A renewed focus on sustainability and green energy projects, paired with the desire to reduce operating costs, has made energy-saving practices and efficiencies a key focus in the not-for-profit and government sectors.
As of July 2015, the top 30 local government partners within the EPA’s Green Power Partnership had a combined green power use of more than 3 billion kilowatt-hours annually. Several of the top partners, including the local government of the District of Columbia, receive 100 percent of their electricity from green power sources.
However, many government entities are unable to take on large amounts of debt to fund new projects and need alternative means to finance the transition to sustainable energy. Leasing offers a low-risk alternative that is funded by the savings derived from improved energy efficiency and lowered operating costs.
The financial benefits of going green are immense for not-for-profits and governments. Upgrading to energy-efficient systems can save organizations anywhere from 20 to 40 percent or more, depending on the strategy, says Tom Sherman, president of Sustainable Energy Services, Inc.
Typically, the savings realized by energy-efficient equipment and projects more than covers the cost of financing such equipment, so there’s not a negative out-of-pocket expense or the need to raise funds (taxes) to fund the project externally. At the end of the lease term, the lessee will typically own the equipment without ever having experienced any negative cash flow.
Mark Cargo, director of originations, not-for-profit and government at SunTrust Equipment Finance & Leasing Corporation, says leasing is “one of the only capital projects that’s usually guaranteed to not be cash negative relative to debt service at any point during the project term.”
How it works
The typical equipment finance process involves three parties: the borrower, the lender and the energy services company. The energy services company (ESCO) begins with an audit of the building’s energy related assets, analyzing the borrower’s energy efficiency, reviews current and future energy rates/requirements and returns with either a guaranteed or non-guaranteed proposal. The expected energy savings per month as a result of the project, coupled with an estimated debt service amortization, ensures a positive cash flow from day one.
“What we find during our audit is that oftentimes, there are significant savings by improving the performance of their current systems,” Sherman says.
The financing is then structured to fit the needs of both the project and the borrower, ensuring the energy savings generated from the project exceed the debt service payments of the project. “It’s very customized in its debt structure relative to the project itself,” Cargo says.
Typically, for the first 6 to 18 months there is no payment required by the borrower, since savings from the project have not yet been realized. The borrower usually begins to make payments once construction is complete and energy savings begin to be realized. The average length of the lease is typically 12 to 16 years.
While leasing offers an affordable means of moving toward green energy, Cargo says some organizations still harbor the concern that even though cash flow is positive, taking on additional debt could affect their credit rating (and hence overall cost of borrowing). To help with this, some service companies and third parties can offer structures that allow the borrower to consider the loan “off-balance sheet,” which could result in having no impact on their credit rating.