Jon Powers:

Welcome to Experts Only Podcast, sponsored by CleanCapital and learn more at cleancapital.com. I’m your host Jon Powers. Each week, we explore the intersection of energy, innovation, and finance with leaders across the industry. Thank you so much for joining us

Tom Burn:

Welcome back to the Experts Only podcast. This is Tom Burn, co-founder of CleanCapital. Again, sitting in for Jon Powers. Today, we speak with Jessica Bailey, the co-founder and CEO of Greenworks Lending, leading PACE lending platform. Jessica is a pioneer and advocate of PACE lending, and Greenworks has done some groundbreaking deals in the past year. Jessica discusses her journey to Greenworks, the PACE market and the future of the industry, we hope you enjoy. Jessica Bailey, CEO and co-founder of Greenworks Lending, thanks for joining us here on the Experts Only Podcast.

Jessica Bailey:

Thanks for having me.

Tom Burn:

So we got to know each other through your efforts with Greenworks Lending. For the audience’s background, Greenworks Lending is one of the leading C-PACE platforms who’s doing some innovative work in the PACE financing space. Jessica, I’d love to hear some of your background and how you found your way to Greenworks Lending.

Jessica Bailey:

Yeah, thanks. So I have probably a fairly unique path to entrepreneurship. I came to Greenworks Lending directly out of a state agency in Connecticut called the Connecticut Green Bank, and before that I was working for a foundation called the Rockefeller Brothers Fund. So my first foray into this world was really on the policy side. I was a program officer at the Rockefeller Brothers Fund where I was lending money or not lending, giving money to nonprofit organizations that were pushing clean energy policies around the country.

Jessica Bailey:

So a whole host of policies, including national type efforts, like cap and trade, and I learned about PACE financing from David Gabrielson, who’s the head of PACENation, when he came in and was looking for some foundation support to get his organization started, and I dug into it and felt like it was a really smart policy idea and invested some money into PACENation to get it started back in, I think it was 2008, so almost a decade ago.

Jessica Bailey:

And that was at the time where PACE policies were just starting to pass in California, New York, a couple of the early states, and I stayed with PACE as a nonprofit effort for a couple of years and saw it grow and got really excited about it, excited enough to the point that when the governor of Connecticut came in and put together a Green Bank and said, “Hey, I’m looking for someone to help us think through what type of products we could offer in this Green Bank, would you be interested?” I jumped at the chance to try and figure out if we could make PACE work in Connecticut. So left the Rockefeller Brothers Fund and went up to the state of Connecticut and worked to design the policy first, and then the origination strategy, and the lending platform that became, really, the first successful commercial PACE program in the country, in Connecticut back in 2012, 13, 14.

Jessica Bailey:

And it worked so well that after a couple of years, I realized that there was a huge opportunity to try and grow what we had done in Connecticut around the country and try and take the lessons that we’d learned and see if we could apply them to some other markets. So my partner, [Elikli 00:03:27], and I left the state of Connecticut and started Greenworks Funding, really with the goal of rinsing and repeating what we’d done in Connecticut, but both of us having a mission to do a little bit more on the climate change front than we can do in Connecticut alone. So, that was the goal.

Tom Burn:

That’s great. We had David Gabrielson on the Experts Only Podcast recently, and he mentioned how the two of you cross paths early on, and he’s now doing great efforts with PACENation, helping to grow PACENation wide. I’m curious, in those early days, when you first got pitched by David to fund it when you were with the Rockefeller fund, what was the pitch and what stuck for you?

Jessica Bailey:

The pitch was pretty simple, it was a state based policy that could have a meaningful impact on climate change in a time when anything at the national level was dead on arrival. So it is unfortunate, but pretty clear to most that national climate change policy is not going anywhere, at least altogether that quickly, and so a policy that could be passed, implemented and scaled at the state level on its merits was really attractive to me.

Jessica Bailey:

And then, the other piece of it that I thought was really exciting was the fact that it had this bipartisan appeal that a lot of clean energy or environmental policies didn’t have. This was really a way for the state to pass a policy, to allow private markets to scale a solution, so it appealed to the environmentalists in the world, because it was going to promote clean energy, but also the more conservative, free market, private sector folks, because it was really the government doing what the government does well, which is set up market signals for clean energy to scale through private capital sources, and so PACE was that nice policy that worked in red states and blue states and everything in between.

