 Aloha and welcome to Kondo Insider. This is our weekly show every Thursday from 3 to 3.30 talking about association issues. And as you may know, and you've heard before, about one-third of our population, actually 37%, lives in some form of association. And each week we discuss issues related to that living for our owners and board members alike to try to help educate you and help you understand association living. One of the major issues in our industry has been energy. What do we do about saving energy? And people feel sometimes that Kondo's don't have much opportunity and we occasionally hear the word solar. So I've invited today as my guest, a good friend of mine, Kareem Alana, very experienced from Alana Buick Burrs, has great expertise in energy issues among other things to be our guest in the show. And I'd like to welcome Kareem to the show. Welcome. Hello. Can you tell us about yourself personally and about your company background? Absolutely. I started this company about 30 years ago and built on sustainability, making construction, buildings last longer, and making them more efficient. And so our specialization includes the exteriors of buildings because that's how buildings weather and age from the outside in, as well as making them more efficient, such as energy efficient, mechanically efficient, and efficient to maintain and operate. And your company has offices in Hawaii elsewhere? I mean, where are you generally located? We have 10 branch offices and they're located in four different states. Hawaii is our second largest office, our main office in Palo Alto, California. And other offices in southern and other northern California areas, Seattle, Washington, Las Vegas, as well as on the east coast in Carolinas. So in Hawaii, since you're representing Hawaii, we hear all the time the word solar. The solar makes sense for kind of those in Hawaii? Yeah, solar definitely makes sense. There's lots of sun in Hawaii. And the cost of energy is so incredibly high that solar makes more sense here than just about anywhere in the country. And when you look at solar from that perspective, I guess it would be safe to say it'll work for some projects or some buildings and not for others just because of the general design of the building. Is that kind of a safe thing to say? It is a very safe thing to say. If you're looking at a high-rise building and you have a rooftop area where you can put solar, the high-rise building is so dense in terms of consuming energy, there's no way you can consume much of anything on a rooftop of a high-rise building. But if you're on a low-rise type building, three or four stories, it's spread out, there's enough rooftop space available and carport space available where you can actually install it. So both of those things have to be there. I've seen in some cases where high-rise larger buildings, what they do is they actually build, I'm going to call it an atrium or ceiling over the parking area, the open parking area, to create the roof space for the solar. Have you seen that? Oh, yeah, no, absolutely. A lot of our parking is underground or multi-story. It doesn't work for that, but if there's open parking and it's open to the sky, you can definitely put shade structures, what we call straight shade structures, where you've got solar panels that are actually providing some shade for parking, as well as providing electricity. So you just need the horizontal space available open to the sky. So the Board of Directors has that issue, they want to save energy, obviously that's very good. I should point out one thing, that our legislature has adopted laws within the condo association world, that the Board has to allow solar for individual owners, for example, in a townhouse type property. Granted, there are certain conditions and rules and there's roof sharing and other issues that come up, but in general, our state totally supports condo associations of developing energy programs and makes it difficult for them to deny an owner to install their own solar, for example, in a townhouse, unless it doesn't meet certain criteria, which is fair and reasonable in that area. But going back to the solar thing, so the Board is thinking about solar, I guess the first thing they should do is hire a professional to analyze it. If so, that's what you do, and what do you do when you're asked to analyze something? Yes, that's a good question, part of how sold solar is expensive. And the way solar becomes affordable is through tax credits. Federal tax credits available of 30%, and state tax credits available of 35%. So 65 cents on the dollar that's put into the project, you get back as tax credits. But homeowners association, as you know, are non-profit organizations and they can't take tax credits. So how you fund it and how you monetize the tax credits is complicated. In addition to the technical nuances of the solar system itself. Combined with both of these things, you really should have a consultant as a third party that can give the association advice on how to go about doing this. Before discussing the financing options, just in general when you look at someone come to the solar project, without getting too technical, what are the general things you look at in evaluating their energy needs? And maybe it goes beyond solar to include lighting retrofit and other type of energy savings. When you're asked to look at a project, what are the basic things you look at and how do you approach the project? So the basic approaches is master planning. Instead of just going in and installing a solar system that's to size what your consumption is today, and often you can't even do that anyway. But if you just did that, and tomorrow you decided to change your light bulbs out and make it LED, or change your chiller system and make it more efficient, then you'll be overproducing. Solar is very expensive and overproducing solar doesn't pay at all. So you want to size it appropriately. You want to do the energy planning, know what efficiency measures are coming up, what you may be installing in the next few years, and then account for the proper sizing. And so you do that, your team does that planning and comes back with a recommendation to the board on here are the energy opportunities, here are the savings. Here is the budget costing of this, obviously you got the bid. But there could be, when you look at bids, my concern always is, you don't always get the best value for the lowest price. And so when you're doing solar, I'm sure you're looking at other things besides just solar works technically, mathematically, and we're going