John Kinney, CleanFund
Today's guest is John Kinney, Founder, CEO and Managing Partner at CleanFund.
CleanFund specializes in PACE financing, an innovative way for property owners to finance public good improvements to their buildings, including clean energy, efficiency, and resiliency through their property taxes. CleanFund got its start in Berkeley, California in 2009 and initiated the first privately funded PACE transaction focused on solar power. Since then, PACE financing options have taken hold in dozens of states across the USA, and CleanFund serves as an enabling mechanism in all of them. CleanFund specifically focuses on C-PACE or Commercial PACE, which means that it's wholly focused on commercial buildings. C-PACE can be applied to new construction or building retrofit projects, and the types of projects that qualify for C-PACE vary by state or locality.
It's going to take new ways of thinking about things for us to drive the decarbonization of our economy as fast as possible. With CleanFund, John is focusing on the huge emissions footprint of the built environment and is helping property managers and lenders unlock new tools to finance needed clean energy upgrades.
Get connected:
Cody Simms
CleanFund
MCJ Podcast /Collective
*You can also reach us via email at info@mcjcollective.com, where we encourage you to share your feedback on episodes and suggestions for future topics or guests.
Episode recorded on February 24, 2023.
In this episode, we cover:
John's transition from fitness into climate
An overview of PACE or “Property Assessed Clean Energy”
Difference between residential and commercial PACE
Impacts of building regulations and penalties
New Hyatt construction example in Salt Lake City
An overview of CleanFund and its role in PACE
Who's on the capital side of PACE products
How CleanFund interacts with green banks at the state level
Forecasting the future of energy efficiency in the built environment
Innovative approaches to addressing emissions in the space
The challenges of working in commercial real estate
How to engage with CleanFund and learn more about PACE at CleanFun.com
CleanFund's plans for expanding
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Cody Simms:
Today's guest is John Kinney, Founder, CEO and Managing Partner at CleanFund. CleanFund specializes in PACE financing, an innovative way for property owners to finance public good improvements to their buildings. Including clean energy, efficiency and resiliency through their property taxes. CleanFund got its start in Berkeley, California in 2009 and initiated the first privately funded PACE transaction focused on solar power. Since then, PACE financing options have taken hold in dozens of states across the USA. And CleanFund serves as an enabling mechanism in all of them. CleanFund specifically focuses on C-PACE or Commercial PACE, which means that it's wholly focused on commercial buildings. C-PACE can be applied to new construction or building retrofit projects. And the types of projects that qualify for C-PACE vary by state or locality. It's going to take new ways of thinking about things for us to drive decarbonization of our economy as fast as possible. With CleanFund, John is focusing on the huge emissions' footprint of the built environment. And is helping property managers and lenders unlock new tools to finance needed clean energy upgrades. I'm Cody Simms.
Yin Lu:
I'm Yin Lu.
Jason Jacobs:
And I'm Jason Jacobs. And welcome to My Climate Journey.
Yin Lu:
This show is a growing body of knowledge focused on climate change and potential solutions.
Cody Simms:
In this podcast, we traverse disciplines, industries, and opinions to better understand and make sense of the formidable problem of climate change and all the ways people like you and I can help.
With that. John, welcome to the show.
John Kinney:
Thanks for having me, Cody. Looking forward to talking about the climate journey. Sounds like you've had quite a journey yourself.
Cody Simms:
Well, I think all of us are on a journey. It's a relatively new phenomenon. I think back on it, people who've been in it for a long time will say, "Hey, 30 years ago we should have done something." But it's really hit, I think, mass awareness just over the last decade or so. So all of us on a journey to some extent.
John Kinney:
Yes, we are.
Cody Simms:
I am excited to hear yours. So we're going to spend some time today talking about PACE and understanding that as an instrument in the climate financing toolkit. Before we do, I was looking at your background and loved seeing, much like my partner Jason, you kind of came from the fitness industry into climate. So how did that happen?
