P A C E 2010

Property Assessed Clean Energy In Missouri

James Trout

WELCOMEv11

PACE = Property Assessed Clean Energy

Is a mechanism for municipalities to offer an arms length financing program for commercial, industrial, and residential property owners to implement energy efficiency and renewable energy improvements that pay for themselves. Local government can establish PACE boards to qualify and administrate.

Funds are provided from the sale of bonds, which are secured by voluntary property tax assessment contracts with participating property owners, and an associated tax lien on their property to repay it over the life of the improvements, up to 20 years. Assessment runs with the land.

Process

Municipality enables PACE through an ordinance and establishes a PACE Board to oversee projects and consultants.

Property Owners sign-up and can make a wide-range of energy improvements.

Loans are underwritten through a municipal bonds and paid back through special voluntary tax assessments.

Introduction

When the General Assembly passed House Bill 1692 during its 2010 legislative session, Missouri joined a growing number of states that have enabled property assessment clean energy (PACE) projects. Because the special assessments have a “senior tax lien” status (i.e., in the event of foreclosure, the special assessments along with property taxes get paid before a mortgage holder), bonds secured by the special assessments may be able to attract favorable interest rates. Originally a residential improvement finance too, PACE is being implemented commercially due to market demand.

Benefits to PACE

There are several benefits to this financing structure. Property owners who wish to participate do not need to pay cash or provide other upfront funding. By accessing capital through the issuance of bonds, PACE programs should be able to generate favorable net borrowing costs for participating property owners. Because the special assessments necessary to pay the cost of the energy efficiency or renewable energy improvements can be spread out over up to twenty years, it is possible for a property owner to realize immediate positive cashflow so long as the annual energy cost savings resulting from improvements exceeds the annual special assessment.

Missouri

A number of energy efficiency experts in Missouri looked at practical barriers to PACE implementation around the country, and decided to develop a model here that would work well from day one, chiefly on commercial.

This stakeholder group is crafting a best practices “playbook” for boards, driven by an energy audit, standardized M&V, and project qualifications.

This model should remove barriers, be scalable, stimulate our economy and create jobs, leverage the private sector to act, assure quality and build confidence, reduce risk to cities, lenders, and consumers, and provide maximum, sustainable benefits.

Additional benefits

- Missouri imports 90% of its energy, and exports those energy dollars.

Green jobs can’t be exported; green savings get spent locally.

Creates a public benefit, jobs, local commerce, and reduces energy consumption, pollution and property expenses

Revenue Neutral Contributes to greater building comfort,

health, affordability, and value

Advantages

Allows for secure financing of comprehensive projects over a longer term that enhances payback

Repayment obligation passes with ownership, overcoming hesitancy to invest in longer payback measures

Taps into private capital, such as the municipal bond market vs business loan

Allows governments to encourage energy efficiency and renewable energy without putting their general funds at risk

.Mo. ranks 41st in Energy Efficiency

http://aceee.org/pubs/e097.htm

Energy use issue addressed

America’s Building Stock Nearly 40% of our nation’s energy usage and

greenhouse gas emissions (GHG) are from buildings and homes

Commercial Homes Number of Units: 5 million 100

million Approximate % of US Energy Consumption: 20% 20%

Number of Units Per

1% of Nation’s Energy Usage: 250,000 5 million

>Office Electric Consumption

.Manufacturing Electric Consumption

Cost effective energy improvements identified by an audit Energy Efficiency •Energy management systems •Insulation & air sealing •HVAC systems •Boilers & furnaces Equipment, processes •Lighting •Energy recovery & redistribution systems •Motors & drives

Water Efficiency •Greywater systems, High efficiency toilets, Waterless urinals

Renewable Energy •Geothermal, Bio-gas, Solar hot water and Solar photo-voltaics

Commercial Property Types

Multi-family (greater than 4 units) •Condominiums •Apartment complexes Commercial •Office buildings •Malls, retail •Gas stations •Restaurants Industrial •Factories •Warehouses •server farms

Agricultural Poultry farms and feedlots

Financing

Pathways

Pooled Bond PACE applications are aggregated, and a revenue bond is issued to fund projects

Stand-Alone Bond For sufficiently large projects, a revenue bond is issued to fund an individual or small number of associated projects

Owner-Arranged Bond An owner arranges project financing with a private lender and the lender accepts PACE securitization and payback framework until aggregation drives bond activity

Advantages to Property Owners

•INCENTIVE - Provides an alternative to loans, and an incentive to undertake EE/RE improvements, improve comfort, value, & savings

• CREDIT - Does not affect credit, secured by assessment contract, lien runs with the land

• SAVES MONEY - Required to be cash-flow positive, so improved finances. Savings increase over time.

