LQH: MARCH 22, 2018 ROOFTOP LEASES AND POWER PURCHASE AGREEMENTS FOR REAL ESTATE RELATED ENERGY TRANSACTIONS

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1 LQH: MARCH 22, 2018 ROOFTOP LEASES AND POWER PURCHASE AGREEMENTS FOR REAL ESTATE RELATED ENERGY TRANSACTIONS Shariff Barakat, Esq. Nixon Peabody LLP (Washington, DC) Mike Auger, Esq. Ever-Green Energy Darryl Austin, Esq. Forerunner Housing Partners

2 Customers Drive Change Expectations being shaped by experiences in other segments of economy - Amazon affect, potential to achieve being driven by technology advancement Many corporations are looking to achieve energy independence from the grid at large Over 100 US cities have adopted goals to transition to 100% renewable energy by 2035 Utilities are having to shift toward trusted connectors, assisting customers with navigating constant change Market forces are increasingly driving change, not policy. Where policy is driving change is at the city and state level.

3 Current Market Trends The New Normal We can no longer talk about renewable energy s slow march on power generation and distribution. Utility leaders across the United States and the world recognize that solar, wind, microgrids and distributed generation are prominent in the new discussion around resource efficiency, and customers are compelling their infrastructure providers toward sustainability. Black & Veatch Strategic Directions Report Change is accelerating across the industry at an unprecedented rate. Black & Veatch Strategic Directions Report

4 2017 Trends - Electric Grid Transformation 4G Thermal Energy Recovery Grid Integration Smart Interconnected Interactive Cyber Threats Source: World Economic Forum

5 2018 Trends Infrastructure Transformation 4G Thermal Urban Energy Recovery BENEFICAL ELECTRIFICATION System / Sub System Integration Energy Services Smart Interconnected Interactive IoT & IIoT Cyber Threats Graphic Source: World Economic Forum

6 Amazon s Seattle campus is using a data center next door as a furnace. It s pretty neat. Using waste heat from digital infrastructure to stay warm downtown.

7 Xcel Attracts Unprecedented Low Prices for Solar and Wind Paired With Storage January 08, 2018

8 The Carlyle Group, the Washington, D.C.- based private equity behemoth, set up a business unit last fall to do just that. Dynamic Energy Networks (DEN) will deploy Carlyle capital to create microgrids, then operate them in an energy-as-a-service model for long-term contracts. The Carlyle Group will put hundreds of millions of dollars toward owning and operating microgrids, tackling the industry s financing challenges. Julian Spector January 25, 2018 Most companies have a hard time coming up with the upfront cash to build a microgrid, and financing one can be a major headache. Theoretically, that headache would go away if an entity with functionally unlimited capital bought the project and operated it on behalf of the customer in exchange for service payments.

9 Rooftop Solar: A Brief Overview Shariff Barakat

10 Rooftop Solar Distributed generation, meaning the location of electric generation equipment near the demand sources, has exploded in recent years as adoption is driven by dramatic cost declines in photovoltaic solar equipment, generous federal, state and local incentives, and state-level renewable generation requirements. Rooftop solar has penetrated residential real estate markets and is now heating up in the commercial and industrial real estate space.

11 Rooftop Solar Value Drivers Value is generally measured as savings compared to the cost to procure electricity from the local utility. Some of the value drivers come in the form of savings and others in the form of additional revenue potential: 1. Distributed generation eliminates the costs of fuel charges, transmission and distribution. 2. Federal tax incentives: The owner of the equipment (generally) is allowed to claim a tax credit equal to 30% of the cost of the equipment. The equipment is subject to very favorable depreciation classification (5 year property). Currently, 100% bonus depreciation is available for these assets. Note that the tax credit rate steps-down beginning in 2020.