Tom Burn:

So then you move over to the Connecticut Green Bank, one of the leading Green Banks in the country, was it with the mandate to focus on PACE financing, or were you doing other stuff there?

Jessica Bailey:

It was really just PACE. So when the Green Bank started, it had this blank slate in front of it, which was exciting for me and Brian Garcia, who was leading it at the time, was looking for things that could work, and trying to be creative about what Connecticut could do to make a model for the rest of the country. And so Brian Garcia and Dan Estee, who is the chair of the department of economic and environmental protection, and the governor said, “what should we offer to commercial building owners?” Because that was obviously a huge component of the energy footprint in Connecticut.

Jessica Bailey:

And I brought with me a pretty deep bench of knowledge, because of PACENation and David and others, about PACE, and said, “why don’t we try this?” And the governor and Dan Estee and Brian Garcia said, “sure, figure out what we need to do and go have at it.” So it was really the only thing I did in Connecticut was try and get this policy passed, build up a coalition around the state that was supportive of it, everyone from the mortgage bankers, to the environmentalists, to commercial building owners and contractors, and then after the policy passed, that was when we were off to the races to see if we could really use this tool to help building owners access capital.

Tom Burn:

And so there’s two parts of, it sounds like, your efforts at the Green Bank, one being the initial get policy enacted, and then two, create financing mechanism through the Green Bank. So let’s start with the first one, how did you navigate and what was the proposal to legislators or to regulators to convince them that PACE made sense and what it was supposed to do, what the PACE program would do in Connecticut?

Jessica Bailey:

Yeah, the first effort with PACE is always to get the state policy right. At the time that I came into Connecticut, there had been probably two dozen different states that had passed PACE policy. So in Connecticut, we got the 25th mover advantage of having the ability to look at all these states and say, “this state did that right, this state did that right, we want to make sure we don’t repeat this mistake”, and so we were able to take the best out of the policies that we saw having been passed around the country and bring them into Connecticut and really create what, we didn’t do everything right, and I think we’re still going back and tweaking certain things in the Connecticut policy, but we got a really good framework in place, and importantly, it wasn’t just a framework that worked for PACE lenders, it also was a framework that worked for mortgage lenders who were an important piece of the conversation.

Jessica Bailey:

And the governor was very clear with me when I came in, he said, “listen, I just started a Green Bank, don’t pass me a policy that all the bankers are going to yell at me about.”

Tom Burn:

Right.

Jessica Bailey:

And there was a little bit of concern from mortgage bankers of the seniority of the PACE lien, and we dealt with that by saying, “that’s fine, we’ll put in requirements around mortgage lender consent.” And there was concern among tax collectors and different municipalities saying, “I don’t want this to be an unfunded mandate”, and we said, “fine, we’ll make it opt in, any jurisdiction that wants to participate can, but you don’t have to.” So we were very careful to listen to the market and figure out what the state needed the policy to look like in order to have the buy-in that was going to be necessary to have success.

Tom Burn:

So, this is a good opportunity to do a step back and do a little PACE intro. So for our listeners who are not PACE experts, which is, I suspect, a lot of them, all clean energy enthusiast, but not necessarily PACE experts. What is PACE? Starting with, what does PACE stand for?

Jessica Bailey:

Sure. So PACE stands for, property assessed clean energy. It is, at its core, a state based policy that says, in so many words, “energy upgrades in our state are a public benefit, and so building owners in our state can access capital using the public benefit assessment system in our state.” So essentially it makes clean energy look like a sewer, it allows financing tool that’s been used to upgrade sewers and sidewalks and build firehouses for centuries really in the United States, to now be used for clean energy. So a building owner places a voluntary tax lien on their property, they access capital from companies like ours, and they repay us through an assessment charge that shows up on their property tax bill in the same manner, the same time as their other property taxes, literally they get a tax bill, that’ll have a line on it that says, PACE assessment, the tax collector then remits that to Greenworks Lending as the lender on the project.

