Podcast Transcript: Jim Spano -Riding the “Solar Coaster” - Solar Finance and Real Estate

Announcer (00:05):

Welcome to another episode of the Solar Podcast. Today, Dave is talking with Jim Spano, Managing Partner at Spano Partners Holdings. Join us as Jim discusses his background in finance and real estate, a very interesting financing product his company offers, and how he rode the solar coaster from riches to rags and back to riches again. Let's get right into it on the Solar Podcast.

Dave Anderson (00:35):

Hello. I'd like to welcome everyone to the Solar Podcast. I'm Dave Anderson, the host. We're thrilled to have it with us today, Jim Spano. Jim is a longtime, well-regarded solar expert. He brings a vast of information and knowledge based on just development work that he's done. As well as he has a particularly interesting financing product that we're going to want to talk about today. We're thrilled to have Jim on with us today, but I'd love for our listeners to get an overview, not just about you professionally, but maybe you can give us a little bit about your background personally as well.

Jim Spano (01:04):

Sure. I come from a middle-income family, low, middle-income family, went through a traditional public education. Went into the military as opposed to college, had an interesting career in the military. Was recruited into their Defense Language Institute program, became a Russian spy for the US and stationed in Europe for four years spying on the Russians. Got out of the Air Force and there wasn't a whole lot of jobs for Russian linguists in the US post the Cold War, so I found myself in the finance industry.

(01:46):

Started out at the bottom like everybody does as a young man. Was fortunate enough to be very successful at a young age. At a very young age, around 45, I was able to retire. I sold my financial planning firm. I'm really doing a quick fast-forward here, but sold the financial planning firm, decided that I was going ... I bought a beautiful private lake and figured life's good. We're just going to spend the rest of our life enjoying our lake.

Dave Anderson (02:17):

That does sound like a pretty good life. Yeah.

Jim Spano (02:19):

It did for about six months. And at the end of six months, you're just itching to get your hands into something. Doing the same thing every day for an entrepreneur is just not a comfortable way to live I learned. I made the mistake, in retrospect, it wasn't such a terrible mistake, but at the time, I made a mistake of investing all of my money into the real estate business, into development real estate, starting in the early 2000s. And by the end of the first decade in 2000, when the markets had crashed and after Lehman went under and the credit markets closed, I was pretty much bankrupt on paper. And it was actually the solar industry and the renewable energy industry that saved me.

(03:08):

At the time, I was building a half-a-million square-foot mall. I had a unique approach in 2004 before solar was economically viable or anybody actually built solar. I designed a three-quarter megawatt field, which in 2004 was monstrous. People had kilowatts. We developed this three-quarter megawatt, 750 kilowatt system that I was putting over a retention pond back-feeding into the mall, and I used it as a marketing scheme to market the first all-green mall in the US. Had Target as my anchor, which is a big sustainability company, and they drew in all my infill vest of the tendencies. Things were going great.

(04:04):

And then of course when the markets crashed and you could buy a developed lot for less than what I was paying, basically Target terminated their contract. All my infill I lost. And when my note came to renew, I was $4 million more in debt than the new appraised value. Having lost all my approvals, I was reappraised as a cornfield. So I was $4 million underwater, in the red. And fortunately at the time, banks didn't want to foreclose because they didn't want to carry the property and the morbid taxes and everything else. So fortunately, they gave me the opportunity to work it out.

(04:49):

And what I did is, I took that three-quarter megawatt solar field, I built a 3.6 megawatt solar field, sold it to a local utility. Paid down my loan by a million bucks, and then I used the ground lease to service the loan and turned it into a performing loan. The banks loved it, the regulators loved it, and it saved the property. And then I went around the state, I repurposed all my other properties. I had a second phase of an industrial park, print and sell a single lot. So I repurposed it. I built a 14 megawatt solar field, sold it to a fund. It was the largest solar field at the time. And said, "Boy, this really works well."

(05:29):

I went around the state, repurposed all my real estate. When I ran out of my own real estate projects, I repurposed all my friends' real estate projects. Became the largest solar developer in the state. And then from there, I built and currently run seven different renewable energy companies. What's really interesting in that story, however, is, looking back, solar enabled me to keep that property. And today, just a year-and-a-half ago, I sold 280 residential lots to Caleb Manian, 142,000. Obviously, it enabled me to make a huge profit, and I still have 175,000 square-feet of retail that I have available to me and offers on.

(06:15):

Solar actually not only saved my real estate business, but it actually became a super growth business. And of course today, with the transformation of the grid to renewable grid, obviously all my companies are doing fantastic. Really, it's a riches to rags to richest story if you want to look at the whole story.

Dave Anderson (06:42):

Yeah. About the time you got into doing the development work and the solar, solar was really taking off on the C&I space. So you've seen a lot of changes as well. Are you still pretty actively involved in solar development projects? Or for the most part, did you do most of that work in the late two 2000s, early 2010s period?

