Bringing Energy Efficiency To Real Estate With Scott Ringlein

P2P 103 | Energy Efficient Real Estate

 

In this day and age, many landlords are looking to save any money that they can. If you are a landlord in search of answers to saving, then you will want to listen to this interview with , Scott Ringlein, the Founder and CEO of The Energy Alliance Group of North America (EAG). In this episode, host William Morales and Scott take us into the world of energy efficiency in real estate, discussing how renewable energy can save landlords on cost. Scott also shares the actual money they have saved from the many projects he has done and how you, too, can implement such measures to ensure you’re putting out less money. Don’t miss out on this insightful conversation on being cashflow positive!

Listen to the podcast here:

Bringing Energy Efficiency To Real Estate With Scott Ringlein

Energy Efficient And Renewable Energy

I have Scott Ringlein. How is it going, Scott? How are you?

I’m good. Thanks, William.

Tell us a little about yourself.

For a little background, I spent 30 years in the automotive industry. I’m an engineer by trade, undergrad mechanical, I have a Master’s in Manufacturing. In ‘08, along with thousands of others, that was the end of my automotive career. I went out on my own. My first real gig was with the Department of Energy. I worked on the American Recovery Act for a couple of years. It got me involved in energy efficiency and new technologies. In 2011, I started The Energy Alliance Group.

After the 2008 crash, you were forced to become your own entrepreneur. Was that scary for you at that point, knowing how the market was and jobs are being lost? How did you get through it?

I’m a positive thinker, so I’m all about half-full, not half-empty. I did the, “Let’s go out and look for a job.” What changed it for me is I went to a recruiting event in the Detroit area. I walked in and it was like being in the movie, The Matrix. Everybody had their suits on. Everybody was holding their resumes. There were thousands of people there and they weren’t hiring people, they were just collecting paper. That’s when I decided I got to go out and find something on my own. That’s what I did. I started out doing everything for friends and family building decks, doing lawn and painting. I hired an executive coach. Over about a six-month period, I figured out what my skillsets are and what I want to do. I moved into business planning and business development, helping entrepreneurs. Slowly, that’s what led me to my path to the Department of Energy and where I’m at now. I’ve not worked for anyone since ‘08. It was scary but I tell people it’s been the greatest experience of my life. I’ve met many great people like yourself by getting into podcasting and doing some great things for our clients too.

It’s amazing, though I have to give you credit because you took that journey, you took the step, you weren’t afraid to get out there and take control of your own life. We get into the energy field. How does that relate to real estate or to any other form of business? How do we benefit from having you on our team, so to speak?

Probably the biggest thing that I came across is in 2011, 2012, we got involved with a company out in California that was doing lighting. They manufactured their own lighting, but what changed the perspective is they had their own funding. They were funding these projects for 10 to 15 years, which at that time was completely unheard of, especially for lighting. That was an eye-opener that I can do these projects. They’re cashflow positive from day one all the way through the entire payment period. As we started progressing and started looking at other financial aspects, we ran across the program called PACE, which is an acronym for Property Assessed Clean Energy. That changed everything not only for our company, but also for the industry as a whole. I’m not sure if you’re familiar with it, but that’s what changed what we were doing. We focus a lot on the tool, educate people about what it is, how it can be used and specifically how the tool can be used to improve our buildings.

Give us an example if you can, because especially in this day and age, and I’m pretty sure you go through this, landlords are always looking to save any type of money that they can. I’m pretty sure also if you deal with shopping malls or anything like that, anything that a landlord has, they’re looking at that type, especially on the energy side.

I’ll give a couple of specifics in regards to those types of properties. We’re doing a mall here in the Detroit area. It’s about a $4.5-million project. It’s one million-square-foot building. We’re replacing well over 3,000 different types of fixtures, interior, exterior, putting controls in. We’re using PACE to finance it, fifteen years fixed rate. It’s a property tax assessment. On the balance sheet, it’s not a debt. It’s an expense. It’s non-recourse and transfers with the property. By law in the State of Michigan, it has to be cashflow positive from day one all the way through. This is going to be a fifteen-year assessment. What’s beautiful about the program is tax assessment has been around since the 1700s and they’ve been using them for infrastructure improvements where they’ll place an assessment on a building when they improve a road. The building owner has to pay for this over a 25-year period. If they sell the building, then the next owner takes it over.

