K-12 schools and colleges across the US are facing two challenges in improving their IAQ: 1) what needs to be done, and 2) how will they pay for it? This article discusses how the C-PACE financing program answers #2 – when a major upgrade of HVAC systems is part of a long-term solution to improve IAQ. It was written with a purposefully narrow focus on private K-12 schools and colleges (collectively “Private Schools”) which are often starved for capital.
It is important to note that building owners in all types of industries are faced with the same problem discussed herein.
The discussion is organized as follows:
- C-PACE: The Basics – a quick background.
- The Problem: Private Schools need to improve IAQ which in some cases, might require a substantial capital outlay.
- The Solution: C-PACE can provide funding to Private Schools even when traditional lenders say no.
- Case Study: the most important part of this article, including comments by a large school district illustrating the problem faced by schools throughout the US.
- Summary.
- Addendum: how C-PACE can open new opportunities in the Private School sector for ESCO’s and Mechanical Contractors. A map is provided showing where C-PACE is available in the US
For those interested in a snapshot of the article, See the Quick Summary below AND the Case Study near the end.
C-PACE – The Basics
If you are unfamiliar with the C-PACE program, it has been used to provide capital to fund over 2,000 projects related to new construction, major renovations, and efficiency retrofits.
In my 35+ years in finance as a banker and CFO, I have never seen a financing structure which is this “borrower friendly” while still mitigating risks of the lender.
Don’t just take my word on this. See this article in the New York Times discussing why the program is gaining traction with building owners throughout the US.
The Problem
Private Schools are reopening and IAQ improvements are needed to ensure the safety of students, teachers, and faculty. In some cases, improving IAQ might not require a large outlay of capital. As an example, a schoolwide upgrade to MERV 13 filters may be all that is needed.
However, upgrading to MERV 13 filters may not be optimal (or even functional) due to the antiquated HVAC systems found in many Private Schools. The most efficient, and perhaps safest solution sometimes requires an upgrade to the HVAC systems.
HVAC system upgrades require capital which leads us to the age-old problem – Private Schools often have great difficulty in raising funds for projects. Donations are often enough to barely cover essential operating costs and additional bank debt is often not available.
This exact scenario is playing out at the Hillsborough School District, the fourth largest school district in Florida. The school is making a great effort to improve its IAQ by investing $630,000 for MERV 13 filters. However, that solves only part of the problem as discussed below by Chris Farkas, Chief of Operations.
Granted, the example above is for a large public school district. It isn’t a stretch to assume the same problem exists for Private Schools, albeit on a smaller scale.
So how can Private Schools access funding to replace antiquated HVAC systems?
The Solution
C-PACE Part 1
How can C-PACE fund Private Schools when traditional lenders say no?
The answer lies with the uniqueness of the C-PACE “assessment” and how it allows lenders to evaluate credit risk using a totally different approach than that of traditional lenders.
Since the C-PACE approach to credit is so unique, projects can be funded with a credit profile that is sometimes unacceptable to traditional lenders.
The C-PACE lender relies on the credit protection provided by the basic structure of the program as outlined below.
- C-PACE funding is repaid through a property assessment quite similar to a property tax levied on a building. The assessment is attached to the building which survives changes in ownership whether due to bankruptcy or a sale of the building.
- The C-PACE lender is most concerned with whether any owner would value the usefulness and location of the building. For example, an office building in a heavily populated area is generally a good candidate whereas a specially designed amusement park in the suburbs is not as good a fit.
Clearly, the ability to access capital is quite valuable to the Private Education Sector. However, C-PACE provides other unique benefits.
C-PACE: Part 2
Can a private school/college upgrade their old HVAC systems and create incremental cash flow to fund ongoing IAQ expenses (such as ongoing replacement of MERV 13 filters) with no up-front capital?
The answer is Yes as shown in the Case Study below.
C-PACE can be repaid over 20+ years, resulting in low annual debt payments. For virtually any pure efficiency retrofit, energy savings plus avoided equipment repair costs more than offset debt payments. The remaining NET cash flow can be used to fund ongoing IAQ and other operating costs.
If this sounds too good to be true, let’s take a look at the Case Study below.
