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.