John Kinney:
Well, I got into the fitness industry with my wife, who was my partner, and we opened up a hundred athletic clubs called Club One. We were delighted to figure out how to get out of it while we were still married, because I don't recommend doing startups with a spouse. It started to get in the way of our marriage. I left, she left. And I really wanted to pursue something that I was passionate about, which is the climate. And I started a biodiesel company and in beginning of 2008, my customers started having problems financing their biodiesel equipment for some strange reason. So I sold that. And just happened across another dad at a lacrosse game who had just come up with an idea for doing solar on houses in Berkeley. And he told me about it and I thought, "Wow, that's a great way to finance commercial buildings to do energy improvements." And we started CleanFund together. That was in 2008, 2009.
Cody Simms:
And I know we're going to get all into PACE financing and everything, but from a bit of reading I was doing, Berkeley was the epicenter of this. It was the experimental beginning of this entire financing structure. Is that correct?
John Kinney:
Yeah, it started in Berkeley. There was a big fire, if you remember here. And the thing that was really a problem for the firefighters is that telephone poles were falling over. And they had trouble getting in and people had trouble getting out. And at a Berkeley town meeting they said, "Well, why don't we underground all the utilities and we'll just have the homeowners pay for it with property taxes." And they could do that because property taxes can be used for the public good. And at that same meeting they said, "We'd really like to have all of our residents also put solar on their roofs when they rebuild on."
And they asked, "Can we do the same thing and pay for solar with property taxes?" And turns out you cannot do that, because solar is not considered for the public good. But by going out and changing the regulations, changing the law, literally in California, we were able to expand the definition for public good to include the environment. And then you could use property taxes for solar.
Cody Simms:
If I understand then with the utility pole issue, that was a common good problem that was just, "Hey, we're going to levy a standard tax on everyone in order to go fund the need to do this." With rooftop solar, to some extent that would be a per individual homeowner decision to do rooftop solar. And so that then becomes a different financing mechanism where you're talking about changes in variable property tax on one property versus another. Is that a correct way to think about it?
John Kinney:
Yeah, that's a good way to think about it. That's one of the nice things about PACE. It's not an imposition by the government, is a totally opt-in program. I'm focusing only on commercial and it's even more important on commercial to not be forcing the real estate owners don't want, they would fight it. So this is an opt-in property tax. And you just sign an assessment agreement and agree that if you get $10 million, you'll raise your property taxes by 500,000 or whatever it takes to pay that back over a long period of time. And then once it's paid back, the property taxes go away.
Cody Simms:
And it's specifically for clean energy or I think it also, you can use it now for resiliency related things like lower water property, etc. Is that correct?
John Kinney:
Yeah, PACE is for the public good and that's defined differently in different states. So in California we've expanded it to include water conservation, initially. And then we expanded it further to include seismic. And we've even expanded it further to include fire mitigation. In places like Florida, the definition for the public good includes weatherization. So it's tie down roofs and pardoned windows and things like that. But any property owner that has an improvement that is PACE eligible can pay for it with funding that is repaid through their property tax bill.
Cody Simms:
So it's expanded beyond the acronym which, if I understand, is for Property Assessed Clean Energy and now can be inclusive of any of these resiliency or climate-related needs that are, you said, are defined locally.
John Kinney:
And it's very bipartisan as well. So when I'm talking to people in Texas, PACE stands for Property Assessed Capital Expenditures. If they have a climate problem.
Cody Simms:
Interesting.
John Kinney:
Because it's really just paying for things that need to be done and are going to be cash flow positive, as many of the climate improvements are. Or that just have to be done. In California, if you're a hospital, you have to have seismic hardening. And so hospitals love to be able to use PACE. It is not a direct increase in their mortgage. PACE is an increase in property taxes. So it's always going to be non-recourse and always going to be attached to the land, not the person. So if you sell your property, you don't have to pay it off. The next owner gets the improvement, so they get the improved lighting or HVAC, whatever it paid for. And then that new owner will continue to pay the property taxes until it gets paid off.
Cody Simms:
And I would assume then, because you're needing to go through some kind of state or local regulatory body to get approval for a given program and even to get the property tax assessed on a per property basis, there's a bit more work upfront than taking on a commercial loan might be. But then you get these features that you were talking about in terms of how the loan is structured. Is that correct?
John Kinney:
Yes. It's not any more work for the real estate owner, but it's a lot more work for CleanFund, or whoever is doing the financing. Because it is somewhat balkanized. Each state has their own property tax law and you have to comply with that. And then each county may have interpreted the law differently. You have to comply with that as well. So it's really important to know where you can do this and what it can be used for, and all those things in order to get the security that comes with having it be on the property tax bill.