Tom Burn:

And who’s actually managing that flow of money between the landowner, or the building owner, the municipality, and for example, Greenworks?

Jessica Bailey:

So it’s a process that’s been pretty well established long before PACE ever came into being, tax collectors are very used to collecting assessments for either jurisdictions that aren’t their own, or policy efforts that aren’t their own, so for example, in some states you pay your car taxes through your property tax bill, you pay a business improvement district surcharge on your tax bill. So, tax collectors have the ability, and in most states, have had the experience of collecting assessments that don’t go immediately into their bank account, but are then remitted to whomever invested the money to begin with. So we have a public private partnership in every market in which we lend, and we’re currently in 13, where we either have a partnership with a state agency like the Connecticut Green Bank or a nonprofit who runs it on behalf of the counties and the municipalities, or the county or the municipality themselves, and that agreement basically puts that public sector side on the hook for collecting and remitting those assessments on our behalf.

Tom Burn:

And what is the typical upgrades that proceeds can be used for?

Jessica Bailey:

So, it varies a little bit by state, so it’s always up to the state legislature to figure out what they want to use this very powerful tool for, in most markets, it is anything energy related that is going to contribute to a reduction in the amount of energy consumed or produce clean energy. So we do a lot of solar, we do a lot of rooftop units and HVAC systems, windows, and roofs, and lighting, really anything in the basement that’s on the mechanical side, all of the types of buildings that we finance end up putting in equipment that’s more efficient than what they’re taking out, and so they’re seeing savings on their utility bill from the project.

Jessica Bailey:

In some markets they have added things to that list. So for example, in Florida, hurricane resiliency is a major focus, and so they can do things like window hardening work, making sure buildings can withstand the types of winds that they’re seeing down in Florida. In Texas, they’ve got water as a major issue, and so water conservation measures are eligible there. So one of the things our company does is, we move into a market, is we get smart about what is eligible in that market, what the needs in that market is, and we apply our financing appropriately.

Tom Burn:

So, it’s not really production based, right? If you’re financing a solar project, you, at Greenworks Lending, are not looking to the production of that solar facility to get repaid, you just have a fixed…

Jessica Bailey:

Not at all.

Tom Burn:

You have a fixed fee or fixed repayment schedule that comes out of the tax assessment.

Jessica Bailey:

You got it. So unlike a PPA, for example, where we would have an ownership in the system and be looking at the production to pay us back, we are financing, it’s essentially a debt product. So the owner of the building is also the owner of all of the equipment that we financed, so they take advantage of the tax credit, they are able to take advantage of any wreck that they’re receiving from it, all we’re doing is, providing them the capital to purchase it.

Tom Burn:

Which is important, because the upfront capital required to do some of these energy efficiency upgrades, and solar installations is substantial, and probably beyond the reach of some of these building owners out of the gates.

Jessica Bailey:

Absolutely. The types of owners that we end up financing are normally small to mid-size commercial building owners, who aren’t often sitting on a huge stack of cash, and if they are, they aren’t looking to dump that stack of cash into a boiler in their basement, they’d rather hire more people or buy a new fleet of trucks or whatever is core to their business. So for them to be able to access 100% of the capital they need to make that boiler replacement is phenomenal and they can pay us back over a very long period of time, our average tenor is about 20 years and it’s a fixed rate note, so the owner is seeing savings on their utility bill right away, and because we’re spreading the repayment of our PACE assessment over 20 years, in almost all cases, these owners are cash flow positive from day one.

Tom Burn:

And this is part of the really interesting story of where PACE has been heading in the last year or so, particularly in the attractiveness of that long term cash flow. The securitization market is starting to pay attention. Greenworks Lending did their first securitization of, I think, about 75 million dollars in 2017, I know the audience would like to hear a little bit about that, but before we get into the details of it, perhaps walk people through why that is a logical long term capital source for this type of debt product, the PACE debt product.

Jessica Bailey:

Sure. Yeah. So I talked a little bit about why owners like PACE. So our customers like PACE, because we’re giving them a hundred percent of the capital they need to do these improvements, and they’re paying us back over a long period of time. The other side of our business, of course is, who likes that asset? And what we’ve found over the last couple years is, the people that like a long term fixed rate note are places like insurance companies or pension funds.

Jessica Bailey:

These are institutions that have an appetite to have assets that are fixed rate and long duration, and so it was a natural fit for us to aggregate on our balance sheet a pool of 75 million dollars worth of assets that had this long term fixed rate note associated with it, and then essentially sell that stream of capital to a long term investor, and that was essentially what the securitization was, it allowed us to lock in long term, low cost capital, allow us to continue to deliver that capital into the market that needs it, which is the commercial building owners looking to do use clean energy improvements, and also ensure that we are able to continue to grow our company, and so the securitization was led by Guggenheim, we closed it in September, you were right, it was 75 million dollars, which for the ABS market is a relatively small securitization, but it allowed us to do a couple of things that were really important for our company at this stage of growth, but also frankly for the industry.

Jessica Bailey:

The entire deal was purchased by TIAA, Teachers Investment Annuity Association, and they were a great partner for us, and what we delivered to them in terms of the asset was a really nice fit with where their interests lie.

Tom Burn:

And this is the natural progression of many asset classes, and I think super important for clean energy. There’s very little institutional capital in clean energy right now, PACE, residential solar, commercial solar, so being able to create the products that are more liquid and more efficient, IE securitization, is a really important step to the growth of the industry.

Jessica Bailey:

Yeah, we agree. And it was one of the reasons we pushed hard to get it done and spent a lot of time trying to make sure we did it right, we were able to get a double A rating from Morningstar, which was an important endorsement of our underwriting and our origination strategy, and for us, that was very meaningful, just in a new industry to make sure we were staying within the parameters of what the rating agencies would agree was a strong asset.

Tom Burn:

And how long was that process with the ratings agency to get that rating?

Jessica Bailey:

It took a couple of months. So, the deal closed in September. I think, the rating agency process was maybe six weeks long. We had enough guidance to know what they’d be looking for, so frankly, we were in pretty good shape when they came in for their diligence meetings and had been really working with them since the inception of the company, to make sure that we were building in a way that would meet their needs when the time came. So I think we benefited strongly from our relationship with the rating agencies from early days in our company’s history

Tom Burn:

And in those conversations with Morningstar, and if you’ve spoken to any other ratings agencies, what’s the temperature like in those rooms, in those companies, on clean energy and solar in particular?

Jessica Bailey:

So I think everyone’s excited about it. I think certainly, there have been a lot of transactions on the solar side and I think the rating agencies have gotten their heads around how to look at those deals, and they’ve gotten pretty nuanced about how they’re evaluating them. On the PACE side, I think, we’re the first movers on the commercial side, so there was a little bit of education on both sides about what this asset looks like and why it looks the way it does and the things that pose risk factors, and don’t. On the residential PACE side, there’s just been more volume on the residential side, so I think the rating agencies are used to having looked at those portfolios for a while, but my sense is that there is both investor appetite and rating agency interest in solar and clean energy in general, so that was a really good signal for us

Tom Burn:

And at Morningstar, did they put PACE in a different bucket than solar? Because it is, ultimately, repayment is not premised on the actual underlying solar facility or energy efficiency and installations.

Jessica Bailey:

Yeah, they really do. It’s interesting, because obviously Eli and I think of ourselves as running a clean energy business and that’s what we finance at the end of the day, but the asset that secures our financing is truly a tax lien. So we are looked at more like a CMBS loan or a tax lien deal from the rating agency’s perspective than we are a solar deal. So there was much less attention on, “what type of panels did you put on the roof?” And far more attention on, “where is this building located and what is the tax collection history of that tax collector in this jurisdiction?” And so there was definitely a different animal, if you will.

Tom Burn:

So having gone through the full transaction cycle from origination to securitization and expanding Greenworks into other markets, where’s PACE at right now? Where is it going to be in the next two years, five years?

