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Guest Column: The Power of Partnership: Riding a $27 Million Wave

Fourth Quarter – 2014

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By Blair Herbert

In each issue of our newsletter, we ask a guest columnist to offer front-line perspectives on the business, politics, and economics of renewable energy. In this issue, Blair Herbert of Kina‘ole Capital Partners talks about how his solar financing firm scaled up to its first major tax equity investment—and gave the firm’s name recognition a boost along the way. CohnReznick provided Kina‘ole with tax consulting and financial modeling for the deal, while Stoel Rives served as legal advisors.

Now that alternative energy has reached a critical mass in terms of affordability and public acceptance, there’s both a huge opportunity and a huge need to bring the technology to market. It’s a highly opportunistic process, which means that the people running market-making enterprises have to have a clear vision but a lot of flexibility about how that vision gets executed.

We’ve been reminded of that over and over at Kina‘ole Capital Partners. My co-founder Andrew Yani and I had already started Bonterra Solar, which has grown to become one of the largest solar installation companies in Hawaii. But Bonterra couldn’t find the steady source of third-party financing it needed to meet customer demand for leasing solar PVs—and neither could Bonterra’s competitors. So we started Kina‘ole to fill that void. Because we couldn’t tackle the whole market at once, we started with a specific niche, sponsoring solar installations for homeowner and condo associations. Targeting that market allowed us to facilitate solar at the residential level, but do it at a larger scale than the individual homeowner.

We started with a friends-and-family fundraising round, which gave us $1 million in capital to take to the market. We were quickly able to put that to work, financing solar installations at more than 30 homes in only two months’ time. That led to a second and third round, both in the $1 million to $3 million range.

Two things became quickly evident to us: We were resonating with our market, and we needed to scale up our financing if we wanted to keep going. Now at this point, because of our track record, there was no shortage of traditional lenders who were interested in partnering with us. But in each case there were strings attached that would have diluted our mission. For example, a lot of lenders wanted us to limit our lending to homeowners with credit scores of 700 or above. That’s completely understandable from a risk-management perspective, but it defeated the purpose of what we wanted to do. People with high credit scores tend to be early adopters of things like converting to solar—if we restricted our market to them, we wouldn’t be doing anything to broaden the base of solar customers. With friends-and-family backing, we had been financing solar to homeowners with scores as low as 660. We could do this because while our friends-and-family investors were obviously looking for a return and are sensitive to risk, they also are more likely to consider factors like social impact in the equation. What we needed was an investor who thought the same way and who also had the resources to finance projects at a larger scale.

This is where serendipity played a key role. It happened that Kohl Christensen, the lead installer at our development company, Bonterra Solar, was a very accomplished surfer—so accomplished, in fact, that he was a brand ambassador for Patagonia, the well-known outdoor clothing company. In the six years he has spent promoting the Patagonia message, he has formed a close relationship with Rose Marcario, the firm’s CEO. And so Kohl did what “real-world” ambassadors do—he acted as a bridge between Kina‘ole and Patagonia. And it turned out that Patagonia had been casting about for an opportunity to invest in alternative energy. And they had the same goals that we did in terms of expanding solar’s reach. They came on as a tax-equity investor, contributing $13 million in exchange for ITC tax credits.

It was a huge jump for us, but there was another piece of the puzzle to solve. Because we are using a leveraged partnership flip model, we needed to have a debt component as well. We were able to narrow our list of potential debt partners because we knew that we would get a better deal if we went with a local lender. Peter Ho, the chairman of Bank of Hawaii was immediately enthusiastic, and the bank made an ideal partner, given its presence as the state’s largest locally owned bank. The end result was $27 million in new financing we were now able to offer to homeowner and condo associations - enough to provide solar power to more than 1,000 homes.

Given that our previous raises were a mere fraction of that, our partnership with Patagonia and the Bank of Hawaii was a key step in our evolution. Looking back over the six-month long journey, four big lessons stand out:

Trust is your most valuable asset: Although all three parties had the same overarching goal, the reality is that debt and equity partners will have different priorities, and to protect their interests, conflicting goals in terms of defining issues like who gets paid when. The situation was exacerbated because none of us had ever done a tax-equity solar financing deal of this size before. We all had a steep learning curve, but that also meant we were all also on equal footing from the start. As the deal’s sponsor, we worked to keep it that way through constant communication and transparency. When there were sticking points, everyone had the same information about what the issues were, who wanted what and who might give in certain places. As a result, trust among the three of us grew quickly and stayed strong throughout the process.

Think five steps ahead: Tax investments can be compelling, but they can also be notoriously complex. It’s important to spend time up-front ensuring that all parties understand how the deal will affect other aspects of their organization’s finances, such as earning statements and cash flows. Making a change at one point in an agreement usually triggers shifts throughout the arrangement. Clearly thinking through goals and implications helps minimize last-minute revisions that can cost time and increase frustration. Make sure that all necessary personnel from each party are involved from the start, so that no one’s concerns get left off the table.

Keep the end goal in mind: As a sponsor, it’s easy to lose sight of the fact that at the end of the day, you aren’t just moving money but are enabling a physical process that has its own constrains and requirements. Our previous “boots on the roof” experience as solar installers allowed us to make sure that the deal was structured so that it would actually result in new solar energy going to new customers. Sponsors without that firsthand experience need to put extra effort into making sure that the developer’s perspective remains in the equation.

Pick your partners well: Both Patagonia and the Bank of Hawaii shared our commitment to making solar energy available to Hawaii residents, who currently pay three times the national average for electricity. But partnering with two institutions with such high name recognition did more than provide capital—it opened a whole new set of doors for our firm. Remember that investors don’t just provide funds. They also send a message to the market about the kind of company you aspire to be. Set your sights on the investors that send the message you want to communicate.

Blair Herbert is a Co-founder and Principal of Kina‘ole Capital Partners, LLC, a market- leading solar finance platform for residential and commercial customers.

For more information, please contact Brett Weal, CohnReznick principal, at or 310-598-1590.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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