Cody Simms:
And as I understand it, there's Residential PACE or R-PACE, which would be a homeowner could leverage. And there's C-PACE, which is Commercial PACE for commercial buildings. I'm guessing R-PACE would be a consideration of the homeowner of going down this route and attaching the improvements to a property tax assessment as compared to maybe a home equity line of credits. Or financing it out of the equity of their home somehow. You all don't operate in that space as I understand it, but that is an ongoing set of programs that people can look at if they want to do solar panels on their home or switch out their HVAC or this, that and the other depending on where they live. If I'm not mistaken.
John Kinney:
Yeah, the Residential PACE got set back quite a bit, because there were some very small percentage of transactions that were done without fully explaining it to the homeowner. Those had a big consumer protection backlash.
Cody Simms:
Oh, interesting. Because it's not an actual loan, so you don't have to have disclosures. Or you didn't maybe.
John Kinney:
So you didn't have to have disclosures. Now you do. Now Residential PACE is really only viable in Florida and California. And Commercial is in 37 states. So quite a bit broader, because on the commercial side we get lenders to consent. The senior lender has to consent to the transaction, and so you really have a check and balance that is put in place right up front. And so you don't have any consumer protection issues. Whereas a consumer, you might have a very unsophisticated homeowner making a decision with an air conditioning contractor or a solar contractor. And they don't really understand how it's going to affect their property taxes. That's being greatly mitigated now and it's back on track in California and Florida.
Cody Simms:
I assume, whether you're talking about a homeowner or a commercial building, there's benefits that the loan doesn't stick with the principle because it's tied to the property. Does it end up impacting the overall future sales price of a property? Assuming that levy is still attached to the property when the property has gone to be sold. Because now this property has a higher property tax than it otherwise would have on an annual basis.
John Kinney:
Right. It's going to have two effects. It's going to have a positive and a negative. The positive effect is that if you put solar panels on, they're reducing your utility bill probably more than the property taxes will have gone up. And so that property will be worth more, because it has solar. And it will be worth less because it has higher property taxes. And depending on whether the increase in property taxes is fully offset by the utilities or not really determines whether or not it impacts the value in a positive or negative way. Which you can imagine on a commercial real estate property, if you have a 20-year-old air conditioning system. If you don't replace it, that's going to impact the property value as well.
Cody Simms:
And now in places like New York with Local Law 97, etc, you're going to start getting penalized for not properly upgrading your, whether it's HVAC or building efficiency, due to emissions concerns that are being levied locally. Right?
John Kinney:
Good point, Cody. You've done your homework.
Cody Simms:
I try to.
John Kinney:
The government tries to use a carrot and stick approach to get people to do energy improvements. And the stick is putting penalties on. Local Law 97 in New York City imposes penalties on buildings that aren't efficient, but Local Law 98 gave them the ability to finance it with PACE. And so they've got a carrot that they can hold out. And because it is going to be used to avoid penalties, it makes it much more positive. And the mortgage holders are much more interested in participating when they know that their borrower is going to face a million dollar penalty per year if they don't do this improvement. They're trying to protect their own debt-service coverage ratio. They're trying to make sure that their borrowers stay healthy.
Cody Simms:
And how much is the delta of cost savings from efficiency gains relative to property tax price increase on an annualized basis? How much on a per project basis is trying to get that to stasis, or even to be accretive to the property owner a consideration in these loans?
John Kinney:
Yeah, well typically it's going to be positive, and that might determine how much of the improvement is financed with PACE. If you have an existing building and you've got a lender, you're probably not going to get so much financing that it winds up being negative. There's probably going to be PACE enough to be positive.
Cody Simms:
Because the building's already cash flowing, so you already have profits you can leverage.
John Kinney:
Yeah.
Cody Simms:
Okay. That makes sense.
John Kinney:
I wouldn't distinguish it between new construction and an existing building. The retrofits are what will be cash flow neutral or better, but on new construction you're going to build that solar or you're going to build that efficient building anyway. And so you really can't take full credit for having PACE in there.
