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PACE Financing Goes Viral, No Thanks to ARRA
Posted by johnsoncontrols on November 19, 2009 11:01 AM
By Derek Supple, Program Manager, Strategic Objectives, Johnson Controls
The excitement on the Delta King riverboat in Sacramento was palpable this week as local government leaders and the finance community gathered to discuss the nuts, bolts, and best practices of setting up property assessed clean energy (PACE) financing programs.
Under the PACE model, property owners borrow money from a municipal agency to finance up to 100% of the upfront cost of energy efficiency and renewable energy projects and repay the loan over 5-20 years through an added annual assessment on their property tax bill.
The tax-lien financing model overcomes several well-known barriers to the adoption of energy efficiency improvements. Financing spreads the first cost to create positive cash flow for building owners, so that monthly energy savings exceed their loan payments. Since the loan is attached to the property, not the borrower, it transfers with ownership, enabling owners to take on longer payback projects with deeper energy savings. Tying payment to the property also solves credit and collateral issues that have been a challenge in commercial real estate. It can also overcome the age-old owner/tenant split incentive problem because owners are allowed to pass-through property taxes (and, through PACE, the retrofit costs) to net lease tenants who also benefit from the savings.
The sheer number of attendees from the financial community at this week’s City & County Clean Energy Financing conference—from Wells Fargo to Hannon Armstrong to local community banks— was exciting, because it shows the potential of this model to “commoditize” energy efficiency. By creating standardized PACE bonds, markets can be harnessed to dramatically scale the capital available for clean energy projects. The investment banks are excited because voluntary property assessments provide a very secure investment. Like any tax assessment, PACE loans are senior to private liens, including mortgages.
The highlight of the conference was a panel of the leaders who championed the only four live PACE programs operating today: Boulder County, CO; Palm Desert, CA; Berkeley, CA; and Sonoma County, CA. While programs are being planned in scores of other communities, these four are learning at the “bleeding edge.” Interestingly, there were two main drivers common for each of these four communities: create jobs and reduce climate impact. The Boulder County Commission has adopted a target to reduce annual greenhouse gas emissions 40% below 2005 levels by 2020 within an interim 1.3 million ton reduction by 2012. Even more aggressive, Sonoma County is targeting a 25% reduction below 1990 levels by 2016. These targets are community wide, not just for municipal operations. All panelists pointed out that without addressing existing building stock, which represents over half their emission inventories, they would have no chance at meeting these carbon targets. PACE is the “best tool yet” for local governments to help their residents and businesses save energy and reduce emissions.
PACE has also been an effective way for municipalities to create jobs in their communities without significant financial burden or risk. Sonoma County saw an 8.4% increase in building industry jobs last quarter, while neighboring counties Napa and Marin saw a 2% decrease in jobs in that sector.
With all these benefits, it’s no wonder that PACE is catching on quickly. I think it is safe to say that PACE has “gone viral.” In the last twelve months, fifteen state legislatures have passed enabling legislation for PACE programs including CA, CO, IL, LA, MD, NV, NM, NY, OH, OK, OR, TX, VT, VA, WI. In addition, communities in FL, HI and UT have pre-existing authority to create municipal financing districts. New York actually just passed its legislation on Monday night (to cheers on the Delta King), through emergency legislation so that communities in that state could create programs to leverage stimulus funding.
Surprisingly, many communities in attendance expressed deep concerns and even reluctance to use ARRA funding through either the state energy programs or the block grant programs to support their PACE programs. The largest concern was that use of ARRA funds would trigger prevailing wage requirements for all work completed in private homes, buildings, and factories financed through PACE. Section 1606 of the Recovery Act specifies that “all laborers and mechanics employed by contractors and subcontractors on construction projects funded directly by or assisted in whole or in part under the Recovery Act must be paid at least the wage rates prevailing in the locality in accordance with the Davis Bacon Act.” There were other concerns about the recently published federal policy framework for those planning to leverage ARRA funding with PACE financing programs, particularly the savings-to-investment ratio requirement.
Other hot debates at this week’s event included: outsourcing vs. in-house program administration, pooled bonding vs. project-by-project micro bonding, choice of interim financing source, and legal validation proceedings to address concerns outside the power of statute. Who knew that a county could sue itself!
These issues aside, the real question is how quickly the PACE model and best practices from the pioneer communities can diffuse across the thousands of other municipalities across the country, including when we will see less affluent cities and counties bring this option to those who need it most.
The wave of PACE programs coming has great potential and couldn’t arrive at a better time. After all, energy efficiency has never been more important. If you have thoughts on how Johnson Controls can help local communities and our customers to leverage the PACE model to rapidly scale energy efficiency and renewable energy investments, please share your ideas.
To learn more about PACE financing, see www.pacenow.org.
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