Jim Spano (07:02):

No, I'm heavily involved in the industry in all aspects of the industry. As I've said, I'm running seven different companies. We have companies that lend to the solar industry, as we indicated, the first solar mortgage REIT. I have several companies that develop with different partners and develop within different sectors, utility scale versus C&I versus residential. We do a lot of aggregated residential now. We're partnering with large real estate, residential real estate developers, enabling them to build resilient net-zero homes using solar and storage assets.

(07:45):

There's a lot of change going on in the way that our grid is operated and how our power is generated, and all of that change is creating all different opportunities within all the different verticals in the industry. What we try to do through my companies is, try and take advantage and try and look ahead as to how those changes are going to affect things two, three, five years in the future and start planning today to position yourself and your company, so they can take advantage of the changes that are occurring pretty massively within the electricity space.

Dave Anderson (08:31):

Jim, I think for the most part, our listeners on the Solar Podcast are oftentimes pretty engaged in the residential space. I think your experience as a developer and the period of time that you've been doing solar in the renewable space actually can help elucidate or illuminate to our customers, or excuse me, to the people that listen to the podcast, some of the changes that you've seen over the past, I guess 12 years plus since being in renewables.

Jim Spano (08:56):

Sure. When the solar industry first started, it was pretty much the Wild West, as one might imagine. It's a niche market so there was all new rules and regulations coming up every single day. It's not a uniform market across any sector, state, federal. Literally right down to municipalities, you can have different laws, different incentives and different rules. It's a very difficult market in the early days, very, very difficult until there's some standardization that occurred.

(09:30):

In the early days, you pretty much built systems and you just fed the power into the grid, and the grid would then distribute it to the customers as clean power and charge some extra fee for delivering clean power. Which is really an anomaly because all the power, green or brown electrons, there's no way to sort them out. You're just getting the equivalent of green energy. But in any event, so back in the early days, it was all selling into the grid. And then sometime, I guess around 2005 or 2006, Jigger Shaw, a friend of mine who's the founder of SunEdison, designed a concept called the power purchase agreement. And that purchase power agreement enabled a completely different approach to the solar markets.

(10:25):

It enabled people to not have to purchase a solar system, but to be able to actually purchase the power from a solar system that was built on their property at a discount to the utilities power, whether it be commercial or residential or utility. The early days, it was strictly selling into the grid. Then we developed this PPA concept and we're up to sell directly to customers in certain markets. In some markets, the utilities had rules that didn't allow you to sell power to third parties, so those markets developed a lease approach as opposed to a power purchase agreement. And the market began to develop.

(11:11):

It pretty much migrated into a very large C&I market. All the large corporate Americas began taking on their different green policies and became more conscious of the environment and of climate change and so forth. And as that occurred, they all began requiring their customers, their vendors, their suppliers to have a certain amount of their energy produced with green energy. And then states started establishing requirement portfolio, or standards required a certain amount of solar be built in a given state and provided incentives to ensure that it was accomplished.

(11:53):

The C&I market developed into a very large market, beginning with your large Home Depots and the Walmarts and so forth. And then it boiled down to the mom-and-pop shops. Went through the large retailers like the Rite Aids and the Wawas and the large retail franchises, all the way down to the mom-and-pop shops. And that's where we began to address credit issues within the industry. As you went from the large commercial installations, which were the initial large C&I space, they were all investment grade and could get financed. And the smaller guys couldn't get the financing.

(12:40):

It's very difficult to sit, for example, a pizzeria or a medical clinic and expect 25 years of revenue from a solar system on the roof that they may be renting. So the commercial industry, the small commercial industry took a lot longer to develop, and different approaches to financing had to be developed in order to accomplish that. So you started to find hedges. We found insurance companies that would come in and they would portfolio approach 500 pizzerias. Now if we put a solar system on all 500 pizzerias, we can expect that we'll have a certain amount of default. But we can hedge that risk by charging extra across all 500 for the 50 or so that may end up defaulting.

(13:28):

And then as that market begun to tighten up, as all the investment grade, the cream of the crop became taken. And as these new commercial markets develop, a huge residential market began to develop. And then these companies like Sunova and GoodLeap began to provide upfront financing to the construction firms so that they could build hundreds and thousands of solar systems on homes with no capital. Ultimately, as I explained earlier, the way that they did that is, they offered very low interest rates, which were optically very attractive to the residential consumer, but they were really priced at very high interest rates.