And so on new construction, it's really just part of the financial engineering. And it allows a building owner to get a little more capital perhaps, not much more, but about 5% more. But it's going to reduce the amount of mortgage that goes on. So if the building qualifies for a $100 and they decide to use PACE, they might get $20 of PACE, but then they'll have only $85 of mortgage. And so they get $105 instead of a $100. And it allows them to do a little bit more in proceeds, but it's really financial engineering on new construction.
Cody Simms:
Let's use an example there. I saw on your website you had a multi hundred million dollar Hyatt hotel being built that was leveraging a fairly significant PACE component to that. Do you want to walk us through what that looks like to the extent you can?
John Kinney:
Sure. That was a real large Hyatt in Salt Lake City that was developed. Acore was the senior lender, great senior lender. And they really wanted to help their client get as many proceeds as possible. And their construction financing was a little bit higher than PACE. So they allowed us to do $56 million of PACE at a very attractive rate to the borrower. And that made the project go forward and allowed the hotel to implement some really interesting environmental features with their controls and their HVAC and adding solar. And being able to do it in as friendly environmentally way as possible. And the senior lender on that, Acore, was happy to go along with it. They did reduce the amount of mortgage that they provided, but the building owner, the Hyatt developer, was really happy with the combined weighted average cost to capital and the combined amount of financing that they were able to get.
Cody Simms:
And then is your role at CleanFund to then work to actually ensure the levies are happening properly, that they're getting implemented at the property tax level properly. And then, I presume, to then secure the financing that is being brought into the PACE loan itself. So you're out finding the LPs, the investors into this PACE product. Either you run your own fund or you are on a product by product basis. Or loan by loan basis. Is that correct?
John Kinney:
Yeah, just in general as a PACE expert, we were the first ones to do PACE and have been involved in every state's legislation. So we're experts in how to get this done. And that's our role, is making sure that the real estate owner understands it. They understand what happens when they sell their property. They understand how it is passed through to tenants. They understand how it looks on their balance sheet, what they can deduct. And working with the senior lender to be sure they understand what it is, because property taxes are not extinguished by a private foreclosure. So we're going to stay in place even if they don't pay their mortgage. And that can concern a mortgage holder until they really think about how this is something that isn't going to accelerate in front of them.
They just have to be sure that property taxes are paid. But the interesting thing, Cody, is that we started CleanFund with a mission to help real estate owners do clean energy financing. And we had to go to the senior lenders and beg them to let us go in front of them. I've recently restarted CleanFund and we have a new mission now. Because the lender consent, getting a lender to allow us to put our own capital in front of them was not easy. And it was really resulting in about 90% of the transactions wouldn't happen because the borrowers don't want to go to their lender, and ask and create some adverse selection, things like that.
Cody Simms:
John, can you unpack for our listeners who aren't heavy in finance, what does it mean for you to be in front of a senior lender? What does that mean for folks?
John Kinney:
Well, the mortgage, it has always been the first priority lien on a property. At least, except for property taxes.
Cody Simms:
Meaning if the building owner defaults on their mortgage, the bank can claim the property. There's a ton of legalese involved in that, but that's generally what that would mean. Is that correct?
John Kinney:
Yeah. If the building owner doesn't pay their property taxes, then the bank's going to step in and take it over. And if there are late property taxes that didn't get paid, they'll need to bring those current also. But they wipe out every other obligation on that property, except for future property taxes. And that's the issue. And that's what protects the PACE investor is that they know even if the bank forecloses, they're still going to get future payments and past payments that are late. The lender doesn't like the fact that they are going to have to pay ongoing property taxes.
And you asked earlier, does it affect the value of the property? It does reduce the value of the property when your property taxes are higher. There will be an offset but you've created a better property by investing in whatever the clean energy improvement was. But that's the rub for lenders. And so what we're doing now, is instead of asking the lenders if we can go ahead of them and put something that's going to be repaid with property taxes. What we're doing is telling the lenders, "Hey, you shouldn't consent to this for someone else to go in front of you. You should do it yourself." So we're helping lenders create their own PACE product and we think that's going to create a hundred billion dollar private capital flowing into the commercial real estate industry to do these clean energy improvements.
It will all go through CleanFund, but we think many of the lenders will be concerned that they don't want to add full-time equivalent employees to create a new product. And they'll use CleanFund to help them add this product and they'll put out PACE on their own properties alongside of their mortgage.
Cody Simms:
Interesting. So there's less of a requirement for you to go out and raise the capital needed to finance these products. You'll be working with the lenders, with the capital they may already have access to. And you're helping them provide the structure and the functionality around the product. Is that correct?
John Kinney:
Right. Some of the lenders we're finding will still want us to finance it. So we give them a choice, we'll finance it or they can finance it. But we pay them fees. Even if we finance it, they get the same fee that they would've received on their mortgage, had they done it all with mortgage. That makes it a lot easier for them. Some of them don't want to carry it for a long time. And we've explained to them that they can sell these just like a mortgage. They're doing 30-year mortgages also, and they sell those. I think they'll probably turn around and sell the PACE bonds as well and we can help them in that process and securitize them if they want us to.
Cody Simms:
And who's on the other end of these PACE products? What does the capital base tend to look like for CleanFund?
John Kinney:
Upfront, there's a variety of different lenders and they're happy to put money up since it's going to be bankruptcy remote. It's really lower risk than a mortgage and it's state tax-free, so people are happy to put the money up upfront. But I think you're asking about where is it going to go in the secondary. And in the secondary market the insurance companies are just ravenous for this product. Because it's super long-dated, super low risk. They get really good balance sheet treatment on it, because it's investment grade. It's more secure than a mortgage and generally pays more than a senior mortgage on a conservative loan to value.
Cody Simms:
But even before it's secondary, didn't it primary market? Are these commercial lenders who are coming in, is this being levied as a bond somehow? What's the mechanism that you're using to actually finance these?
John Kinney:
More and more it's commercial lenders are coming in. But really most of it is either coming from insurance companies that will advance the funds and keep it on their balance sheet. Or it's with hedge funds and people that are playing the fact that this is a very low risk, high return improvement. And they just don't want to carry it for a long time. They want to turn around and sell it. They might give us warehouse financing. Lets us keep it in our balance sheet for a year, year and a half. But they really don't want to keep it for 30. And so it's important for us to be able to get these rated and sell.
Yin Lu:
Hey everyone. I'm Yin, a partner at MCJ Collective, here to take a quick minute to tell you about our MCJ membership community, which was born out of a collective thirst for peer-to-peer learning and doing that goes beyond just listening to the podcast. We started in 2019 and have grown to thousands of members globally. Each week we're inspired by people who join with different backgrounds and points of view. What we all share is a deep curiosity to learn and a bias to action around ways to accelerate solutions to climate change. Some awesome initiatives have come out of the community. A number of founding teams have met, several nonprofits have been established and a bunch of hiring has been done. Many early stage investments have been made as well as ongoing events and programming. Like monthly Women in Climate meetups, idea jam sessions for early stage founders, climate book club, art workshops and more.
Whether you've been in the climate space for a while or just embarking on your journey, having a community to support you is important. If you want to learn more, head over to mcjcollective.com and click on the members tab at the top. Thanks, and enjoy the rest of the show.
Cody Simms:
Do you play closely with different green banks at a state level in order to create these products in the first place?
John Kinney:
We do. For example, in Connecticut we've done three securitizations where we've actually bought paper that they've originated. So they were the source of the capital originally. And they're very innovative and really make it easy for their citizens, their constituents, their taxpayers to do energy improvements. But really they don't want to use public capital for this long-term. So they want to make private capital come in and fix a public problem. And that's what PACE does, is it attracts private capital for a public benefit. And the green banks might start with funding their own deals or they'll bring us in and have us start. So New York, NYCEEC, New York City Energy Efficiency Corporation is really also very good at doing this. And it's happening in Chicago and Ohio and even certain counties like Sonoma County and California is doing it.
But more and more the counties are recognizing that by simply having this mechanism available, they can attract private capital. And they really don't want to use taxpayer funds when they can attract private capital.
Cody Simms:
But they use it, as the government is generally pretty good to do, to almost kickstart it locally and prove to both local regulatory bodies and to capital in the state. Not state capital, but capital in the state. There's a there there and then that allows commercial lenders to then step in like CleanFund.
John Kinney:
That's a great role for government, is to create the infrastructure so that it makes the investment in these clean energy improvements safer. And longer terms that the borrowers don't have to think about a payback in five years. They can say, "Hey, I need to make a payback over the 20 or 30 years that it's out." And it covers a lot more properties by doing that. And the US has led this, but I just got off a call with the UN's Green Finance Institute and they're trying to get this started in other countries. It's already starting in Australia, it's in Canada. It's being piloted in Cape Town and New Zealand and London now. So it's going to become a worldwide phenomenon.
