MESAs: COURTING INSTITUTIONAL INVESTMENT
The Managed Energy Services Agreement (MESA) is one of the newest financing solutions. Like PACE and on-bill financing, the MESA can allow the building owner to hurdle the barrier of upfront cost but it does so in a very different way.
In a MESA transaction a developer firm and its investment partners take on the roles of financier, owner of the installed energy equipment, and intermediary between the building owner and the utility. The MESA developer pays the building’s energy bills directly to the utility for the length of the agreement. It then charges the building owner a monthly fee equal to the building’s historical energy charges. The monthly fee can be adjusted for actual weather- and occupancy-related variables as they have been written into the MESA agreement. The developer puts up the funds for the capital energy improvement.
As the retrofit is implemented and the building’s utility bill goes down, the developer receives the difference between the actual bill and the fee paid to the owner. At the end of the contract, the building owner typically becomes the owner of the energy equipment. In a MESA deal the developer may manage the contracting and maintenance services as well as the financing.
Resolving Split Inventives
Another benefit of the MESA approach is that it can solve the issue of split incentives between landlord and tenants. If a commercial lease stipulates that the tenants pay for their energy as an operating expense while the landlord pays for the building’s capital improvements, neither has great incentives to pay for an energy retrofit. The MESA can bridge this disconnect if the landlord passes the MESA’s monthly charge to the tenants much like the operating expense of the utility bills.
As a relatively new solution with a limited track record, MESAs have not yet gained wide acceptance in the marketplace. Steve Gossett, Jr., CEO of developer SCIenergy and creator of the MESA structure, believes that is about to change. “A large scale is coming to energy efficiency, the kind of scale associated with institutional investments in oil and gas, infrastructure, and real estate,” he says.
Gossett expects a public announcement soon about a large institutional fund for MESA investments managed by a national bank as the general partner. Qualified institutional investors have already been approached by the general partner. SCIenergy and others will participate as MESA developers who bring possible projects to the fund. Gossett believes that most of the fund’s energy efficiency projects will be in the range of $1–$5 million. However, far larger projects up to $25 million could also be acquired. The fund’s deployment schedule requires the institutions’ capital to be spent within three years.
“This transaction structure allows funds for energy efficiency to be extended as a service model. As a result, firms do not need to put new debt on their balance sheet or worry about mortgage lender covenants or liens,” Gossett says.