(14:21):

And the differential between the stated rate and the real rate was just built into the cost of the system. They would take the cost of the differential of that higher rate and just say, instead of a $10,000 system, I'm going to sell you a $12,000. The same system, but I'm going to sell it to you at 12,000. And that $2,000 pretty much covered the difference between the 2% interest rate and the real, maybe 11% interest rate that they were trying to achieve in their portfolio. Ultimately, the residential market boomed because EPCs could build as many of these as possible. They had no capital constraints, and the consumer was still getting a good deal because they were getting a discount on their power.

(15:06):

Most recently, as the energy crisis hit across the world, that's where things changed significantly. Because now, well, you increase interest rates 4% over a six-month period. Now, instead of 2000 being added to the $10,000 system cost, you might have to add 6,000 to that system cost. And suddenly, the power rate that you need to offer the consumer is higher than what they're currently paying in order for you to make a margin in building this. That slowed the residential market significantly. It's created a tremendous stress on a lot of the residential EPCs. In fact, one of the largest ones in New Jersey had just filed bankruptcy two weeks ago.

(16:04):

I have partners that do roll-ups of these EPCs and they're all stressing terribly right now. Because when interest rates went up and they had signed all those contracts, the difference between that 2000 and that 6,000 is now coming out of their pocket. And they're not making any money on the projects. Now, you're starting to see new financing opportunities come into the market. One of the firms that I founded, a company called Sol-REIT, which was the first solar mortgage REIT in the US, they put together a specific plan to enable these EPCs to offer much lower cost financing to the consumers, so that they can still maintain their margins and offer competitive pricing.

Dave Anderson (16:50):

Yeah. We should try to get in to break that. I'd love to break that product down, but couple things we should try to unpack a little bit more. Over the time that you've been doing the development projects that you have been working on, has it been your experience that small commercial, particularly in the C&I, has been able to gain access to financing? I think it's still a fairly underserved market from my perspective.

Jim Spano (17:16):

It's been a literally underserved market primarily because of the credit risk. Now, Sol-REIT is just one of several finance firms that are coming out with programs that are enabling us to hedge that risk, so that there's an additional upfront cost to the solar consumer in order to offset that risk of default. Again, so as I explained earlier, Sol-REIT will put together, and other financiers will put together large portfolios of the small C&I and then we'll go and we'll reinsure against loss as a portfolio.

(18:01):

Obviously, there's a premium that we pay. That premium is passed on to each of the borrowers, and it gives assurance to us as lenders that we can now loan to that underserved market without putting ourselves at risk of default. Remember, as a solar mortgage REIT, we deploy equity, but then we lever our equity with our debt. It's very important that we maintain a very, very, very low default rate, and that's why we hedge any risk that we're not comfortable with.

Dave Anderson (18:35):

Sure. Early days, when you were doing the multi-megawatt deals with utility companies, typically what you would do is, you'd have a contract with the utility company to purchase electricity back for some period of time at some return rate. And you're building these on an amortized basis for maybe at the time, let's call it 10 cents for easy math, 10 cents per kilowatt-hour. And then you might get a 10-year contract with the utility company for an 11 or a 12 cent return per kilowatt-hour from the utility company.

(19:03):

That parlayed into these power purchase agreements where you'd have the end user of the power signing an agreement with the developer to purchase the electricity. And then the developer would also establish some version of an energy contractor, net-energy agreement with utility as part of that power purchase agreement or lease. Where that next evolution was, and PPAs and leases, I think many people that listen to this podcast are going to be very familiar with them, particularly on the residential space.

(19:36):

And then there's been a shift. I would say it was maybe as much as 75 or 80% with Sunrun and then SolarCity, before they were purchased by Tesla. That really led the charge in terms of helping residential solar expand, and it was because of the ease of selling these energy contracts or these power purchase agreements and leases. And then there's been a shift over the last little while, moving now into this ownership where people are taking out loans. They purchase the equipment, they take advantage of the tax credits, and typically you'd have these introductory or very low interest rates. And then the developer, whoever the residential installer company was, would pay a backend fee or a dealer fee to facilitate the financing.

(20:22):

And that worked great with low interest rates, but what you're pointing out is that we've seen in the market a shift where the cost of financing has gone up pretty significantly on the residential side. A lot of analysts, Wall Street analysts that are analyzing these different companies, Sunrun, Sunovas of the world, the people that are offering these PPAs and leases, are signaling pretty strongly that we're going to see a shift back to PPAs and leases because of the traditional financing.

(20:49):

I'm excited to hear, Jim, that you have a new finance product that you want to explain to us and talk about, and I think the residential space is looking for advancements and innovations in financing. I think that's an exciting thing. Those that are within the solar space for a while have thought that those high dealer fee, high fee loans were perhaps a little higher than they needed to be, and that there was some opportunity for innovation in that space. While you can't discount the importance of those lenders coming in and providing financing to residential homeowners, certainly there's room for innovation.

(21:32):

I'd love to get a little bit more of a breakdown on how those REITs work and how your company is playing its role in trying to roll this type of a product to market.

Jim Spano (21:43):

Sure. First we understand that the residential solar market, because of credit underwriting, you either have to be able to afford to buy the system or you have to have a FICO Score high enough to qualify. But one significant concern that created for me from a social justice perspective, because I've always been a advocate for low and middle-income household to participate in the solar transformation, unfortunately the PPA approach and the way that the incentives were originally set up to establish the market so that it could be a competitive, economically competitive market, were all done in a manner that really hurt the low and middle-income consumers.

(22:33):

Understanding that, the PPAs and that whole model was based on what's referred to as net energy metering, net metering. NEM is a common acronym for it. What that just means is that the consumer generates his own power and doesn't pay the ... If he generates the same amount of power that he uses, he doesn't pay the power company. Now, the problem with that is that the power company doesn't get any revenue from that consumer and yet, still provides the lines, the transmission, all the infrastructure that's needed for that home to be able to access the grid when the solar isn't working. All night, when a cloud comes over, whatever the case may be.

(23:20):

What happens is, when a person who can afford a solar system, like myself, bought my solar system, I stop paying for transmission and distribution charges to the grid. Which means that the people that didn't elect solar, they now have to pick up a higher percentage because I didn't pay my share anymore. When you had all of the wealthy people in the US, all made sense to buy solar, particularly if they were climate-conscious individuals. The more people that went solar, the higher the electricity costs where the non-solar people went. And it was all the people that couldn't afford solar, low and middle-income people, that started paying more for their power, so that wealthier people could avoid that cost.

(24:10):

First of all, the industry recognized that. Now, it's matured, and now we've come up with new approaches to residential solar. We've come up with community solar where we build a big residential farm and then every consumer gets a little piece of savings from that farm on an individual basis. Obviously, it's always best to have solar generated where it's used. You don't have any line loss. The power that's generated being used on site means no cybersecurity issues. It's really the best way to produce power in the US. But of course, it's not efficient because we use power at different times, in different amounts. But the sun comes up or the wind blows at certain times and it doesn't always match up, of course.

(24:58):

What Sol-REIT's looking at now is saying, how do we enable low and middle-income people to qualify to be able to get these PPAs, and to start participating in the savings, and not being burdened with the additional cost by not being able to participate? Sol-REIT put a program together where we've enabled EPCs to go out into the market and offer solar to virtually old consumers. If they're low and middle-income consumers and there's non-additional incentives, which quite often are the case, there's additional incentives in different states for low and middle-income communities, but if there's not the additional incentives, the ability to hedge that, which was never available before, when you sung to an individual homeowner, you can't hedge a $200 a month or a $100 a month payment.

(25:59):

But when I do a $10 million a month with an aggregation of thousands of homes, now I can hedge that. Now, I can offer to somebody who has an under 700 FICO Score. They can still qualify for solar. Naturally, if you have a 500 FICO Score, it means you're not paying your bills. You're still not going to qualify. But if you're a low income earner and you're paying your bills on time, and you're maintaining a 650, we can now provide the benefit of the savings in the solar sector to those people. What we've done is, we've lowered the cost of capital to the EPCs by eliminating those dealer fees, and allowing them to borrow from us on an aggregated basis.

(26:51):

Then to build all the homes and collect all of the PPA revenue themselves, pay us the mortgage payment, and they maintain the cashflow difference between the mortgage payment and all the revenue that's coming in. So they not only get paid for installing the system in their traditional, more EPC margin for building the system, but now, instead of Sunrun or GoodLeap or Tesla, one of these larger companies owning the asset, now they actually aggregate and own these assets. And they get all of that value that was being passed upstream because they didn't have the capital that Sunova and Tesla and these others have.

Dave Anderson (27:35):

You're helping me understand this a little bit better. The way that Sol-REIT presently works, are you then providing financing to the EPCs? The EPCs are underwriting the deal, or is Sol-REIT underwriting the consumer?

Jim Spano (27:51):

We underwrite the deal. We provide 100% of the construction cost to the EPC. He builds it, then we bring in the tax equity. That's the other difficulty is-

Dave Anderson (28:04):

That was my next question is how you take advantage of the tax equity.

Jim Spano (28:08):

Yes. What we do is we monetize it for the EPC. We bring in a third party who will be a partner with the EPC, the tax equity partner. They provide as much as 35 to 40% of the capital stack of the cost to construct, and they get all the ITC and all the tax benefits. And then the developer gets all the cashflows and his EPC margin.

Dave Anderson (28:35):

Right. And then the Sol-REIT, your model then is to get paid back out of the cashflows from the contractor?

Jim Spano (28:42):

We're a mortgage company. We're willing to take the risk to loan 100% of the cost to build the system, so that we can lock in the long-term mortgage. Which is where we make our money, is a little bit every year over a long period of time.

Dave Anderson (28:59):

Yeah. When you talk about the mortgage, you're talking about the homeowner's mortgage against the home? Or you're talking about ...

Jim Spano (29:05):

No, we issue a mortgage to the EPC company. He owns all the assets. It's a loan. We got the IRS to qualify as a mortgage in order to get preferred treatment to our investors. We can get a lower cost of capital because we're providing our investors with tax-sheltered returns. Our capital cost is lower and it enables us to deploy money into the market and be competitive in making our loans to the consumer.

Dave Anderson (29:36):

Jim, who is an ideal customer to work with Sol-REIT? Who's the type of person that should be reaching out to Sol-REIT to try to understand these loans and work to try to secure this line of financing?

Jim Spano (29:47):

The residential EPC that's looking to grow his business and has found himself in dire need because of the high dealer fees that have occurred as a result of this increase in interest rates over the last four to six months. Right now, all the EPCs' business is slowing down dramatically because the value proposition is, I can't offer a 15% discount on a power rate to my consumer because that doesn't generate enough revenue to cover that extra 3% of interest that I'm paying today versus when I signed them up three months, four months ago.

(30:31):

We're revenue financiers, so we're agnostic as to where projects are located, what the incentives are. We're agnostic to anything but the revenue and obviously, contracted revenue. If it's not contracted, then we either hedge or we discount, and that's where our underwriters pretty much have to make a call in. If you're not contracted, it's difficult for us to give you 100% financing. But if you have contracted revenue that we can rely on, then we're willing to take that upfront risk.

(31:04):

And bear in mind that we're not a traditional bank. We're a team of solar developers, so we know projects. We know if a project's going sideways, we know why, and we have the resources and the relationships to be able to come in and do something about it. Whereas a bank just lists as a default, sells it as a distressed asset and you get screwed.

Dave Anderson (31:26):

No, that's true. Yeah. If I were a customer, what are the benefits to me as a homeowner using this line of financing compared to a loan, traditional loan that's offered through the residential solar space right now, or a PPA or lease?

Jim Spano (31:46):

The EPC will be able to offer you a better discount on your pricing because his costs are lower. When his costs increase, he has to pass that on to maintain a margin. When I'm able to significantly decrease his cost of capital, he's able to pass that on. Whether he increases his margin or passes it on to the consumer, obviously each EPC runs his business as he sees fit. And we don't dictate that. But our goal is to enable these EPCs and developers and real estate developers, the residential real estate developers that come to us. Find a solar company, we'll finance their solar company for them and we'll enable them to build solar on every one of their homes without putting up a penny out of their pockets. And now they're selling a home with a lower electricity cost. So when the expenses of a home are lower, it means the value of the home is higher.

(32:38):

For example, if I'm selling two homes side by side, identical homes, one homebuilder puts solar and the other builder doesn't. So my electricity cost in one home, $200, and the other home it's $90. Well, the home with the $90 is going to sell before the home with the $200 electric rate. And that's pretty much what we try to enable real estate develops who I've worked with my whole career. Remember, I came from the real estate industry before I came into the solar industry, so I'm working with a number of national real estate developers that are working with our program now. In fact, we just signed one up that's committed to a $15 million a month in residential financing.

(33:19):

There's a tremendous opportunity for these EPCs to contact Sol-REIT and be able to begin offering a significant better value to the consumer, or to significantly increase their margins if the markets allow.

Dave Anderson (33:34):

Yeah. I hope I'm not getting too technical for both the people that are listening, as well as just for the general purposes of this conversation, but what does the agreement look like? Is the agreement with Sol-REIT as a long-term provider of energy, or is it the agreement with the EPC? Do you facilitate those agreements? Or how does that look?

Jim Spano (33:52):

Okay. If I'm working with a new homebuilder and we've agreed to put solar on all 2000 of his homes, we incorporate within the closing package. If he's selling the homes within the closing package, you incorporate the PPA and the site license, which gives access to the system to maintain it. And then of course, in his marketing materials, we provide him all the marketing materials to show all the climate benefits to his development, and then to the individual homeowner, the benefit of the lower cost of power and the resiliency.

(34:34):

Oftentimes, we're building storage systems with the solar systems. And enabling each residence to have resiliency, so that when the grid goes out, they have power stored in the battery. And then when the grid's operating, we use that battery. We allow the utility to store and push power in and out of that battery as it needs to maintain grid stability. The grids work off of certain frequency. And if you generate more power and you don't have more people using that power, it changes the megahertz of the frequency.

(35:10):

And that's when you get lights flickering. What are those safety things on your outlets all click off? Yeah. That's when you get irregular power, or your computers, when they crash out on you. The grid, it's very important for the grid, particularly data centers and hospitals and so forth, to maintain that frequency. Now, we contract with the utility to say, "Look, I put 2000 residential solar systems in these homes. People don't use them when the grid's operating because they have their solar systems. They're getting power from the sun."