Cody Simms:
It's a good reminder for people who care about climate change to pay attention to state and local elections, because this is often where these types of programs get going. Federal programs are incredibly helpful accelerants, but it's often these state and local initiatives that actually can trail blaze.
John Kinney:
And as I said, it's really nice to have a bipartisan issue. Because I can understand people saying, "Hey, we don't want public funds going to pay for an air conditioning improvement." But this is private. So, the decision making becomes a very localized issue and it's going to happen because of economics. It just makes sense to reduce your utilities. And if you can make the building more comfortable and safer, you can attract better tenants and charge more. It's just making the economics work to incentivize building owners to do these energy improvements.
Cody Simms:
And John, one of the things you mentioned earlier on and I saw on your website too, I just want to understand what this means. There's something with PACE called tenant pass through. What does that actually mean? And is that mostly focused on multifamily housing? Or is that also related to a commercial building?
John Kinney:
It's actually excluded from multifamily housing generally. And the tenant pass through is that, if you have an industrial property or retail property, or even an office property that has a stipulation where the tenants pay for the common area maintenance costs. So they pay for utilities, they pay for property taxes. That retail center might not have an incentive, or that industrial warehouse might not have an incentive to put solar on or reduce the air conditioning load. Because their tenants get the benefit of those decreased utilities. And they can't just turn around and say, "Hey, pay me more if I do this for you."
But if they have the pass through of PACE, then the tenants pay the higher property taxes and the tenants get the reduction in utilities. And so it winds up being something that the owner really doesn't have any liability for. Makes their owners more money, makes the mortgage holders happy because they've got a higher ability to pay the loan off. And their tenants wind up being able to get a little better calm area maintenance charge.
Cody Simms:
Got it. That makes sense. Now I'm curious, we talked a little bit about the carrot and the stick at the local level. There's more and more of that happening on each side of the equation when it comes to energy efficiency, the built environment as a source of emissions, etc. What do you forecast is going to happen over the next five or 10 years, generally speaking, in this whole arena?
John Kinney:
Well, there's pushback from the real estate community for good reason. That they don't want to have penalties associated with inefficient buildings. At the same time, if we don't do some type of carbon pricing or something, we're just not going to be able to fix this at the scale and speed that we need to. And if you're looking at the climate change cost and saying, "Okay, we know that this is happening, we can't just push it off to the next generation. It's not fair to our kids. We've got to do something about it now." And so I think that we'll continue to see more penalties or pricing for carbon and also more measuring and public information about who is doing it. And we're seeing the lenders are coming up with some really important staggering goals. I've seen Bank of America and Wells Fargo and others say they're going to do $200 billion of climate improvement loans.
So now with their public promise to do these improvements, they've got to figure out how to put it out in a meaningful way. So this is a great low cost way for them to accomplish what we call ESG. Environmental social and governance goals, that the lenders have. But I think that you're going to get places like New York City and California might lead the way. But this is going to happen in Texas, it's going to happen in Florida, it's going to happen everywhere that we just have to have improvements to the commercial real estate which is responsible for about 40% of the carbon. It's more than transportation. So we're putting a lot of money behind the electric grid and getting electric cars and things like that to help on the transportation side. We've got to do the same thing for the commercial and residential real estate.
Cody Simms:
And what are some are some of the more innovative approaches you've seen come up recently?
John Kinney:
The brute force way is Local Law 97 where you're just putting penalties on. But I think that the display, being able to give kudos to the buildings that are doing this and letting them attract other tenants is helpful. Just in general, the codes that are required when you do improvements on a building, once you trip over into other codes, you're going to have to have compliance with new regulations to be able to do tenant improvements. And those are going to require the building owners or residents to do energy improvements. And I think that's the kind of incremental thing that has to happen. In places like the EU, we're seeing carbon pricing is getting much more sophisticated and I believe that's going to come over to the US. That's going to just make it more economical for a building owner to get carbon credits by reducing their utilities.
Cody Simms:
How are these building owners mostly doing carbon accounting and carbon footprinting today?
