,000. Solar installers can generally get progress payments during the installation process, even in smaller projects.
The disadvantage: PACE commercial programs are only in approximately half of the US states, and some of them are barely getting started. So you may need to wait before you can take advantage of this structure. To see who is active in your state, check this site.
Contact your local PACE administrator to see if they offer this, or contact me to evaluate your project’s funding potential.
Special Purpose Corporation To Hold a PPA
If you can’t find a lender for your non-profit, then create one! The process is legal, though expensive and tumultuous, but it’s a lot better than paying 40% over those that can take the cumulative value of the solar tax benefits. The key here is that the non-profit entity must have qualifying, willing individuals within its constituency to become stockholders. But no folks care more for a charitable institution than those in its own community. Here is how to take advantage of that.
A Special Purpose Corporation (SPC) is created to own the asset of the solar installation, just like any other leasing or PPA company. Stocks are then sold to “supporting constituents” who are members of the organization, who trust its management, and who like the benefits of the deal: they get all the tax advantages, and they get a steady annuity from an organization they trust and love. Generally between four and eight investors are needed to subscribe the investment, depending on the size of the plant. An “arm’s length” administrator is selected, one who has no interest whatsoever in any of the parties involved; his/her job is purely to create the company, structure the agreements, collect money from the non-profit and distribute it to the stockholders, return tax documentation etc. It can be an accountant or attorney. A fee for these services must be added to the cost of the deal, generally about 10% or more, plus annual admin fees (note that the PPA/PACE structure will also have fees, and most likely higher interest). The beauty of this SPC structure is that the negotiated terms are jointly set. So the length of the PPA, the interest rate, the buy-out option, etc, are directly agreed upon by the non-profit (the customer) and the stockholders (owners of the solar installation). Want a 7-year buy-out for pennies on the dollar? Can do. Want a pre-paid lease? No problem, if the investors agree. So this is a much more friendly PPA structuring process than usual, because the SPC wants to support the non-profit.
Now here’s a warning: solar sales representatives attempting to guide this must watch their time investment in this process, and I suggest that he/she point to it, but not lead it. Once the process explained, the organization must find an internal champion to push the deal through, or pay someone to make it work. I know this first-hand, having wasted way too many months attempting to drive these structures in instances without robust commitment inside the organization. It only works with extremely motivated constituencies that have more than one champion among them willing to drive the process. If the non-profit formulates the PPA quickly and structures the transaction through their attorney and accountant, then it’s a marriage of interests made in heaven, including for the solar installation company.
Just a beginning
These solutions will not yield 100% conversion to solar by charitable institutions, obviously. But, per the title, the dark ages for non-profits and distributed generation seem to be moving towards the rear view mirror. The first wave of those institutions will definitely be adopting clean energy from this year forward in California and other early PACE state; that will trigger interest from the larger non-profit sector. By 2021, the ITC sunset will move the financing industry to an even playing field for all, a new dawn for solar and charitable organizations.
Feel free to contact me at [email protected].
Other writings in this publication by Philippe Hartley:
