How REITs With Solar Can Unlock $500K in Cash

James Richards: What we do is we provide all-in-one modern tax financing for clean energy assets around the United States. Whenever you build a new clean energy asset, whether that’s solar on your roof, batteries in your basement, EV charging, generally you get tax credits now. And what we do is we step in and finance those so you can pay for your project.

Narrator: Welcome to the Future of Commercial Real Estate, where innovation meets the built environment. Join us as we explore stories from pioneering professionals in the CRE industry, uncovering the strategies, best practices, and lessons learned that are shaping the future of sustainable commercial real estate. Your host throughout this journey is Sean Swentek, VP of Marketing at Omnidian. Now let’s dive right into today’s episode.

Sean Swentek: Hey, everyone, thank you for tuning in. I’m here today with James Richards, Co-founder and CEO of Evergrow. Welcome, James.

James Richards: Thank you so much for having me, Sean. It’s a real pleasure to be here.

Sean Swentek: We’re glad to have you here today. Can you tell me a little bit about Evergrow, why it started, and your history there?

James Richards: Yeah, absolutely. Well, I’d love to back up and tell you a bit about my story because it kind of led to Evergrow. During the pandemic, I think a lot of people were reassessing where they wanted to spend their time. And I had been spending a few years getting to know the clean energy community here in the Bay Area. I’d invested in a few clean energy companies, joined the board of a waste heat to power developer in 2020, and I decided that I wanted to start a company that was relevant to climate and clean energy. And as coincidence would have it, I was also at the time investing in a solar project of my own. I had met some folks building solar on the roof of a high school in LA. And through some complication in the tax code, I became basically the tax investor in that project because the school was a nonprofit, and so it can’t take the tax attributes from a solar project, which I’m sure we’ll get into. And so that was my foray into tax equity.

And then when the IRA passed a year later, I saw this really great opportunity to make that process of funding community energy projects easier for people. That’s why we started Evergrow. And what we do is we provide all-in-one modern tax financing for. clean energy assets around the United States. Whenever you build a new clean energy asset — whether that’s solar on your roof, batteries in your basement, EV charging – generally, you get tax credits now. And what we do is we step in and finance those so you can pay for your project.

Sean Swentek: Brilliant. You already touched on this, but the IRA was obviously a big deal in our industry. What did that do for the market, especially for commercial real estate and REITs specifically. What was the big change that came out of that?

James Richards: It’s a huge unlock for commercial real estate and REITs. So before the IRA, the tax attributes that would get generated whenever a commercial building owner, say, put solar on their roof were generally locked in that the REIT couldn’t sell the tax attributes. You couldn’t sell tax credits before the IRA. And as a REIT, and generally as a commercial building owner, as well, you’re not paying any tax. As a REIT, you don’t pay tax at the entity level. And as a commercial building owner, generally the depreciation from the building is a pretty good shield on any income, rental income from the building. So the tax attributes kind of just sat there and went to waste.

And to give you a sense of how big that is, you know, these tax credits for solar are anywhere from 30% to 50% of the cost to put solar in. So if you’re a building owner, you know, and you just spent a million dollars putting solar on your roof, and you lose $300,000 to $500,000 of the value of that solar asset because you can’t do anything with the tax credits, that’s really painful. And so, as a result, I think commercial building owners and REITs were forced into what are called third-party ownership models, where they effectively have to rent out their roof space or buy power from a third-party developer who could use the tax attributes through a complicated structure called tax equity, which is what I did in 2021 for the school.

Now with the IRA, that’s all different. Building owner, REIT, whatever the case may be, can buy the solar asset outright, and decide to own it for the long term, make an investment in the building. It’s effectively an upgrade. And now, instead of having those $300,000-$500,000 worth of tax credits sit there and go to waste, they can go sell them to an investor, add a discount to their face value, turn it into cash, and use that cash back in their operations. So they can access the full value of a subsidy now where prior to the IRA, they were locked out of it.

Sean Swentek: Wow. It’s a big change in the market. What are you seeing as far as REIT appetite for taking on projects now that this is available to them?

James Richards: It’s huge and growing. I think a really interesting thing is happening in the market right now, summer of 2024, which is that a lot of REITs and building owners are looking at their portfolio to see where does it make sense for us to do all sorts of things to decarbonize. And I think people are realizing that decarbonization makes really good business sense because especially in the current market conditions for REITs and building owners looking for ways to save cash and OpEx on the building is really important.

And so oftentimes that means doing things like retrofitting your lighting or your heating. And yes, also installing solar and storage to make your building more energy efficient, because energy is such a large cost. And what folks are seeing when they do that evaluation is that now that you can get a 30% to 50% effectively subsidy on clean energy, thanks to the IRA, which before you couldn’t as a REIT, there’s this massive set of projects that pencil now that a few years ago wouldn’t.

And so it’s a really exciting time in the market, we think, because the early adopters are moving quickly to capitalize on that, but people are hearing about it, too. And there’s like a new lease on life, I think, on installing energy in commercial buildings in the U.S. It’s great.

Sean Swentek: How does the tax credit marketplace actually function? What are the challenges that a REIT might expect as they embark on this?

James Richards: Yeah, well, so the thing to remember about the tax credit market is just how new it is. It’s a baby. The market was, in theory, born when the IRA passed, which was summer of 2022. But we didn’t get preliminary rules on this tax credit marketplace until the summer of 2023. And then we didn’t get final rules until about May of this year. So we’ve really, depending on how you measure this, only known what the market model looked like for about two months now.

That said, transaction volume is growing really quickly. Estimates solidly in the billions of tax credits transacted last year, probably going to scale beyond that this year and growing really quickly. But it’s a really complicated and new market to navigate. And all of the REITs and commercial building owners that we’ve talked to don’t really have the internal expertise or bandwidth to navigate that market themselves. And so they need a lot of handholding and help, which we can help provide as they think through their strategy here, because there are some considerations which we can get into. But I think the high level is that it’s a young and fast-growing market. There is liquidity, but there’s also a tale of haves and have nots, because you have to think about this in the context of the energy market, not just the REIT market, now.

When a REIT goes to try and sell its tax credits, you’re not just competing with other REITs and commercial building owners. You’re competing with energy developers who are building billion-dollar solar projects at the outskirts of town, mega power plants, and a lot of, if not nearly all, of the liquidity in the tax credit market goes there. There’s generally much less appetite to buy credits that are small and coming from the commercial real estate market, both because it’s new and because the size of the credit is often really small. And so that can often be a huge challenge for the REITs to navigate and one that we help with, too.

Sean Swentek: Can you dispel some of the myths that REITs might be thinking about as they hear about navigating the tax credit marketplace?

James Richards: Yeah, I touched on the biggest one, which is that you might be too small to participate. We were at a real estate conference a couple of weeks ago, and that was probably the number one question asked to me. Hey, I understand you, Evergrow, finance our tax credits, but are we too small? And the answer for us was always no. For context, and we haven’t announced this before, but the smallest ITC that we’ve ever funded, (which is investment tax credit) is well under $100,000. I can’t remember the precise number, but it’s somewhere between $50,000 and $100,000.

Sean Swentek: Wow.

James Richards: So we are able to process what are considered microtransactions in the industry. And the reason that we’re able to do that is because we’ve made a substantial investment in software and R&D to make the process really streamlined and easy for everybody. And we provide this all-in-one service so that really our customers don’t need to navigate the market. We do that for them. But outside of us and a few others that focus on this section of the market, there really isn’t that much liquidity beyond it. So I would say this myth of
“we might be too small” is like a half myth in that you might be too small for most people, but you’re not too small for everybody.

The other myth that I’d like to dispel is that it isn’t worth the hassle. This one surprised me, to be honest. Because when I look at this, I’m like, it’s free money from the government. Who wouldn’t want to go do this? But what I’ve learned by talking to a lot of REITs and commercial building owners is that their lives are really complex and they’re really busy. And unlike an energy developer whose full-time job it is to go develop these projects and finance them, life as a building owner and REIT and a building manager, you’ve got 50 things to do in a day. And figuring out how to sell the tax credits from a building upgrade that’s now the 51st.

