Small nonprofits have a notoriously hard time financing solar power projects. Now CollectiveSun, a San Diego-based startup, has a plan for making it easier to find funding.
Why the problem? Basically, churches, schools and other such places may have a heap of assets. But they can’t take advantage of most of the federal and state tax incentives for solar power, thanks to their tax exempt status and lack of tax liability.
What’s more, because they’re small, the projects they need to finance are similarly modest in size. Plus they’re riskier bets than large nonprofits, like universities. So banks and other financial institutions tend to avoid giving loans to these organizations. (Think about it: a church defaults on a loan and the bank has to foreclose on the property. Can you spell public relations nightmare)?
About two years ago, Lee Barken, an accountant and LEED-certified professional , came up with a solution. He would create a company offering a platform and marketplace for nonprofits, investors and solar installers, aggregating investments to help fund small solar projects in the $50,000 to $1 million range. Then, the business could use the money to install solar systems and sell power at a discount through a power purchase agreement (PPA).
In case you don’t know, a solar power PPA is a contract through which a developer takes care of everything from financing to installation and more on a customer’s property at a discount or at no cost. The developer then sells the power to the customer and receives not only money from the arrangement, but also, since it’s not a nonprofit, any tax credits that exist. “It’s like buying the milk instead of the cow,” says Barken.
(Small businesses also have trouble getting financing, because they’re not lucrative enough for banks to go through all the labor-intensive due diligence and paperwork, a problem that BlocPower, another solar-power social enterprise that I recently wrote about, seeks to address).
Investors, who are paid back in annual payments over ten years, are meant to come from the nonprofit’s community–not big honchos, but people who care about the organization and are willing to make small investments of as little as $25. “This is only possible if the community steps forward to back the project,” says Barken. To make sure that happens, CollectiveSun also does a lot of behind the scenes work, helping with marketing campaigns and the like.
By doing so, Barken figures the nonprofits will be able to save on energy expenses and, ultimately, have more money to spend on their mission. What’s more, they also can boost community involvement–a lot more than by, say, sending out a letter asking for donations. Still, this isn’t risk-free. If the nonprofit were to default, then investors would lose their money.
Barken got the idea when he was working on industrial renewable energy projects. It just didn’t make sense that the only way small nonprofits could convert to solar power was to spend more money on their electricity than before. “I got more and more frustrated that nonprofits were being left out,” he says. “The tax benefits–that’s the ball game, the difference between a cost-effective and non cost-effective project.”
For the first 10 years, CollectiveSun or a designated third party own the solar equipment. About half of the investment is paid back after the first year, since Barken expects many investors won’t be the usual suspects, but low-income people. After ten years, the nonprofit can buy it through a four-year arrangement with a fixed rate.
Money from such a sale is where CollectiveSun will make the most in revenues, according to Barken. It also charges installers a 3% origination fee and investors a .2% servicing fee.
It took Barken a good two years struggling with legal and accounting complexities before he could officially get the social enterprise approved. Last December, CollectiveSun launched its first pilot for TERI, an Oceanside, Cal., nonprofit that, among other services, operates residential housing for developmentally disabled adults. They raised about $445,000 from about 27 investments from $25 to $10,000 and are in the process of a second pilot.
Now, Barken has about 30 proposals from other nonprofits in the pipeline. “There are a lot of nonprofits out there,” he says.
Source: Forbes Business