(35:50):

But when they're not, you can reach into their systems and borrow their power and then refill it and maintain your grid. And they pay us for the ability to have that service. That's what pays us, gives us the ability to add the storage system, along with the solar, so that the homeowner gets resiliency, not just lower cost of power. But they also have backup power if the grid goes out.

Dave Anderson (36:19):

The REIT itself is obviously a mortgage to the EPC. Then you have what would be essentially a PPA or a lease agreement with the end consumer. And the calculus for determining the rate, that is something that's done. Do you have a backend software that EPCs use to be able to determine what the market rate would be for any given customer, given the shade characteristics? What platforms are you using to be able to deliver that pricing?

Jim Spano (36:51):

Each developer, there's different platforms in order to size and determine the production of a system. There's HelioScopes. There's PVsyst. There's PVWatts. There's different companies that compete in that space. Different engineers will rate those different systems and within all of those systems, there's different allowances for shading, for soilage, rain or snow on animals in one market verse another. We rely on independent engineering studies to ensure that the power in the performer that's going to generate the revenue, that the system itself will, in fact, produce that power. That's the first stage, which is just getting your essential design done.

(37:43):

When we get comfortable that the EPC is going to build these 2000 units and they're all going to produce 10 kilowatts per system cumulatively, then we'll come in and we have a standard PPA that they can give to their consumer, that's already fully approved for our financing. They execute the PPA with the homeowner. They build the system. Whether it's a homeowner or even their tenant, they build the system. They collect monthly payments off the PPA that they signed with the consumer, and they make monthly payments to Sol-REIT, monthly mortgage payments for the total mortgage on the whole portfolio aggregation of residential units. The relationship remains, which is important.

(38:37):

Oftentimes, like what happened to me, is, I had my local solar company install my system, but after it was installed, they disappear. And now, I'm working with the financier who owns it. And when I need to service it, I got to call the financier. And it's not the people that installed it that I had confidence in. It's whoever they happen to send. Now, I enable the EPC to be the actual owner of the system. So now, when the residential customer has a problem, he's not calling some new guy and saying, "Well, when they sold it to me and installed it, they told me this. And now, I'm being told that."

(39:11):

It's the same guy. The same EPC is now the owner of the system. He's not handing it off to a third party who can say, "Well, I didn't make any promises, you signed a contract with me."

Dave Anderson (39:24):

Obviously, you're bringing a tax equity partner. How long are the tax equity partners involved in the project? Is it six years, or are they in for the whole 20? What is the length of the power purchase agreement?

Jim Spano (39:37):

That's negotiated with the tax equity partner, and the different type of negotiation determines how much of the capital contribution they'll make toward the upfront cost of capital expense of the project. Typically though, you're going to have what's called common flip model, which means that you'll hold an asset for a full five years and at some point in the sixth year, the ownership will flip. Traditionally, with the EPC, we bring in a tax equity investor that will own 99% of the asset, and the EPC will only own 1% for that first five years.

(40:18):

The EPC will get all the cashflow, so that the tax equity owner that owns 99%, he gets a fixed return each year. And the EPC gets all of the difference. At the end of five years, the EPC becomes the 95% owner. The tax equity guy is reduced to only 5%, but continues to get his return on his original investment, unless the EPC buys him out for that 5%, which we facilitate to a Mezz loan. Then they buy the tax equity owner out for the 5%, and they no longer have to pay that preferred return, and they capture 100%.

(41:02):

Of course, it's now been fully depreciated and the ITC is gone, but they capture 100% of the cashflows. What I did is, I enabled that EPC to come in, build the system, make his profit, own the system and capture that cashflow for the whole 20, 25 years without ever putting a penny out of his pocket. It's a no-brainer. And eventually, obviously, there'll be a lot of competition in the market. But right now, we're the only company offering that product. It's a first move advantage and we're hoping to take advantage of it.

Dave Anderson (41:40):

Is there a commercial REIT as well, or a commercial product as well? Or is this only for residential presently?

Jim Spano (41:47):

No, we're doing commercial and residential, and utility scale. It's just, we're not really competitive at the utility scale. Once you get over 50 megawatts, there's more competitive capital in the market.

Dave Anderson (41:58):

But on the small commercial side, certainly there is. And what's that underwriting process look like?

Jim Spano (42:03):

Traditional underwriting? Some of the significant differences is, when you have an SREC market, a solar renewable energy credit market, we don't discount the credits like the banks do. We have what are called forward curves, which are just how we believe the incentives will be in the future if they're not fixed. We're very aggressive on them because obviously, we know the solar industry. Whereas the banks have to be so all too conservative because they don't understand the industry like we do. As I said, I run seven different renewable energy companies, so there's not much that happens in this industry that I'm not aware of.

(42:42):

Thirdly, when we underwrite an asset, we give much more value to the collateral because we recognize that if we have a default, we're not going to be selling an asset as a distressed asset. We have the in-house ability to have the asset perform and then to get repaid full on our debt. And understanding that, we give the developer 100% of the upfront capital to build the systems. We let them take out all their EPC margins and make their profits. But then when they own it the longterm, they're going to get the excess cashflows out of that project for the entire term.

(43:30):

Our goal, of course, is to own the asset longterm because we don't make our money up upfront. Obviously, we lose money up upfront. It's over the course of time that we make our value, so it's important to us to maintain good relationships. And that's why we want to partner with EPCs that are well-established. Almost every EPC in the industry in the residential spaces has had significant financial stresses this last year. As I said, a number of them are going bankrupt. It's a really very difficult market for them right now because of the increase in interest rate.

(44:07):

Our product will enable them to recover. And if interest rates come back down, our product allows them to refinance that in-house. So that, for example, if prime goes down by 2% three years from now and they come to us and say, "We want to refinance," I'll refinance to the balance of that term and lower their rate by that 2%. So my current rate really is a cap, but my rate could come down if prime comes down.

Dave Anderson (44:35):

That's great. Well, Jim, I think we dug in pretty deep into that product. I had to ask a lot of questions to make sure that I understood it well, but I appreciate your very thorough explanation of it. I am curious though. A guy that's been in solar as long as you have, where do you see the industry going? What are the things that you're excited about for the solar space right now?

Jim Spano (44:52):

Sure. Community solar is going to be the number one installation for solar because it enables everybody to participate, irrespective of whether they have a home that's south-facing or north-facing or too many trees in your yard. Or whether they have a business that can't meet credit underwriting. Community solar eliminates all of that, so I think you're going to see a tremendous growth in the community solar sector. I think you're going to see a tremendous growth in the aggregated residential sector. And the reason for that is, in order to have a grid system that operates the most efficiently, understand that large generators, they pump power into a transmission line. Then it gets sent down to a distribution line. Then it gets down into a residence or commercial system. And it may cross 600 miles, that electron, before it gets used by you.

(45:53):

That means that power is coming down through distribution lines and it is like water. It just flows its way all the way through. But if you are at the bottom of the distribution system, in other words, if that distribution line, you're at the very end of it, well, you're the guy that runs out of power when they start having power issues. When they don't have enough power and they have demand, greater demand than generation, before they can get their power plants throttled up and get the power pump back in, the people at the very end of the distribution system are the ones that have the flickering and the black and brownouts. All those are primarily the residences.

(46:26):

What we're trying to do is put storage systems in all those residences, so that when you have power issues and you have the generators pushing power down, I'm also able to push power back up into the grid. And now, at any point in the grid, we have power coming from both ends, as opposed to always having to flow down and the end of the distribution system always being the one that eats the lack of power. When you're a new developer and you're developing at the end of a circuit, that's a big concern. You really want to have storage systems at that end of that circuit, so that you never run into those situations where your tenants are having computer failures or blackouts. I think it's really important that the residential sector be a major participant in the transformation of the grid.

Dave Anderson (47:20):

Yeah. The recent regulatory changes in California, the US's largest solar market, at least last year, I think in the last quarter, Texas maybe surpassed it, but in the last year, it still remained to be, I think, California, based on most recent numbers that I looked at. Of course, I could verify those things.

(47:40):

But the recent regulatory changes, you're going to see a lot more storage certainly in California. I think that for those that installs those batteries, there already is in some places, but eventually, there'll be an opportunity for people to be able to share their extra or their excess electricity from their storage with the grid.

Jim Spano (48:01):

I can tell you that we're working with companies, and my own included. I own a company called Green Power Coursings that's building the largest microgrid in the Northeast. We own the entire underground distribution system, so we're literally taking power from the utility on a 12.5 KV line. I own everything, the conduits, the line, everything underneath it. So it enables me to put battery storage on my microgrid, and I can operate when the grid's out. And I continue to operate like nothing's happened. Residences, it's super important. In California, with NEM 3.0, basically solar doesn't make any sense. The incentive was cut by like 80% to where it makes no sense to put solar in your home.

Dave Anderson (48:53):

Well, the cost of electricity in California is such that it still will save money, but the value proposition has been affected pretty negatively.

Jim Spano (49:00):

Actually, solar only costs more. Literally, I just spoke on a content two weeks ago, and SIA put out a graph that's showing that solar alone in California is now more expensive than grid power, unless you bring in battery storage. And that's what NEM 3.0 really did is it came with a significant reduction in the power revenue, but a significant increase in the incentive for the batteries.

(49:30):

So now, it makes sense if you put solar and storage. It makes sense. And that was the whole reason that California did that is they recognize that we need to get storage at the end of the distribution lines, not just the big, central storage units that are up upstream in the distribution and transmission lines.

Dave Anderson (49:54):

We've done a lot of work on modeling that, actually, and so we've been able to get a pretty good feel for what the average homeowner in California is going to be. While it's true that not every homeowner can save money by going PV only anymore, many will. And there's lots of different reasons for that. There's kickers on the rates based on the zip code you live in and your rate schedule and the utility company.

(50:18):

The point is that California residential homeowners are going to have to get a quote. We actually have done a lot of work in the modeling on that. And so CALSA as well has done a lot of work on work on the modeling, and that we've leveraged a lot of the work that they've done. California solar is far from dead or far from over. In fact, you could even say this is the next evolution of it.

(50:36):

The problem that most people had with NEM 3.0 regulation is how abrupt it was. It gave the industry that was thriving two months to try to figure out something that's not super simple to figure out; the supply chain, the installation, the financing, all of these things, the ability to make proposals in quotes to homeowners such that they can understand it. So it was a fairly abrupt change to a very much still thriving industry.

(51:04):

I think that solar is resilient. We'll figure out a way to do it. Certainly, the Solar Podcast.

Jim Spano (51:09):

The Solar Coaster. We've been through this in the last ... Let's see. I started in this industry in 2004, so it's 18 years. I could tell you, when I started in the industry, there were projects everywhere and there was no capital. Today, there's tons of capital and projects are harder to find. And it's been up and down throughout the years. We've went from in New Jersey, a $600 SREC to a $60 SREC in a matter of two years. It's just an emerging market. And if you're not resilient and you're not flexible, be careful in this market.

Dave Anderson (51:48):

Yeah. Without a doubt. I know that you're involved in multiple businesses. Some people say that entrepreneurs think of their businesses like their own kids, but you also have a lot of kids. So Jim, how do you manage your time? And if I read correctly, you have seven children, is that right? You're very blessed. So, how are you able to manage your time with all of your business endeavors, as well as your family endeavors?

Jim Spano (52:10):

With a phenomenal wife and a great support system in the household. I have a daughter that's quadriplegic and nonverbal. She's 35 now, so I've been very fortunate enough to have the support systems around me that help me. It's enabled me to build my businesses. All my children have gone through college. They all have their own careers. I got to tell you that the renewal energy industry really saved me from the crash of the real estate industry.

(52:50):

But more than just saving me economically, it's given me a whole new purpose in life. It's enabled me to meet low and middle-income needs, which is really in my heart. And by the way, we use our profits, we build solar systems in Haiti, India, Africa. And we donate them for free to orphanages, villages, schools. I'm very passionate about getting power to Third-World countries, where power enables them to grow an economic base and to get out of the severe poverty that some of these people live in.

(53:30):

Anytime that I can deliver to the low and middle-income communities and use profits even from that to support the true low ... What we call low and middle income in the US is actually very wealthy if you went to Haiti or some of the location in India and Africa that we go to. Every little bit that this industry can do to support power in these Third-World countries, I think we all have an obligation to do it.

Dave Anderson (54:01):

Well, Jim, you're talking about things I'm really passionate about as well. It's crazy to think that in this world that we live in, that there's still about nearly a billion people that don't have access to electricity, and another about that many that have very limited access to electricity. You think about how critical it is to everything that we do in our society and how we can enhance other people's lives in societies as well.

(54:22):

I love to see the innovations that happen in solar. I like to see entrepreneurs that are working not only on trying to secure electricity and energy rights for people here in the United States, but are looking outside of the United States for people that are certainly underprivileged as it relates to access to power. You seem very blessed, certainly professionally, but I'm glad to see that you're as blessed as you are in your personal life, as well as in your private endeavors in the entrepreneurial and altruistic things that you're doing. Thank you so much as well.

(54:48):

Jim, it's been an absolute pleasure to have you come on the podcast, the Solar Podcast with us today. I certainly learned a lot. This is a form of financing. I consider myself fairly savvy as it relates to residential and commercial financing, but this is a product that I was learning about for the first time as well. Hopefully, my questions came across and made sense. And thank you so much. I know your answers made a lot of sense, so thanks for coming on.

Jim Spano (55:09):

You're quite welcome. And look forward to meeting again in the future and doing an update at some point when we see these markets really come around.

Dave Anderson (55:18):

Jim, I'd love that. It'd make a lot of sense for our listeners to come back on, especially as you continue to progress and grow, not just the Sol-REIT business, but the other businesses and the other ventures that you have. It's great to have someone with the wealth of knowledge that you have in the solar space come on and talk about it for as long as you have. So thank you so much for your time. We genuinely appreciate it.

Jim Spano (55:34):

You got it. Thanks so much. Bye-bye, man.