to do the specs, we're going to bid it out. I'm sure there's a lot of other issues like the quality of the panels that may affect all of this. Absolutely, and again, it depends on the type of if you're purchasing outright, if you're leasing it, if you're doing a PPA, those things matter for the quality of the product. When you have more of an ownership stake in the system, you have more reason to expect higher quality. You want something that's going to last 30 years or more. It was going to consistently produce power. The power does degrade over time, roughly about a 1% a year of degradation. And so that is typically built into the calculations that you do. But panels can go out, you'd have to replace them. They're very expensive. Inverters, there's another part that lasts between five and ten years that has to be replaced every so often. Panels have to be cleaned. And so there's just a lot of things. And you may install a panel on a roofing system and then you have to replace the roof in ten years or five years. Now, the cost of the roof may go from $200,000 roof replacement to $400,000 roof replacement because you have to deal with all the dense solar that's installed on top of the roof. You've just added that burden on top of your, so there's a lot of planning that goes into it. Is it important that they, I'm going to assume all solar panels are not the same? Some are made of a higher quality, for lack of a better way to describe it, and maybe have better warranties on it. So the fact that we see all these advertisements and some of them are very low in price, it doesn't mean all saw it. I don't, common, are all solar panels the same or some better, better producers, more efficient, longer warranties or are they all pretty much the same? No, they're not all the same. There are what we call first tier panels. They may be produced in China, but they are first tier panels versus second, third tier panels. And so the quality does vary. And within the quality, it's like how often these panels go out? And who is there to replace them under warranty? See, if you have a 10-year warranty on the system and you're buying it from some source, and this is a small little manufacturer that goes out of business in five years, or doesn't have the financial wherewithal because the product they sold is all defective and everything has to be replaced and they just don't have the money to replace it. If you bought it from Samsung or a large entity like this and they had a warranty and they had a recall, they could afford to spring 30, 40 million dollars to replace a certain number of panels and survive. So warranties don't mean anything unless there's somebody really there to back it up. And better built panels, there's no substitution because it's not down, you're not losing energy, you're not interrupting your plan of having a successful saving money. There's a theoretical, I mean, because I know a little bit about seller, but that's certainly not my expertise, that you could have a house or a unit that needed solar panels that one company, you may need less solar panels just because they're more energy efficient and creating energy. Is there any truth to that being a possibility or? Oh yeah, absolutely. The amount of the sizing of the solar like we were talking about is very important. But there are panels that are more efficient and each year, the efficiency of the panels goes up by approximately 3%. And so does the cost. So you're not getting the types of leaps and bounds efficiency as we were getting with Intel making microprocessors where they were doubling in capacity and size and speed every 18 months. Solar is a very gradual increase in efficiency and quality and it's been roughly 3% a year over the last 10 years. And one of the other things I've heard on occasion is that we can't put solar panels on because if we had a hurricane, they'd all be wiped out. I realize there's different levels of hurricane. Are there standards of meeting certain minimum win criteria or recognize that if you have the catastrophic hurricane fire, maybe nothing will save us. I've often said to my condo clients who were in flood zones that if that ever happens, you can't build an arc because it's catastrophic. You can't control the most catastrophic event. But are there basic standards for wind resistance that the likelihood of a wind storm or a small hurricane would be okay? Oh yeah, absolutely. By code you're required to build everything to withstand a certain amount of wind speed depending on where you are within the islands and which island you're on. But roughly it's in the 125 miles an hour wind is what you're really designing for. So it's a pretty severe condition and it is a hurricane forced wind and everything on your building really ought to survive to some extent and certainly the new solar system ought to survive that kind of wind. I would say to you, I'm a big proponent of energy efficiency and not related to a condo but on my own personal house I installed a 15 kilowatt PV system and that before I did that my electric bill was let's say six or seven hundred dollars a month and then I had a car and an electric or the gasoline was another three hundred dollars a month. This was called a thousand dollars a month and I took the time to put it in, got my federal and state tax breaks which were significant and my bill literally went down to fifteen dollars in change a month. Including your Tesla? Yes, including my Tesla, my car. And so I think because we are Hawaii we're on an island, we have such great sun and we have ideal conditions for solar energy that it makes a lot of sense for condos to explore even though it may not pay for their full electric bill. If it's paying for the common elements or certain major components you, let's say you're a chiller, air conditioner or whatever, it's still saving some value or some money to the association and I'm not convinced that these tax credits will be there forever, you know and that's a concern. Yeah, the tax credit got renewed by President Obama recently and think they're good for another four years at least and but you know there are ways of, you can save substantial amounts of money with solar and we can talk about it and we can talk about how to finance for an association where the savings can be substantial but I will say that if the decisions are not made properly and carefully by the associations, they can actually lose money, they can actually have a loss on a new solar system that they buy. Well I've had that experience, we'll get into that after our break that's coming up shortly on the