It’s the same structure, but now they’re looking at buildings as infrastructures. The money can only be used for three purposes: energy efficiency improvements, water conservation and renewable energy. The game-changer is that through the assessment, we can get access to funding at 25 to 30-year terms. That’s the change because let’s say you want to do a $4.5 million lighting upgrade and you go to a traditional funder. If you ask for a 10 or 15-year term, they’re going to laugh you right out of the office. It’s allowing building owners to purchase a building that needs a lot of improvements, but they don’t have to use their cash to do it.

They can take an assessment. There’s no money down. It’s not like an 80/20 split or anything like that. Typically, you can get access to 20% to 30% of the property’s value to use towards these types of improvements. One thing that’s unique about it is it’s state-based. New York is a PACE state. There are 35 states that participate. Every state is different. They have different rules of engagement, but for the most part, they’re all the same structure. It’s a tax assessment. You can do all these types of improvements and it’s allowing building owners to look beyond the low hanging fruit. We did a project here in Michigan where we replaced close to 300 windows in an apartment building that was built back in the ‘20s and still had the original single pane windows.

When an owner defaults and the county or city takes over a building, the first dollar out when it's sold is the tax. Click To Tweet

It was cashflow positive from day one. We’ve got a twenty-year term fixed rate. The other thing is in traditional capital, the lender and the company that’s taking on the capital investment, they only look at the capital. They never look at the expense and maintenance expenses. With PACE, it combines both of them. When we’re looking at, “What’s the improvement on the financials?” It’s not just the reduction of utilities, it’s also you’re not going to be paying this type of money from a maintenance standpoint. The easiest to describe it is a light bulb. We got a parking lot light bulb that’s 1,000-watt metal halide. Its life might be 15,000 hours. You’ve got a guy in a lift truck maybe once a year or once every couple of years going up there and changing it. Where if you’re replacing it with an LED that’s going to last 75,000 hours, you’re not changing it for fifteen years. That’s a lot of maintenance costs that have been deferred. In a traditional capital request, no one looks at that. They look at what’s the cost to purchase and what am I going to see a return on an investment. That’s what’s changed it.

It’s funny because this is something that I’m learning as I am speaking to you. Is traditional bank financing a part of this type of business or you look for maybe private lenders or hard money lenders? How does the financing work?

In most States, the money’s coming from private lenders. They have to be approved. Not anybody can participate. Here in Michigan, we’re on what’s called an open market. The money can come from any investment group, but most of it is investors that are managing pension funds, 401(k)s, insurance annuities and stuff like that. They’re looking for a very long-term investment that’s very secure. With a tax, you’re securing it against the building, not the building owner. If there’s a default, it doesn’t matter whether you have PACE or not. When an owner defaults and the county or city takes over that building, when it’s sold, what’s the first dollar out? Tax. That mitigates the investor’s risk. If somebody buys the building, they’re only required to pay the back taxes, not the entire principal, because those improvements are fixed to the building and they’re going to transfer to the next owner. Somebody that holds the mortgage, so your senior debt, they have a piece of the action to the building but more importantly, they’re going to go after the owner to recover it.

While taxes still take a first position overseeing your debt, it’s not affecting their ability to go after the owner to collect it. Whoever comes in and purchases it, if there’s some type of buy out on the mortgage side, they don’t have to come up with a sack of cash to pay off the PACE assessment and the mortgage. All they’re paying is it sat for three years, it accrued three years of tax assessment payments, pay that first, then you pay whatever else is off. It gives either current building owners or especially those that are purchasing buildings a way to leverage money that they don’t necessarily have now. It’s not considered personal property. It’s affixed to the building. It’s raising the value of the building right from day one. When we do a project, we get to take advantage of typically 60% to 90% of that value and add it to the current value of the building. You have to have an appraised value to know what it’s worth.

