Over the last few months, I’ve been working in a capacity of Rooted Investing with Nicholas Papaefthimiou on funding solar for low income housing in my city of Portland, Oregon. I’ve covered the work that Nicholas is doing as part of a Community Impact Leader story in the past, and I jumped at the opportunity to partner with him on a common goal of increasing affordable housing in Portland.
Nick is interested in the potential for ADU’s to address the lack of affordable rental housing in Portland. He has built several ADU’s now and rennovated some single family homes, all dedicated to providing affordable rental housing (defined as less than 30% housing burden, using the City of Portland’s Housing Bureau’s Median Family Income). He had already been taking small steps to increase energy efficiency in his built homes, both out of a sense of environmental stewardship as well as to provide tenants with a little more expendable income. As the designers and builders of these ADU’s he has a lot of flexibility in how to orient the roof, and it’s a pretty inexpensive proposition to upsize the structure to take the load of the panels themselves. What was missing, is how to fund the solar installs. Most low income tenants don’t have the funds themselves to do the installs and banks generally don’t want to loan to them.
He just didn’t have a financial model that penciled. Rooted Investing was the one to connect us with A&R Solar, and between the three of us we figured out a way to make this a benefit for everyone.
For information about A&R Solar, see the piece I wrote about their great work in designing and installing solar arrays in the Pacific Northwest.
Why is This Important?
Affordable Housing should be thought of more broadly than just rent; it’s the total cost of renting a home, including utilities. If we can figure out how to lower utility costs that gives our tenants extra spending money. For those of our tenants on Housing Assistance programs that lessens the burden on those programs and enables them to help other people in need.
Rooted Investing Provides a Solution
Logically, there are two primary entities that are going to put solar panels on the roof of a rental property: the tenant or the landlord. The tenant will almost never make this investment because unless they stay in the home for a very long time they are not going to recoup the value of their investment… especially since a large portion of the savings over time come in tax benefits to the property, which the tenant will never see. Even if a tenant secured a long-term lease many renters (and especially low-income families) aren’t going to have cash-on-hand to pay for something like this outright, and may find it more difficult to qualify for a solar loan. Many solar loans are based off a home improvement loan model, and the fact that the tenants are only renting means they might not be able to apply in the first place.
The more likely candidate is the landlord, but there are two hurdles. The first is that under the current utility setup the electrical service needs to remain in the landlord’s name. That means the landlords must either include electricity in the rent or need to coordinate collecting a check for the power bill every month. That entails more effort and risk on the part of the landlord. The second hurdle is that the systems are really set up to return the value of the energy produced by PV directly to the users, as they use it; there’s a lot of back-end work for the landlord who wants to capture the value of that energy for themselves. You really want to pass it on to the tenant, but that doesn’t usually pencil out from financial perspective.
By introducing a third party to fund the panel installation you introduce a really interesting variable into the financing part of this. It is precisely the presence of a low-interest loan from an outside investor, coupled with the tax incentive structure at the federal level, is the key to making this model a win-win-win.
Rooted Investing was absolutely critical to the success of this project.
Let’s say we have a project that is well-designed for solar. It will cost us $10,000 (including all applicable incentives) to put a 2.7kW array on the roof, which will return about $275 annually in power production (these are all rough placeholders). On the surface of things this system has a payback of 36 years ($10,000 / $275 per year). But that doesn’t tell the whole story; the owner of the installation receives some significant tax breaks. One is a 30% Federal tax credit. The second is a State tax credit that is spread over 4 years, with a maximum value of $1,500 per year. The tricky part is balancing the loan interest, the tax credits, and the value of the energy production between all the parties.
Now we’re ready to see how the model works:
An investor like Rooted Investing can provide a low-interest solar loan, say at 3% on a 5-year term. Over the life of the loan the total principal and interest will be roughly $10,800. If we assume all the power generation benefits the tenant, then after 5 years they are ahead $1,375 ($275/year for 5 years), Rooted Investing is ahead $800 ($10,800 in payments minus the $10,000 loan), and I as the owner am down $800 relative to had I paid for the array myself. But…
We need to look at the tax credits. The owner of the array receives 30% back on the Federal tax return (= $3,000) and another $1,500 from the Oregon State return. By the end of Year 1 on the loan, there would have been 12 payments made to Rooted Investing, for a total of about $2,200. But the owner received $4,500 in tax credits. So there is actually a $2,300 surplus at the end of the first year (net profit declines for each of the next four years, and hits -$800 by the end of year 5).
The trick is taking that $2,300 in year one and making at least $800 on it over 5 years (I’m ignoring the state tax credits in years 2 through 4, which only help the math). If the $2,300 can be turned into $3,100 in five years then the numbers will break even; everything above that is pure profit. That’s an annual rate of return of roughly 9%. And we’re ignoring the fact that the owner has gained a $10,000 asset on the rental – the panels themselves – for essentially nothing.
But focusing just on the cash part of the equation, it is pretty easy to get returns well in excess of 9% building affordable infill housing as Nicholas shows on his website. The owner reinvests the $2,300 into affordable housing in the community, the return will be far greater than $800 over 5 years. So the tenant saves money, Rooted Investing makes money, and I as the owner gain a significant asset and am almost assured of also making more cash than I put in within 5 years. After 5 years it becomes even easier.
Everyone makes money, so that’s good. But what I really like about this model is that all of the players are making money by contributing to local social and environmental goals: promoting green power, building affordable housing, and investing in local businesses (Nicholas and I use A&R Solar, an Oregon Benefits Corporation, for our installations). The investor, the owner, and tenants are clear winners, and as long as Nicholas can continue to build affordable housing – and this model allows him to do that, and to make units more affordable and more appealing in the marketplace – it’s a virtuous cycle.
In addition to the tax credit structure, this model needs two things to work: a low-interest lender, and a high-return investment. To be fair, most financing models will work well with those two things; but what’s important here is that we identified a combination of them working towards a common goal. There’s a tremendous need for community investors, especially so for something like this where there is no strong incentive for either party to pull the trigger on the project. We can also support renewable power, especially solar — the more support it has at all levels, the more the cost will come down and the more the technology will spread. I think we’re at a tipping point now and will see tremendous growth in this area over the next few years. As an investor, the paybacks can be less than 5 years. On one of Nicholas’ last projects, if he had taken the energy savings as well as the tax credits, the payback was 2.7 years!
On a side note, I cannot give a strong enough referral to A&R Solar for all the work they’ve done as part of this team and for their help navigating the tax credit process. Here’s to the next one!
Interested in participating in a future funding of solar for low income families? Reach out to us and let us know.