financing and in some of these risks but I can tell you that I know that there are associations that lost money because in my opinion they should have hired professionals and gone through the protocol we're talking about here, looking at all the energy issues, looking at their plan plus how to pay for it which certainly solar is not cheap because of the fact in the scheme of this is the big decision for the association can have great results but at the same time if not properly vetted can be a real issue. Yeah and financing, how they finance is such an important decision that it can lead to either them making money or losing money on the solar project. So right after this break we're going to talk about financing and and all the free interest you give them for free financing, we'll be right back after the break. You're watching Think Tech Hawaii meeting people we may not otherwise have met, helping us understand and appreciate the good things about Hawaii. Great content for Hawaii from Think Tech. Aloha Howard Wigg, I am the proud host of Code Green, Think Tech Hawaii, I appear every other Monday at three in the afternoon, do not tune in in the morning. My topic is energy efficiency, it sounds dry as heck but it's not. We're paying five billion dollars a year for imported oil, my job is to shave that, shave that, shave that down in homes and buildings while delivering better comfort, better light, better air conditioning, better everything. So if you're interested in your future you'd better tune in to me three o'clock every other Monday Code Green Aloha and thank you very much. Welcome back to Condo Insider, we're talking with Karim Alana and the question does solar make sense for condo associations? The big issue in Hawaii energy saving a big priority for our state so we had just finished talking about why solar makes sense but we both agree that's expensive. Yes. What are the basic choices for how an association can pay for solar? Well the way the solar economically makes sense like I said is that the tax credit, the 65 percent total tax credits that are available today, get monetized, get used in some way by someone and so there are two basic mechanisms, rather A you pay cash and you cannot manage monetize those, B you could do a PPA, a power purchase agreement which is the most common method and there's a third method which is a lease, lease, lease back and that's that's a third method that has more promise and is better than PPA and I can talk about all. Let's go back to the cash for a second, I hear you saying is because associations are nonprofits, they don't have the ability to take the tax benefits themselves and so if they were to pay cash they would be paying a lot more money for the system because they don't get the tax credits back. Correct, they're paying 100 cent on the dollar and then the return on investment is way low and so the other two choices are you get another party to either lease the system to you and I'm assuming that party gets the tax benefits therefore the cost of the system is lower to you and third would be a power purchase agreement where they are actually becoming the utility provider for the association but just to be clear let's take a minute and have you describe what a power purchase agreement is. Okay, a power purchase agreement essentially is an agreement to purchase power from a third party from a private source, they're installing the solar on your space, they own the equipment, it is theirs not yours and they're selling you power and generally they'll sell you the power at the savings of 10 to 20 percent from what HECO charges you and at the end of the 20 years they own the equipment it's a 20-year lease agreement for the power purchase and the end of 20 years they take the equipment off the roof and they take it back or you can buy it from them but it's essentially a 20-year agreement to purchase power at a savings of 10 to 20 percent. So what happens if you make that agreement and you know we've seen an incredible downward slide of utility rates what happens in that case because it sounds to me you could make agreement to pay 20% off today's rates or maybe a couple years ago and it's even higher yeah and then all of a sudden the actual rates of the utility company are lower than your power purchase agreement. Yeah exactly and that has happened in 2012 for example the utility rates were 28.75 cents and people sign power purchase agreements for 20% cheaper and which was at 23 cents and they were saving 20% of the money it was pretty good until the energy prices crashed or oil prices crashed and once they crashed the the rates went down to 19 cents and so now instead of saving money you're actually paying more to the power purchase people that you've agreed with than what you started out with with with HECO you better off staying with HECO. I would be candid with you I'm not a big fan of power purchase agreements I think the leasing option makes a lot more sense but that's my personal view and I'm sure solar people might argue with me but to share an example a factual example with you I knew of an association that entered into a power purchase agreement. The fundamental mistake because they didn't really have a design professional like yourself to monitor it they kind of went with what the solar company said and they designed the system based on the entire project not the 28 buildings was a gut into actual operation certain buildings were designed better than others so even under that scenario for getting the argument of the utility rates go up and down certain buildings were costing them more money than it was originally and certain buildings were costing them less money but the end of the day when you added it all up was costing them more than the original estimate because they had to actually design this for each building independently and unfortunately that the design company or that solar company didn't take into consideration that HECO is going to make this on a building-by-building basis first was a project-wide basis so it became potentially litigation although it was settled and a lot of these issues were resolved in a way that the association would save money but there are some real risks on power purchase agreements as if there's much volatility and utility rates. Oh yeah no absolutely you know in your example the really the thing to do is to study every single meter on the 23 buildings and know exactly what the power consumption is for each meter and then exactly size the solar appropriately for every building and we find these discrepancies all over the place you know