Jessica Bailey:

So we are, I think, at the beginning of the market still, which is a fun place to be, because we are seeing such significant growth. If you look at the volume of commercial PACE growth over the last couple years, it’s been between 60 and 70% year on year since 2015, and it really does feel like we’re just getting started. So there are probably about 15 states that have seen commercial PACE activity, which means there’s 35 more to go where we could be investing the time and resources necessary to get those markets turned on and bring this attractive financing option to commercial building owners in those states, so it does feel like we’re scratching the surface. I think our company is going to continue to focus on growing geographically and serving a larger percentage of the country and also looking at ways that we can continue to refine our product to make sure that it’s meeting all of the needs of the different types of building owners that we’re hitting.

Tom Burn:

So PACE is a great example of the intersection of finance and policy and how melding the two together can really produce outstanding results for clean energy, and as we look to Washington and a variety of different policy decisions that are being made there, do you, as a clean energy first company, have any concerns about clean energy more broadly, or where do you think clean energy, not just PACE, is in the entirety of its growth cycle?

Jessica Bailey:

Yeah, well, certainly the signals from Washington are worrying and any of us are enjoying to hear the rhetoric coming out around trying to bring back coal and kill solar. So I will say, it doesn’t keep me up at night, but it certainly cuts down a little bit of the wind at our back, I think. The nice thing about PACE is that the policy that we operate under is based at the state and then even deeper at the local taxing level. So I always think it would take quite a long time for a Trump administration to be able to dismantle PACE financing all the way from the local tax collector in a small town in Maryland, that said, I do think there are some fundamental policies that have an impact on demand for solar, for example, looking at tax policy and making sure that we’re not cutting off this growing industry at the knees, just as it’s starting to scale seems very shortsighted.

Jessica Bailey:

I was pleased that the tax policy didn’t go as far as some people had feared it might, and I do think we are benefited by the fact that the cost of solar is coming down, installation costs are coming down, companies are getting smarter about how to keep their cost of acquisition low enough to continue to grow. So I think that the trend lines are still pointing in the right direction, I think perhaps they’re not pointing quite as steeply in the right direction as they would’ve under a different administration, but I think this is an industry that isn’t going anywhere no matter what federal policy does. So we just got to keep putting along

Tom Burn:

Yeah. At CleanCapital we think that we’re, and I know you probably feel the same way, at the still the early stages of clean energy, there’s still ways to go. Do you ever step back from the grind of the day-to-day, to appreciate the position you are in to help lead this industry forward in an industry that’s not just important to grow on its own, but important for a broader social and climate goals?

Jessica Bailey:

Absolutely. I think, it isn’t easy to start a company, period. It isn’t easy to start a company in the clean energy space, period, and it isn’t easy to do PACE financing period. So all three of those things are the challenges those of us who try and do this, wake up to every day, and I think, we all have to sit back and say, “Hey, we’re in an industry that we’re helping to shape and grow, and those of us that have kids can feel a little bit better about leaving them each day to try and do this because if we all agree that this is the future, being a part of the team that’s going to build, it feels really empowering, it feels exciting.”

Jessica Bailey:

So that helps with the days that feel like you’re walking up hill both ways, but it’s been fun, and we do see ourselves moving more quickly than we were a year ago, and that starts to feel exciting when things that used to be hard, become easy, and then you start doing the next thing that’s hard. So, it’s been fun.

Tom Burn:

That’s great. Well, Jessica Bailey, thank you very much for joining and thank you very much for your leadership in PACE and clean energy, more broadly, what you and Eli are doing at Greenworks is phenomenal. Thank you for joining Experts Only.

Jessica Bailey:

Thanks so much. Appreciate the time.

Tom Burn:

Thank you, Jessica, for a great conversation. We hope our listeners got a better understanding of PACE lending. We’d like to thank our producers, Lauren Glickman, and Emily Connor. Please go to iTunes and subscribe and give us five stars. Please also go to cleancapital.com to learn more about CleanCapital. Thanks.

Jon Powers:

Thanks for listening in today’s conversation. Find more episodes on cleancapital.com, iTunes or wherever you get your podcasts. If you like what you hear, be sure to subscribe and leave us a five star review. We look forward to continuing our conversation on energy, innovation and finance with you.