For most small and mid-sized commercial building owners, financial options for energy efficiency upgrades tend have always been relatively limited. However, the one tried and true option has been operating leases. These operating leases have a relatively simple to follow cash benefit to the customer:
You start with the base energy expense of the building—let’s say 100 units—you reduce the expense via efficient upgrades offering a gross expense reduction of 60 units. The lease payment might take up half of your savings, but your net savings ends up at 30 units; plus, you have new and energy efficient infrastructure.
It’s easy to see the attraction here. In fact, the ease and simplicity of operating leases have led to these structures acting as the financial backbone of many of the most popular financing methods in energy efficiency. The US DOE has correctly identified that “Leases are commonly used to provide underlying financing for energy performance contracts (EPCs) and other structures.” These “other structures” include most Energy Services Agreements, Lumens-as-a-Service Agreements, Energy-as-a-Service Agreements, and the like that have been marketed in the past half decade.
Operating leases have always been an easier sell than capital leases or loans for one additional reason: they have always been an off-balance-sheet item. This can benefit the company in that it appears less risky. To provide color, this may keep them inside of certain debt covenants or it could perhaps benefit the cost of capital, especially in private middle market companies as they apply for their next loan. In other words, it was always a convenient way to finance equipment without having negative ramifications to the company’s proverbial FICO Score.
However, as of February 2016, that gravy train has pulled into the station for the last time. The Financial Accounting Standards Board ruled that operating leases must be reported on a company’s balance sheet just like all other forms of financing. This will begin in 2018 for public companies and 2019 for all entities. This ruling was understandably made to increase transparency, but it will have massive effects on balance sheets in the US. As it doesn’t matter if you’re Boeing leasing planes to Delta or Joe’s Electric leasing light bulbs to Ma and Pa’s Grocery Store, overnight, the method just got a lot less attractive.
This is precisely the impetus for Empower Equity’s innovative UnFinancing℠ program. Our Simple Energy Subscription℠ model brings many of the same benefits that were previously seen under operating leases in new infrastructure, no capex, and immediate savings, but, as the owners of the assets, we are fully responsible for maintaining and servicing the equipment during the term. And, perhaps most importantly, because of our third-party ownership approach, the subscription remains an “off-balance sheet” item for the end customer.
We see our UnFinancing program as a very unusual win-win-win-win where EMPEQ, our partners, our customers, and our planet can all come out ahead and we can do it adhering to changes to financial reporting standards.