John Kinney:
Right now it's all over the map. And the Inflation Reduction Act is trying to put some teeth into getting more auditing behind and giving the SEC some power to go in and say, "Hey, you said you're doing $50 billion of ESG of energy improvements, but show us what that looks like. We want to really document that you have done that." And so there's a whole new industry that's coming up that is measuring and accounting for the climate improvements that owners and lenders are saying they're doing.
Cody Simms:
In my early stage world where I work, I often hear that as a startup it's really hard to work in commercial real estate. It's really hard to sell to building owners or to sell to property developers. Can you contextualize that a little bit, why that might be? Because this feels like a very needed product to go in and help these property owners assess what's actually going on in their portfolio of properties.
John Kinney:
Well, we're addressing the critical resource of cash to be able to do the improvements. But the other critical resource we have trouble addressing is time. And it takes time for them to figure out what to do. It takes time for them to do the improvements. And if they're going to do an air conditioning or a lighting upgrade, sometimes they may need to displace tenants in order to do it. Or inconvenience the tenants. So it's a very complicated problem for them. And at CleanFund, we can't address all the different issues. All we can do is remove the barrier, which is the capital. And make it economically attractive for them to do it. And, all the companies that are coming up with all these great innovative solutions that can actually take your building to net-zero now, are available. But there's a cost to doing them. Easier to do them upfront, but we have to do them to the installed base if we want to really make the impact.
Cody Simms:
That's a fascinating consideration is you not only need to account for the cost of doing the work, you need to account for the cost of the lost revenue that your building is generating while your tenants can't be in there because you're doing the work.
John Kinney:
Yeah. Or the inconvenience, whatever it is. They all want to do the right thing as long as it doesn't cost them money. And they can find the time to do it. But those two constraints are pretty important and we need to address both of them at the same time.
Cody Simms:
And so John, for any listeners who are motivated to want to learn more about PACE in terms of actually accessing a financing mechanism or want to understand more about CleanFund, how should they engage you?
John Kinney:
Thanks for asking. It is hard for lenders to think about a new product, so this is a great way for them to do it, but they are likely to want to outsource it. I would love for them to reach out to my website, which is cleanfund.com or cleanfund.org. And they can reach me at John.Kinney@cleanfund.com.
Cody Simms:
Great, thank you. Well, John, what more should I have asked you about CleanFund, about PACE? Where else should we go with this before we wrap up today?
John Kinney:
Well, I think that the big move that we've made that I think is interesting is trying to bring this product to the senior lenders. And so a question that they should be asking is why should they put out PACE instead of a mortgage? So that's an important question to ask. And the answer is that if they put out $20 of PACE on a $100 loan, instead of putting out a $100, they put out $80 a mortgage and $20 of PACE. The $20 of PACE is going to be more profitable because of this mechanism that we've created where it's paid back with property taxes. That makes it state tax-free, which really means something in California.
It also means that the duration of the loan is going to be longer, their mortgage is going to get paid off. Construction loan gets paid off in three to five years. A regular mortgage is routinely going to be paid off in five to seven. And the PACE is going to be embedded for a much longer period of time. Commercial real estate owners can pay it off, but they don't have to when they sell their property. They have to pay off their mortgage. So the commercial real estate lenders make more money. They don't have to reserve against PACE like they do a loan. Since when they do PACE, it's not really a loan. What they're doing is they're making an investment, they're making an investment in a PACE security. And the way the banking regulations work, it's just is more efficient for them to reserve against an investment than they have to reserve against a loan. Which from a regulator standpoint makes total sense because PACE is always going to get paid and mortgages don't always get paid.
Cody Simms:
I wonder too, obviously we talked about how the origin of this product was in clean energy, was in solar in Berkeley, but it's since expanded. You also talked about how the largest finance years of this product, especially in the secondary markets are starting to be insurance companies. If I were to crystal ball this knowing now 40 minutes of knowledge on this topic. It seems like there will be part of this product that goes to finance emissions efficiency, true like root causing climate issues. And there will be almost a splintered out version of this that funds resiliency around floods, wildfires, etc. And becomes a heavily associated with insurance and the ability to build resiliency and then maybe even secure better insurance policies because you have this in place.