And so I’m very sympathetic to people in the industry who say, “Well, maybe this just isn’t worth the hassle. So either we don’t install the solar because we don’t believe we’ll sell the tax credits, or we spend the money and then we just let the tax credits sit there,” which we’ve also heard of. And it’s so much value to leave on the table, it’s heartbreaking. I would encourage the people who haven’t tried to do this before to reach out to us or someone else in the market who can help them with that, because I think what we’re finding certainly with the REITs that we work with, that when they’re able to see the value, when they get the successful financing done, it makes so much sense for them to keep using this as a way to fund the remainder of their decarbonization rollout and their energy upgrades.

Sean Swentek: Yeah, even with the tax credit incentives, these renewable projects are significant capital expense for these commercial real estate entities. What do they need to be thinking about as far as protecting that investment?

James Richards: Yeah, that’s a great question. So I’ll answer that from two perspectives. One is the perspective of the asset owner, you know, the building owner, and the other is very selfishly the perspective of the person buying the tax credits and financing the project. The lenders would think the same way.

So first, as an asset owner, the thing to remember is these are long-lived, long-duration assets. They’re going to be there for a long time, and — we don’t have the data on this, this is just one man’s opinion — if you think of our power plants, our legacy coal and gas plants, we’re using those way longer than we intended. We keep extending their life. Nuclear, the same. I have a feeling that solar… we talk about a 30-year life or whatever, but we’ll probably still be using these things in 40, 50 years, as well, if we take care of them right. And that’s the beauty of them. You install once and then you have free power forever because the sun is free. And so you’ve got to take care of them really well because they’re long-term investments. They take a long time to pay back.

And the thing about this transition from third-party ownership to first-party ownership is it does mean that the building owner is going to have to take on some operations and maintenance work. And that’s where having a really trusted partner, we think, makes a lot of sense. I’ll tell you, from our perspective as a tax investor, when we look at an opportunity, one thing we underwrite is what’s called the O&M provider, the operations and maintenance provider of the asset, who’s going to be there to make sure it stays up and make sure it’s clean and performing and doesn’t break. And the reason we underwrite that, among other things, is because when you sell a tax credit, the buyer of that tax credit is actually on the hook. If your project breaks and goes out of service within five years, that’s called recapture.

Sean Swentek: Wow.

James Richards: You can imagine for the investors that we work with, they’re very sensitive to this, and they need assurance that you’re going to be able to run this thing for at least five years. We’re usually really happy, to be honest, when we see Omnidian as the name that’s being hired and contracted to go do the O&M on a site. I told you before this that I would look it up: so on a recent transaction we did, and this is pretty representative of our solar base, we think, we saw Omnidian as the O&M provider over 40% of the time, approaching half. And this was primarily from commercial building owners and REITs that were working with you guys, unbeknownst to us, until we underwrote the deal, which I think is really encouraging, because sometimes we see O&M providers who aren’t as reputable. And that becomes an awkward conversation.

Sean Swentek: Outside of the operations and maintenance post installation, what can REITs do on the front end to ensure that they’re getting the best possible solar or battery storage installation?

James Richards: Yeah, great question. So I think that there’s a lot of folks who do effectively sustainability consulting for REITs and building owners. We partner with a lot of them and think they’re great because it’s a lot of work to do the analysis to figure out where should solar go, where should storage go, in the context of lighting and all the other things you could do to a building. And that’s not work we do. That’s work that some really great folks in the industry do. Some have a more software angle, some have a more services angle, but the idea is the same, which is to help really figure out where in their footprint they should do what and we think that’s a really important step of the journey.

The next is to work with really good EPC partners, people building the actual solar or storage or lighting, whatever the case may be. Delays in this industry and costs overrun are notorious. And, you know, in our view, working with a reputable EPC who can wrap the project and has experience dealing with the local utility that you’re going to have to deal with is probably a better bet than any because so much of energy is local, you know, navigating local permitting, navigating local utilities. And that local knowledge often makes a pretty big difference.

Sean Swentek: Sure. What other options are out there for REITs or other CRE entities that might be considering sustainability additions outside of just solar or battery storage?