Case Study
A school or private college wants to improve the IAQ at all or a portion of its facilities. At one-half of the facilities, IAQ can be improved by upgrading to MERV 13 filters. The remaining half needs a total HVAC systems upgrade.
*annual estimate of $8,000 – $10,000 per 50,000 sq. ft. obtained from a study by WELLAWARE which can be found here.
As shown below, annual Total Savings more than offsets C-PACE Payments plus ongoing MERV 13 change outs. In addition, over $32,000 is available annually to fund other operating expenses.
A few notes:
- Opting for higher rated filters is only one of the ways to improve IAQ. It was considered the only option here for simplicity of the Case Study.
- The results above can be greatly impacted by a different project payback period and/or changes in the relationship between the amount of the HVAC upgrade vs ongoing IAQ costs.
- MERV 13 and 14 filters generally increase the energy needed run an HVAC system vs the more common MERV 6 and 8 filters. That’s because higher filtration creates a pressure drop causing the HVAC system to work harder to push clean air throughout the building. The increase in energy consumption is not considered here and might be mitigated through other means.
- There were no assumptions regarding utility cost rebates, increases in the future price of energy, or degradation to the efficiency of the new equipment in the later years.
- A short EnFlux plug: the cash flow analysis above was taken directly from our Project Savings Analysis which is one of the online sales tools we offer ESCO’s/Mechanical Contractors. It’s designed to give CFO’s a simple one-page snapshot of project economics comparing annual project savings to annual debt payments. As a former CFO, I can attest to their desire to see project economics laid out in this fashion.
Summary
- C-PACE provides 100% financing to allow the Private Schools to replace antiquated HVAC systems to preserve the health of students, teachers and faculty.
- Due to the manner in which credit is assessed, C-PACE can provide funding to the Private Schools even when traditional lenders cannot.
- Since C-PACE is repaid over 20+ years, virtually any pure efficiency projects will generate incremental NET cash flow which can be used to fund ongoing IAQ costs and other operating expenses.
- C-PACE can help ESCO’s/Mechanical Contractors tap into the Private School market which has been under-served for years.
Please feel free to like the article and comment as the views of others are always appreciated.
Questions? Reach out to Larry Derrett, founder, and CEO of EnFlux Building Solutions.
Cell: 713.714.0575, or e-mail: lderrett@enfluxbuildingsolutions.com
See the Addendum for ESCO’s and Mechanical Contractors below.
Addendum: ESCO/Mechanical Contractor Opportunities with Private Schools
Many ESCO’s/mechanical contractors already consider the public market (owned by the federal, state, or local government) as an important vertical. However, in conversations with many, I’m not surprised to see that private schools (and other nonprofits) are not highly prioritized because so few have access to capital needed to fund projects.
Might C-PACE provide the tool that’s been missing so long in the nonprofit vertical? Let’s put this in perspective by looking at the size of market for Private vs Public schools.
- Private Colleges: there are 1687 compared to 1,687 public and 985 for-profit colleges.
- Private Grades 1 -12: there are a little over one-third as many private schools vs public.
Granted, these colleges and Grade 1 – 12 schools vary greatly in both size and access to funding. However, the opportunity is still substantial.
If you’re interested, there is a valuable search school that will identify the largest private K – 12 schools located in your marketing territory. click here.
A similar search tool can be found for the largest private colleges in your marketing territory. click here.
See below to find where C-PACE is available in the US.
The C-PACE program is growing rapidly and is available in various parts of the green states below. Please don’t hesitate to contact us so we can ensure the program is available where your project is located.
I hope this helps you find new opportunities to grow your business!
About the author: Larry Derrett is the founder and CEO of EnFlux Building Solutions, which provides financing and energy solutions to building owners directly or through contractors who provide them services. For three years, he led the financial structuring group at Enron Energy Services working solely on the origination side of the business helping clients understand the importance of allocating capital to energy efficiency projects. Upon the demise of Enron, he formed HVAC Capital Corp whose clients included large mechanical contractors with a national footprint. HVAC Capital provided a finance program that contractors could use to offer financing to their customers for replacement projects. During this time, Larry trained hundreds of sales reps on the finer points of incorporating financial selling into their sales process. Having sat on both sides of the desk as a banker and CFO, he brings a unique perspective to why businesses often fail to invest in energy efficiency projects.