John Kinney:
The reduction in insurance is part of what makes the PACE for resiliency work. I think what's going to happen is that right now a lot of PACE is used on new construction. And I think what we're going to see is that the senior lenders are going to make what I call a CELOC, a clean energy line of credit instead of a HELOCK, they're going to make a line of credit available to their borrowers and say, "If you've got a $50 million mortgage with us, here's $5 million or $10 million line of credit that you can use at a specific spread or specific rate that should be below the mortgage since it's senior to the mortgage and state tax-free."
And that's going to unleash a huge amount of thinking by the real estater saying, "Oh my gosh, now I've got access to incremental capital that I don't have to take away from my capital expenditure budget. I'm not taking it away from tenant improvements or doing some expansion. I'm able to use this new source of incremental capital and it's going to be cash flow positive. And it's going to make a lot of the improvements that would wind up getting spread over five or 10 years. It's going to make them available next year." And that's what's really going to accelerate the climate improvements that we're trying to get going.
Cody Simms:
And the lenders like that because again, they've set these ESG targets for themselves and these are direct emissions reducing or efficiency gaining projects.
John Kinney:
And they're going to be doing it with their own capital. They're going to make money doing it. We're not asking them to let us go in front of them anymore. We're saying, "Hey, we can empower you to do this yourself. You ought to have your own PACE program." And every lender ought to be doing this.
Cody Simms:
Interesting. So do you think the clean energy version of PACE and the resiliency versions of PACE are going to somewhat separate into different pools of capital over time?
John Kinney:
No, I think it's just the definition of public good is going to be different in places like Florida than it is in places like California. But I do see in Washington state and Oregon resiliency has been part of the legislation now, so they're able to do seismic upgrades there as well. Since it's a seismic unstable place. I think that whatever the public good law will be, what guides this, it is easier, however, to cost justify the clean energy immediately because of the utility savings. And so as insurance goes up in places like Florida, it will wind up being more cost-effective to do PACE for resiliency. And it just doesn't make sense to have the government subsidize people rebuilding in places that shouldn't be rebuilt.
Cody Simms:
Yeah. So the risk factor becomes the factor in that financial equation, whereas...
John Kinney:
Yeah, it's like carbon pricing. You got to put a price on building in a flood zone. And if you're going to build in the flood zone, you better spend a little bit more to make it resilient. And the insurance companies will appreciate that and give you lower rates.
Cody Simms:
And PACE today is available in the US in, it's pushing 40 states, I think. Is that correct?
John Kinney:
Yeah, it's pushing 40 states. It's legislatively possible in 40 states, but the laws aren't all written as well as they should. Where in New Jersey, the law's been in place for a long time and we're doing the first transaction on Natirar, and we had to really push to get that done. And the law has been rewritten and is going to be implemented with a new program anytime. But we're excited to get New Jersey as one of the states that is doing PACE. And they've been incredibly cooperative and helpful, to try and make sure that their state is benefiting from these clean energy improvements just like every other state.
Cody Simms:
And so for our listeners who live in or are even trying to build projects in states that either don't have it today or that have it but hasn't really been well-defined, what should they do?
John Kinney:
Well, it's writing your senators and congressmen. And it is a bipartisan issue, so some of it is just awareness. And I think once the lenders start doing this, once JP Morgan and BlackRock and others start putting this out alongside of their mortgages, then I think all the state legislators in places like Arizona where it's not possible to do it yet, will get on board. But really it's gone pretty fast. I mean, we're in almost every large state.
Cody Simms:
And you founded it in when? 2009, 2010. I think you said.
John Kinney:
The first law passed in 2008. So we've gone pretty fast. And I think now the important thing is getting it in other countries too. So Canada and Mexico hasn't done much here and really should. But it'll spread throughout the EU and expand more in Australia and Canada as well.
Cody Simms:
Well, John, I super appreciate you coming on today. Thanks for the pioneering work you've done here. And thanks for taking the time to share it with us. I learned a ton.
John Kinney:
Cody, thank you for your work. I'm glad to be on a journey with you.
Jason Jacobs:
Thanks again for joining us on the My Climate Journey Podcast.
Cody Simms:
At MCJ Collective, we're all about powering collective innovation for climate solutions by breaking down silos and unleashing problem solving capacity.
Jason Jacobs:
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Yin Lu:
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Jason Jacobs:
Thanks, and see you next episode.