Does this plan work for single families or warehouses? Do you prefer to work with new buildings or can you work with existing buildings that might be 70, 80, 100 years old? How would a landlord that has a building from the 1920s, let’s say eight units, benefit from that?

First and foremost, it has to exist in the state that you’re in. I’ve read that you do some business in Pennsylvania. That’s a PACE state. Once the state adopts it, the state does not collect taxes. The local community does or local authorities do, so you have to create this PACE district. Once that exists, typically any owner of an industrial, commercial, multifamily, some allow non-profits and faith-based buildings to participate. Each lender has some certain restrictions in regards to total loan-to-value or the percentage of assessment against the value. The range is typically 20% to 30%, although we’ve run across some lenders that it’s faith-based and our underwriters are only allowing us to go 20% even though they don’t have debt against the building. First and foremost, it’s understanding it exists in your backyard and then how you can use it. One of the questions you had is about who’s funding it and uses.

P2P 103 | Energy Efficient Real Estate

Energy Efficient Real Estate: When the building is improved, landlords will have better tenants and they will be able to raise their rent and pay the mortgage.

 

We also have projects where we’re combining traditional funding along with PACE funding because they’re not competing against each other. The biggest thing is that whoever has a lien against the building, they have to provide consent to take on this additional lien through the tax assessment. Although I would say 99% of the time it’s not an issue, there are some those cases where whoever holds senior debt or first position lien, they don’t want to give it, but it then forces them to get a little more creative on, “I own this building. I can go out and find money to buy you out.” Some of them that won’t give consent, they then, “We’ll work around your needs and come up with a type of funding in terms you need to improve your building.” Because the bottom line is when that building gets approved or improved, their loan-to-value is going to get less but improve. The building is worth more. Chances are you might have better tenants. You’re going to be able to raise your rent and pay the mortgage. It has benefits on both sides.

I see these new buildings now. There was one building I went to. I think it was the Bank of America building. This is a few years ago. If I remember correctly, when you walked on a platform and let’s say you were in the rain, it had some type of heating system. I never heard of that. I’ve never seen that since. Is that what we’re looking forward to the future besides the floor? We’ve got windows. Is there anything else that we could use to save on energy bills? It could be endless possibilities.

Quite honestly it is. It’s going to be driven by whatever the legislation is in the state. Here in Michigan, what we tell our clients is if we can calculate either a reduction in energy or a reduction in water use, the technology typically can be approved and paid for through PACE. Believe it or not, some states do not allow it for new construction, which is crazy because typically, a developer in new construction their focus is to keep initial costs down. They’re willing to say, “Whatever I got to do to meet code, I’m going to do that. I’m not going to go any higher.” In states where PACE exists, you can use this money right on top of your current capital stack. You’re not pulling money out of your own pocket, but now let’s say you want to put in geothermal. We’re doing a project here in Detroit. It’s a multifamily building. They want to do geothermal. We’re helping them secure PACE dollars to do it. Geothermal is going to be 80% more efficient than a traditional heating and cooling system and the savings of utility costs and maintenance costs are going to pay for that assessment. The way it’s set up is they never take a dime out of their pocket to make these improvements. When it’s new construction and you’re dealing with the developer, they want to keep costs down. They want to keep their costs down to a minimum.

They build the code and anytime an architect is saying, “We should do all these fancy windows or solar or LED and all these neat controls and stuff,” they’re like, “No.” What we run into, which is industry-wide, is that the cost and payback is the primary deterrent to doing these improvements. Whether it’s with an existing building or a new building. It’s either too expensive and they don’t have the capital or they have internal targets of, “I have to have an ROI by year two or year three.” A lot of these things take time, especially renewables. Geothermal takes time, windows, doors, roofs and that’s why they’re not doing it. Nobody’s doing it. Statistically, 98% of all the capital requests for these types of improvement don’t get approved because you can’t.

