Partnerships and Collaborations in Business Transformation

Everything’s A Pilot

A Short Case Study of SEED Partners, a Mission-Driven ESCO

Hunter L. Johnson, President & CEO

LINC Housing Corporation

Long Beach, California

Presented to

International Housing Partnership

October 17, 2012

In 2011 LINC joined a collaborative effort to establish the concept of a Mission-Driven Energy Service Company as a viable business model that would:

Bring in direct revenue to LINC as a new, long-term line of business;
Improve the financial viability of our 4,500 units across California through reduced energy and water bills;
Provide greater cashflow from those properties some of which would flow to LINC; and
Help California meet its goals of reducing Green House Gasses.

This collaboration, known as the National Multifamily Energy Services Collaborative, NMESC, or the Collaborative, includes fellow HPN member, Hispanic Housing Development Corporation in Chicago, Partner Prep, a functional branch of the New York Enterprise office, and the national office of Enterprise Community Partners (ECP). Two auxiliary organizations support this effort as well; technical advice and training is currently being provided by the Center for Neighborhood Technology (CNT) while the Network’s group buying program, HP Direct, is expected to provide building materials and equipment at a discounted price.

With the goal of testing this concept across the US and in three very different markets, in November of 2011 the Collaborative applied for, and in the Spring of 2012 was awarded an Energy Innovation Fund Grant from the U S Department of Housing and Urban Development. That approximately $2.8 million grant has helped us with a mix of administrative overhead and capital for energy and water efficiency improvements (EE and WE) as well as installation of renewable systems. In addition, each organization has provided some of its own financial resources and leveraged private debt and foundation grants.

In LINC’s case, we identified 13 properties with approximately 1,500 units as a series of increasingly complex pilots to be retrofitted during the two-year grant period and we formed an LLC, SEED Partners, to be the operating entity. SEED is an acronym for Sustainable Energy Efficiency Development and will go beyond simple energy efficiency work to bring renewable sources and water efficiency to our properties. In April, we closed the first Fannie Mae Green Refi Plus loan in the US, thus making Fannie a key financial partner, too. Using HUD risk-sharing, Fannie’s credit enhancement provides increased leverage for retrofits beyond normal capital improvements. The $20 million loan was originated by Bellwether Enterprise; although an affiliate of ECP, this entity has also played a role beyond that of a conventional investment banker and in a collaborative effort, qualified SEED as the construction manager and facilitator, thus providing SEED with a track-record and dropping approximately $100,000 to LINC’s bottom line.

The collaboration between the core members of NMESC has been instrumental in progress to date. I do not believe any one member of the group would have been funded for the EIF grant had we applied separately. Even though we are all different organizations in different markets, we share many of the same challenges. To help each other with solutions to problems that constantly arise, we hold bi-weekly one hour conference calls and quarterly, on-site one or two day meetings at one member’s home office. We have had field visits from ECP and CNT to review work in progress and to suggest improvements in the business plan each organization has created. Currently, we are working together to create a common and coordinated approach to raising the capital we really need to get to scale. We will be applying to some funders jointly as The Collaborative and in other case an individual member may apply to a geographically appropriate entity, but with support from the other members.

Several other partners must also be mentioned:

Southern California Edison and Southern California Gas, Investor Owned Utilities for electricity and natural gas respectively, have provided direct payments for EE and WE improvements and worked to coordinate these efforts. This joint income-qualification and physical improvements is the first time the two utilities have worked together in this way. We hold regular meetings with the utilities to continue this coordination and expect to collaborate with SoCal Gas on an On-Bill Repayment pilot described below.

The California Public Utilities Commission is expected to approve two new pilot financing programs by the end of this year; one will be known as a co-financing approach, using rate-payer fees to leverage private capital for EE improvements, and the other an On-Bill Repayment program (OBR) that allows the utility company to include loan repayments for EE improvements on the bill of a property owner or a tenant, thus increasing the number of lenders willing to invest in this space. The California Housing Partnership Corporation (CHPC) in conjunction with Stewards for Affordable Housing for the Future (SAHF) are spearheading the implementation of this latter pilot and we have identified a lender and servicer that is also willing to make the first loans under this program. We hope to close the first loan by year-end. Both CHPC and SAHF have been strong collaborators our efforts, offering help beyond the OBR program.

Kango Development, an energy consultant and construction manager has helped set up many of the protocols we are using and making introductions to others working in the field.

4. Wilson Sonsini Goodrich & Rosati is a law firm that specializes in energy business and policy. Like Kango, they have been an invaluable source of information and connections to others in the industry.

Lessons Learned:

1. Nothing is as easy as you think it’s going to be. If you are getting into a new line of business and find there is not much competition, even if there is a strong demand, that’s good news and bad news. Good because there is room for you and bad because there is definitely some reason no one else is doing it.

2. Nothing gets done as fast as you think it should. We expected to have five properties underway by now instead of just one.

3. Some folks and some organizations are born collaborators and some are lone eagles. You can’t collaborate with a lone eagle, especially if he is unreliable.

4. As you look for collaborators, talk to as many folks as you can. We went through three consultants and spoke with four law firms before picking those parts of our team.

5. Finding start up capital is harder for nonprofits than other entrepreneurs because it is harder for us to give an angel an equity-like return.

6. At least in our case, getting to scale will be important, otherwise our portfolio will be more efficient, but it won’t get to

7. It’s definitely fun and can seed your entire organization with new ideas.

SEED Case Study October 10, 2012