12 Rooftop Solar Value Drivers (continued) 3. Primary state/local incentives: Renewable Portfolio Standards state laws requiring local utilities to procure a certain portion of their power from renewable sources by a certain year. Most jurisdictions have some form of solar renewable energy credit program (RECs or SRECs) whereby RECs are generated alongside renewable energy power and sold to utilities who use those RECs to satisfy their state requirements. The buyer of the RECs can be different from the buyer of the electricity. REC/SREC value varies widely based on geography Net-metering this is one of the most powerful drivers of rooftop solar adoption. In its most pure and basic form, net-metering effectively allows a solar generator to use the local utility like a battery by putting power onto the grid when generation is in excess of sitedemand and pulling that power back from the grid for free when site-demand exceeds generation. In other words, the utility customer only pays for the net amount of energy it uses. This is an over-simplified understanding of net-metering and each jurisdiction handles the specific mechanics differently (including by intentionally reducing the value of the program, in some instances), but the general concept is that a utility customer obtains an economic benefit when it puts power back on the grid that is greater than a typical wholesale power supplier would receive.

13 Rooftop Solar Value Drivers (continued) 4. Primary state/local incentives (continued): Local tax incentives property tax abatements, state income tax credits, exemptions from sales tax 5. Battery revenue potential: Additional revenue generation potential based on battery storage allowing for distributed generation/storage systems to provide ancillary services to utilities. May ultimately eliminate the need for net-metering.

14 Rooftop Solar Financing Mechanisms Ownership / Self-financing Self-financing the upfront capital expenditures; ongoing costs are generally minimal consisting of operations and maintenance services. Efficient self-financing requires utilization of the tax benefits. It is possible to finance portions of the capital stack (such as the tax incentives), but this should not be undertaken lightly.

15 Rooftop Solar Financing Mechanisms (continued) Third-Party Ownership Financing parties provide the capital required to construct and install the solar equipment, while the CRE owner or its tenants usually make periodic payments (certain solar developers allow for full pre-payment of the contract). The long-term equipment owner is usually a joint venture between a solar developer and one or more financing parties. Typical initial term is years, with optional renewal terms. CRE owner usually has option to purchase equipment at certain points in time at then appraised fair market value. Often contain production guarantees, but rarely savings guarantees.

16 Rooftop Solar Financing Mechanisms (continued) Third-Party Ownership (continued) Power Purchase Agreements (PPA) CRE owner or its tenants purchase power produced by the equipment, usually at a fixed and escalating rate. Operating Lease CRE owner or its tenants lease the equipment, usually at a fixed rate regardless of power production volumes. Less common than PPAs. Commercial Property Assessed Clean Energy (C-PACE) relatively new financing mechanism in the market, but now available in many states in some form. Financing payments are made via property tax assessments rather than stand-alone bills for power production or equipment rental.

17 Rooftop Solar Financing Mechanisms (continued) Community Solar and Synthetic PPAs Generally involve some kind of financial instrument that allows the CRE owner or its tenants to finance off-site solar generation. Not rooftop solar, but worth mentioning as many large corporations are utilizing this strategy to achieve sustainability / green corporate goals as an alternative to directly procuring and consuming renewable energy.

18 Rooftop Solar Key Contracts Self-finance: Installation Agreement / Engineering, Procurement and Construction Agreement (EPC) provides construction/installation of system. O&M Agreement provides ongoing operations and maintenance of system. Third-party finance: License/Lease/Easement Agreements provides access to rooftop. PPA/Lease for third-party owned systems, this is the primary contractual relationship between CRE owner/tenant and solar provider/financier.

19 Rooftop Solar Helpful Resources Form contracts General background information on financing rooftop solar Database of solar incentives by jurisdiction

20 Shariff Barakat, Nixon Peabody LLP (Washington, DC) Mike Auger Ever-Green Energy Darryl Austin Forerunner Housing Partners This presentation contains images used under license. Retransmission, republication, redistribution, and downloading of this presentation, including any of the images as stand-alone files, is prohibited. This presentation may be considered advertising under certain rules of professional conduct. The content should not be construed as legal advice, and readers should not act upon information in this publication without professional counsel Nixon Peabody LLP. All rights reserved.