Aren’t the landlords down the road going to see savings? Aren’t the developers looking to not cash out, but get the saving like if they wait maybe a year or two down the road, they could get the savings? It’s pretty much like you said, they just want to get the building done and stay at cost. Is there a way for you to show these potential landlords, building owners and developers that if you do this by year one, year two, year three, you’ll see savings across the board?

The whole basis of the program is that by law, you have to show not only the owner of the building, but also the PACE administrator that by incorporating these improvements, it’s going to be cashflow positive from day one. The way they measure it, they say that the savings-to-cost ratio has to be greater than one. If your assessment costs $1 every year, your savings have to cost $1.01. It forces companies like us that do this to look at a combination of improvements that can offset that cost and you get the time. That’s the other thing. I can get 15, 20 years to pay for and the model includes maintenance and end-of-life replacement. We’ll use the mall here in Detroit that we’re doing. Some of the lights are on 24 hours a day and we’re going to have a fifteen-year assessment. In year nine, there is a lot of the lights that would have to be replaced. The cost to do it is put in the financial model and it still has to be cashflow positive. They know that they’re going to have this expense in the future and where’s the money going to come from? The savings that you’re accruing over a period of time.

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It also allows us to get involved with maintenance programs. That’s one of the things that we’re offering to this client. There will be a fifteen-year maintenance program, no cost out of pocket because we predict what that cost is going to be. It’s escrowed. It doesn’t matter who owns the building. There will always be money there to fund the maintenance during that assessment period. It’s structured that way. It makes sense because typically, I came out of the industry, maintenance is the last thing to be done. “The light bulb’s out.” “Don’t worry about it. It’s just going to be dark,” rather than, “We have the money to do it.” It’s a completely different thought process and it forces companies to do things that they typically never do or they’re not comfortable in doing. In fact, we had a customer who’s like, “We only use cash.” That’s great. However, in the cash model, the things that we wanted to do did not meet their internal rate of return, but by funding it over a 25-year period, they kept their cash. They could invest it into their process. They were in manufacturing food industry, so I’m sure dollar for dollar, they’re going to get a bigger bang for the buck by doing that than replacing a roof.

We can take this money that’s not coming out of their pocket and utilize it to improve their building. Unfortunately, there are some companies out there that are not willing to change, “Sorry, nope, we only do cash.” What do they do? They put a Band-Aid on the roof and they keep moving on. With that Band-Aid, they’re not looking at how much money are you losing because your energy bills are much higher because you have inadequate insulation and you have leaks. Unfortunately, the CFOs don’t look at that side of it. They look at what’s the capital, not what’s it going to cost us to maintain and how are we going to approve the operation through energy efficiencies.

You have the proven model that you’re saving these landlords and developers money. At the end of the day, it’s all about cashflow but also energy efficiency because in some building, I’m assuming, you might have to pay for those charges or pass it along to the tenant. Still, now the tenants get to save some money because all of a sudden, they’ve seen their costs going down. For you though, Scott, how do you get the word out? What presentation can you show these landlords or developers when you do meet with them? Do you have a presentation that you have to go to? Do you have to show them testimonials? It’s a tough tax for you because you are saving the money, but these guys seem to be so hardheaded that, “We don’t know.” How do you get your word out?

That’s one thing I tell my staff is that we’re educators first because most people don’t know that PACE and some of these other tools exist. I’m also a believer in self-education. There are a lot of resources out there that we refer them to. A lot of it is driven by case studies. I speak at a lot of conferences around the US. They’re focused on facility maintenance and stuff like that. This the first time they see it. I focus on, “Here’s the tool, this is how it works and this is how it’s being used. Here’s a case study where we replaced all these windows and they’re saving this money,” and people be like, “That’s a lot of money.” Yeah, but before they had single pane windows and the windows were 80 years old. Where are you going to get parts for an 80-year-old window? It cost them a fortune in maintenance and it was historic buildings. They couldn’t do whatever they wanted to do. As you start talking about the successes, for instance, I was talking about the roof. This company purchased a 70,000 square-foot facility. It badly needed a new roof. We put together a proposal where not only could they get a new roof, they could get a one-megawatt solar system installed on the roof and pay for all the maintenance including inverter replacement in year ’20, funded for 25 years, no money out of their pocket. It was cashflow positive from day one and it was still 3% cashflow positive in year 25.