some buildings have pumps in them the others may not some buildings have have better shading the others have less shading so they need more energy and so they do vary but you know talking about PPAs there are ways of negotiating with even the PPAs and making sure that if you do have a good PPA that if they follow the savings of the energy with HECO and if they do that sometimes they'll put a floor on it like in 2012 it was common to say that the floor where their rates will never go then the PPA rate will never go below twenty three cents. Is that fair to say the short summary of that you better know what you're doing? You better know what you're doing you better know how to negotiate these rates because you're literally buying and negotiating a power agreement for twenty years you're locked in. And how does the leasing work? Now tell me about the leasing as a comparison. The leasing is a very interesting option it's somewhat like you know a bank or a leasing company may come in and own the system and lease it to you for seven years six to seven years minimum it could be seven to ten years where they lease it to you. In those seven years they're basically monetizing the sixty five percent tax credits because they need at least that much time to monetize it. And then they're simply leasing the principle back to you for seven years. And so your lease payment may be about the same as your HECO payment. At that point you're not saving any money for the first seven years. But after seven years you've paid off the system and then maybe there's a ten or twenty percent residual on the lease to buy out the equipment outright. And now you own it. And now that you own it for the next thirteen years or next twenty three years of the solar last two thirty years you're making a hell of a lot of money. And I'll give you an example. If you did a PPA and everything worked out and HECO rates didn't go up and down and things were okay. On a five hundred kilowatt system for example. In twenty years you could wind up saving seven hundred and eighty thousand dollars on a five hundred kilowatt system. If you had that large of a system installed. With a lease in the twenty year period in the same twenty years you would save three and a half million dollars. Huge difference. And so lease while you have to suffer through not making much of a cash flow in some instances making a negative cash flow a slight negative cash flow for the first few years. And as rates climb up that negative cash flow goes away may go away. And however the first seven years are tight. You're not there to save in the first seven years. You're there to save in the next twenty three years. Yeah my experience in the leasing is and I'm not an expert at this but there's capital leases with like one dollar buyouts. It's my understanding that the leasing companies can't give those to associations because it won't qualify for them to get the tax credits. So you have some kind of buyout provisions of it. But you know frankly speaking a solar system ten years from now with the changes of technology and everything it's probably not going to have that much of a market value of the buyout anyway. You can't contract you have that committed to but it probably doesn't have that much residual value anyway at the end of ten years. Where you get into a much little tighter circumstance when you have a twenty year power purchase agreement. It's kind of like pay me now or pay me later. Pay a little bit more now to say three and a half million versus pay a little less now and we save seven eighty five thousand. Or lose money. On a PPA you could wind up in the negative. You could wind up actually making even or losing money in the first seven years and that has happened over the course of the last five years because of the energy prices falling. People are actually overpaying right now that that got solar as a result of the PPA. But in a lease you're right you cannot have a dollar lease. You have to have a fair market buyout. And you generally were looking at twenty percent of the cost of the solar. And that twenty percent you the association either funded themselves because all of a sudden they're paying nothing for electricity. And the stream of money that they start saving is huge. So they could simply fund it out of their pocket if they have the money or borrow from the bank to fund it to buy it out. And but the savings at that point electricity bill zero. Are there other considerations in planning us out like battery battery storage systems or other types of storage systems. I know we only have a couple minutes left on the show. So can you briefly comment are there other considerations such as battery storage or something else that they they might want to also include in their thought wave. Yeah the battery storage prices are coming down. And so they're becoming more and more economical. There are also the same tax credits that are available for battery storage. So battery storage is a viable option but still quite expensive. Another form of storage that's actually very popular in gaining and popularity in Hawaii is ice storage. Because we're chilling buildings twenty four seven. If you had ice storage which which is essentially taking the power of solar the excess power you're generating in the morning and the daytime. You're storing it in the form of ice blocks and you know large chunks of ice that you're then using for cooling the whole day or during the office of peak times. And so you're you're that becomes a storage system and you're storing ice instead of storing in a lithium battery. And there are now small units made where you can put on the rooftop for like a town home and the town home could essentially store enough ice right on the rooftop for their unit and utilize that that power back into just chilling. Well I guess I'll cancel my order for two hundred thousand double day batteries and help my house case by P. V. goes down. But I want to thank you for being here. The one thing you have taught me today is this is a complex technical subject and the board you should hire professionals to properly evaluate this because there's as many risks where you could lose money. Just the word solar sends the message save money. But unless you do it right for an association you could lose money. It's a recipe. So I want to thank all of you for listening to Condo Insider today. Again we invite you to come back next Thursday at three o'clock to learn more about association living. We thank Kareem Alana president of Alana doing birds for being here and sharing this insight with us today. Aloha.