James Richards: Many. So, you know, theme is, and I think a really good one that you bring up, is this idea that there’s more than just solar and storage out there, right? The real why of what we’re trying to do here, yes, is to decarbonize commercial buildings, but it’s also to make them better and more efficient performing assets. You know, at the end of the day, no one is going to install solar nationwide on their warehouse or apartment building footprint if it doesn’t make financial sense. And so really, the theme, I think for decarbonization for REITs is how do you make your building more energy efficient? How do you make it more water efficient? How do you make it more performant as a financial asset? Because those things are hugely accretive to investors, not to mention great for the planet, as well.

And so I’ve just been amazed by the sheer breadth of options now, the menu available to building owners, whether that’s smart sensors for their water, HVAC, different types of window treatments to improve the heating performance. And it’s just a great time to be in the industry because there are so many great things getting deployed into buildings.

Sean Swentek: Any words of advice for real estate investors or asset owners who are on the fence about embarking on sustainability initiatives?

James Richards: Yeah, I would encourage them to pilot. It generally is intimidating when we talk to folks who say, “Well, I’ve owned 300 apartment buildings around the country. You want me to put solar on all of them or look at lighting on all of them?” And that can be tough. Energy is regional and local, and REITs and building owners know their footprint better than anyone. And so maybe, for example, you’re paying higher electricity costs in the northeast, or maybe you’re seeing a lot of tenants in California and Oregon demand clean energy as an amenity almost, or EV charging as an amenity. And so you need to be responsive to the business conditions that you’re seeing within your footprint. And maybe it makes sense to identify a segment of your footprint where there’s a specific need that you can show a really strong business case to.

Once you have that, you’re skiing downhill, because there’s a whole industry happy to help you implement that project, including get it financed, including maintaining the asset beyond. The hard part really is on the REIT to do the real business work of figuring out where they want to get started.

Sean Swentek: If you look into your crystal ball, where do you see this industry five years from now?

James Richards: Yeah, I think that the energy behind this is secular. We’re in the early innings of a clean energy supercycle. That’s at least our view. And because the tailwinds between the tax credits and subsidies in the IRA being massive and a massive pull forward for U.S. energy. What that also creates as a secondary matter is a whole bunch of manufacturing demand and we’re doing a lot of work to onshore our manufacturing base as part. of the IRA as well. So in three to five years, when a lot of those factories come online, I think that we’re going to continue to see solar get cheaper. But I’m really in particular excited about what’s coming next, like batteries and EV adoption.

Once those things start to get on the supercycle as well, you start to see costs really come down, and it becomes more and more accepted to have behind the meter, batteries behind the meter, EV charging everywhere. That’s when I think you’ll really start to see REITs and commercial building owners think of energy not just as a cost, but really as an essential part of their building and real estate strategy, whether that’s keeping up with what tenants are requiring in multifamily, like EV charging and clean energy, or that’s even doing really interesting things. Like, I admire very much what Prologis are doing with one of their programs where they install a small amount of solar on a warehouse and sell the electricity almost like a power company would to the tenants, and sell them the clean energy attributes from that, as well. I think it’s phenomenal. You’re going to see a lot more folks go down that route, I think, and start seeing energy as source of value for their business. And I think that’s really exciting.

Sean Swentek: How is your team planning against political implications, as it might affect the IRA or the industry as a whole going forward?

James Richards: Yeah, we get asked that question a lot. Obviously, we’ll know more toward the end of the year, but what we see is pretty encouraging, regardless of where the winds might blow. We think that, in particular, the core energy incentives — solar, batteries, manufacturing — certainly are popular on both sides of the aisle. Because part of the country looks at this as really imperative for climate. But another part of this country looks at this as imperative for energy independence and national security. Isn’t it wonderful that we can generate power ourselves for free? That seems vital and important and something we’ve been looking at for a long time in this country.

There are things obviously at the margin, maybe experimental technologies. Electric vehicles, I’m told, are somewhat politically sensitive parts of the IRA that may be more in jeopardy than others. But from everything we’ve heard, regardless of where things go in the election, I think folks should expect that these incentives will be there for the long term.