Most of us would be like, “Let’s go do it.” In that case, they’re like, “We only pay cash. What does it look like in cash?” It’s terrible but that’s how they are. In the end, we try not to work too hard to make a no a yes. If they’re like, “Nope,” there’s a whole lot of other people out there that are willing to listen and they’ll say yes. That’s the thing, there are a lot of people that want to use the tool. They don’t have access to capital, especially nonprofits. They don’t have capital. They can’t go out and get 15, 20-year terms from a traditional lender. Now, you have this tool here that they can, “That roof that we’ve been putting off for the last ten years, now I have a way to pay for it. I can get a term that’s long-term and it’s something that we can afford.”

When we’re doing it, we’re also looking at what’s the best we can do for the client. Let’s make sure we put as much insulation in there, make sure we get long-term warranties. Roofers, we can get 20, 25-year warranties. They’ll do annual inspections and stuff like that. It allows our clients to look at things that they would never ever consider because they don’t have access to the tools and they don’t know where to look, but that’s not their fault. They’re busy doing what they’re doing, making their widgets in a commercial, providing a place for their tenants and stuff like that.The way PACE is structured is that whoever takes on the assessment has to show the path of repayment.

 

Is this something that an individual could do on their own? Let’s say if they have their own home, they could reach out to someone like you. It’s not always just corporations, it could be the individual single-family homeowner.

That is one downfall of the program. There are only many states that allow single-family residentials to use it like California, Florida, Ohio. Michigan does not. It’s slowly moving that way. For the most part, it’s typically multifamily. Single-family residential like in Florida, we’re working with a developer right now. He’s building a new development. It will be single-family homes and as the developer, he can then use these dollars to make improvements to the house itself. Even in the state of Florida, the improvements for hurricanes, the windows and stuff like that, they all qualify under this program. It’s helping people to build to a code that typically they can’t afford. They don’t want to do it. California, for the seismic improvements that they’re doing to the buildings, it helps pay for those types of costs also. Hopefully, legislators will start seeing more of the benefit to single-family residential. It’s focused on industrial commercial, which of course are the largest users.

If you look at it statistically, and I think we have somewhere around six million industrial commercial buildings, 50% of them are 50 years old and 80% of them have 30-year-old technology. People will be like, “Why?” Because we’re set up that way. Our financial systems are such that these big improvements don’t make sense to companies to do it because they’re looking at, “I need a two-year payback or I’m only going to be here five years. Let the next guy worry about it.” PACE eliminates those concerns because it’s like you do it and it goes to the next owner. Don’t be so focused on, “I have to have a quick payback because I want to flip this building and sell it.”

It’s sad that anybody would try to fight against this in terms of you’re providing service, whether it’s your company or any other company. You’re trying to get the word out that you’re saving energy and you reap the rewards 2, 3, 4 years down the line. It seems like you’re educating people first and then maybe some owners, landlord or developers say, “Let’s do this.” For me personally, if I’m getting a building and we have PACE here in the city, I’m going to reach out to you like, “Scott, I’m looking to save some energy costs because I don’t want to pass it onto my tenants. I want to keep my tenants. What can we do?”

That’s the other thing too. There are ways to benefit the tenants. Most tenants pay their own utilities. The way PACE is structured, whoever takes on the assessment, they have to show the path of repayment. How are they going to pay for it? If your tenant is benefiting from it because they have lower utilities, in our rent, there is a fixed assessment that can be calculated. Now they’re paying for the improvement through their rent, but they’re benefiting from the reduced energy costs. Energy Star appliances, controls on their lighting, led lighting, low flush toilets. We go into buildings all the time. There are toilets out there that are still using 3, 4 gallons a flush. They’re not doing anything about it because they don’t think they have the means to do it.