That was actually one of the core things about the IRA. People don’t remember that the tax credits for solar actually came about in 2006, which is during the Bush administration, Republican administration. And they worked great, but they were always in place for a short period of time. Two years here, one year there, three years there. And they kept getting extended and extended. But it makes it really hard to plan in one or two- or three-year cycles, you know, when you’re talking about 30-year assets that you’re going to install. It’s really tricky. They called it the “solar coaster” that you’d have to ride and the “battery coaster” and “all clean energy coaster,” effectively, when you’re on such short of a timeline. The IRA made these subsidies extend through the early 2030s at least. There’s an automatic extension depending on our rate of progress against our decarbonization and GHD reduction goals in the U.S. And that’s wonderful, that ability to plan for the long run. So it’s also not something like if things change in November, oh, suddenly these credits are gone. No, it’s in law from Congress that these things are there for a long time. And that’s, I think, really essential.

Sean Swentek: The tax credit marketplace as a whole is growing rapidly. Why would someone choose Evergrow as a partner?

James Richards: Great question. So I think there’s three things that set us apart. The first is that we’re very focused on clean energy projects in the community, meaning we serve building owners, REITs, and developers who are building what are normally called affectionately “small projects.” These are projects that cost $10 million or less to build, probably less than a million dollars by most. I mean, over 90% of what we see is in that size range. And we think that’s really exciting, because this part of the market really hasn’t gotten the time of day from most of the major banks who view this as too small or not lucrative enough to invest in or just prohibitively expensive for them to transact in. We’re really building in service of people who are building this type of energy project, the size range, because we think that not only do they deserve a really great financial partner, but what they’re doing is essential. Building clean energy at the edge in local communities is a fundamentally different and more decentralized and resilient way to build a grid. And that’s, we think, something that’s really incredible that we’re enabling with these people.

The second thing that sets us apart is that we’re all-in-one. So usually when you’re navigating the tax credit marketplace, you have to either do all the work yourself or hire a broker or maybe go to a marketplace where you’re going to meet a whole bunch of buyers and they’re going to ask you to do the work yourself. The tradition in this market is to put all of the work on sellers, whether that’s to compile what are called cost segregations, or independent engineering reports or insurance, pay legal fees… generally that’s put all on the seller. The buyer just wants to show up with a pot of money and get the tax credit. And that’s tough, right? That’s tough for energy developers, and it’s their job to do it. Imagine how hard it is for a REIT or building owner to navigate this for the first time and being told all the while that they’re too small. So we do all of that work for our customers. We view the REIT and building owner and developer as our customer and we take care of them. And all of those things I mentioned — cost seg, the IE report, the insurance — we include those in our service and we quote one clear, easy net price to the customer so they understand exactly what’s going to happen when, and exactly how much money they’re going to get, which ultimately is what really matters. And then we take care of everything else.

The last thing is that we have a modern technology platform, and we think this is really important because in the context of a REIT, you’re not going to do this once, you’re going to do this ten times, 20 times, 30 times. And all of that paperwork really adds up if you don’t have a purpose-built solution for it. Through our software, which we use extensively as well ourselves, to make this all streamlined, we’re able to deliver what we think is a really world-class user experience to the customer. This is something I’m personally really passionate about. I believe that funding clean energy should be really easy. If you think about it, why wouldn’t we make it really easy to do good things for the world? I find it weird that it’s harder to fund clean energy on a roof than it is to get a mortgage or a credit card. And that’s something we’re really working hard to change at Evergrow, and something we’re really proud of.

Sean Swentek: James, thank you so much for joining us today on the Future of Commercial Real Estate. It’s been a pleasure.

James Richards: Thank you. It’s been great.

Sean Swentek: We’ll see you next time on the Future of Commercial Real Estate.

Narrator: That’s a wrap for today’s episode of the Future of Commercial Real Estate. To stay ahead of the curve, visit omnidian.com and subscribe to our newsletter for the latest insights and strategies in the CRE industry. Thanks for tuning in, and we’ll see you next time.