There are more and more programs out there that are focusing on efficiency. The big thing is we don’t want to build any more power plants. I get that. Unless we reduce what we’re using, they will eventually have to. People aren’t stopping. Our population is not a leveling off and going to reduce, there will always be need. We waste a lot. Why don’t we focus on the waste first? That’s one of our tag lines. Reduce first before produce. People want to put in solar and then you go to their building and it’s like, “How about we get rid of those 1,000-watt metal halides first? Because now we can reduce the amount of solar that you’re going to need from the sheer size of the system.”

Property Assessed Clean Energy is becoming a tool to improve our buildings and infrastructure by reducing energy and reducing water usage. Click To Tweet

Scott, I appreciate you being here. I always get this question for me to ask entrepreneurs like yourself. How do you structure your day? What does Scott do from beginning to when he’s off-work mode?

My wife, God bless her, she’s the full-time worker in the house. I’m the caretaker. I take care of the house, but it’s no different than anybody else. I had a meeting at 9:00 in Detroit and my wife gets home at 4:30. We have dinner together, watch some TV. She gets up early, she goes to bed, I go back to the office. I love what I do. I work out of the house most of the time, and so my days are typically long. I work on the weekends and stuff like that. At the same time, I make sure that I structure it where when she gets home around 4:00, 4:30, the phone stays in the office, the computer’s off and it’s my time with her. Once she goes to bed, I’ll just go back into the office.

If somebody wanted to get in contact with you, what’s the best way?

An easy way to do is type in WhatsPossible.today. It’s not a .com or .org. That will take your right to our contact page. On the website, you can see some case studies and stuff like that and resources that they can look into. PACE is in over 35 states now. It’s in DC, it’s moved into Europe, Canada, Australia. It’s becoming a tool to improve our building’s infrastructure, reduce energy, reduce water usage and stuff like that. It’s been around since ‘09, but it’s one of those things that if I knew it, I would want to use it. There are still many people out there that it’s too good to be true.

At the end of the day, that’s what it is. They’re like, “I’m saving money? I don’t know. There’s something wrong here.” I’m hoping that if it’s in 35 states, then eventually it will get to all 50. It’s already 35. It’s just a matter of time.

There’s an organization, PACENation.org out of Washington DC. It’s a nonprofit. That is the go-to for PACE. You can get case studies, legislation, where’s it at. That’s been the big thing. A state will adopt it, but without people like us that are educating, pushing and getting it down to those that can use it, it takes time. A lot of people are like, “How come I never heard of it?” When was the last time you paid attention to what’s going on in your Capitol building and laws and stuff like that? It takes time for everybody to learn.

We’ll definitely get the word out because at the end of the day, we want to save money. That’s what we’re trying to do. Scott, thank you so much for being on the show. I appreciate it.

Thank you, William. I appreciate it. I’m glad I got a chance to share some of my knowledge with your readers.

That was Scott Ringlein of EnergyAllianceGroup.org. You can find Scott also at SRinglein@EnergyAllianceGroup.org. Scott, thank you so much. Don’t give up on your dreams. Guard it with your life. Don’t let anyone talk you out of what you want to do. If you want to become an entrepreneur, then do it. If you want to pursue a career, then do it. Don’t let anyone talk you out of it. It’s your life. Live it the way you want.

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About Scott Ringlein

P2P 103 | Energy Efficient Real EstateThe founder and CEO of The Energy Alliance Group of North America (EAG). Raised as a farmer, educated as an engineer, and trained in the auto industry, Scott never thought his “automotive” career would end.

But it did and led to the creation of a company that develops solutions to what many say is impossible…..making our world more energy efficient and less wasteful!

 

 

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