• INVESTMENT - Improves property value – voluntary program

• REDUCED RISK – less concern with recouping costs on resale, since assessment contract stays with the property; benefits stay too.•NO UPFRONT COST – no down payment required typically

•INCENTIVE - Provides an alternative to loans, and an incentive to undertake EE/RE improvements, improve comfort, value, & savings

• CREDIT - Does not affect credit, secured by assessment contract, lien runs with the land

• SAVES MONEY - Required to be cash-flow positive, so improved finances. Savings increase over time.

• INVESTMENT - Improves property value – voluntary program

• REDUCED RISK – less concern with recouping costs on resale, since assessment contract stays with the property; benefits stay too.•NO UPFRONT COST – no down payment required typically

Advantages for Municipalities

NO NET COST – Bond issue can include funds for program admin, legal, marketing, reserve fund. A budget-neutral incentive

JOBS - real, permanent, green jobs, such as: energy auditors, design, insulators, HVAC, solar installers, windows installers, etc. unlikely to be off-shored.

LIMITED LIABILITY – Liability lies with separate board set up to administer the program. Property liens take first position.

MEET CLIMATE GOALS – move quickly to reduce energy use

Advantages to Lenders

Existing Mortgage Lenders: Borrowers cash flow/credit profile improves

(energy savings > annual tax cost) Property/collateral value increases

Lender: Virtually no risk of loss as property tax liens

are senior to mortgage debt 97% of property taxes are current & losses

are less than 1%

Sample project

1. $12,000 project 2. The total project cost is $13,200

(including audit, financing and administration costs)

3. Yearly tax assessment = $660 4. Resulting yearly energy savings =

$1,0005. Net result = ($1000-660=$340+)

Typical commercial = x 100

Recommended Anti-fraud

PACE has many ways to prevent fraud and ensure accountability: Annual reports to boards and then state Require use of certified contractors/energy

auditors, permits, standardized metrics Verification of project metrics at completion Direct pay of contractors White House and Missouri “Best Practices”

Combine Audits & Energy savings for a range of EE measures:

Other Rebates, incentives, Tools Access to financing ID Qualified contractors Performance measurement & evaluation Consumer education & marketing Partnering with community institutions

A potential “one-stop-shop” for energy improvements:

Recommended Commercial Audit Qualifications:

Commercial Auditor StandardsAuditors conduct ASHRAE energy audits at commercial project

sites, IAC protocols for Industrial sites. Qualified energy auditors may possess one of the following

credentials: 1) A four-year technical degree from an accredited university or

college and relevant experience in commercial and industrial auditing

2) A two-year technical degree with at least five years experience in commercial and industrial auditing.

3) A Professional Engineers (PE) or a Certified Energy Managers (CEM) license with experience in commercial and industrial auditing.

Recommended Residential Audit Standards

Mo. DNR accredited BPI, RESNET, or similar training protocol as approved by Mo. DNR,

using REMdesign reporting software model, or any DoE “Best Test” system.

Positive cash flow Re-testing after substantial envelope

improvements. 3rd party verification recommended in

minimum of 1-5% of audits.

Recommended “BEST PRACTICES”

Savings-to-Investment Ratio (SIR) Greater Than OneThe Term Should Not Exceed the Life of the ImprovementPACE Lien Non-Acceleration Upon Owner Default Employ Quality Assurance and Anti-Fraud MeasuresCompound PACE benefit with Rebates and Tax Credits Promote Consumer and government Education Provide for data collection, standardized metrics, M&VPromote Assessment Underwriting Best Practices

GuidelinesInclude Debt\/Property Valuation, Owner’s Ability to Pay

Potential property disqualifications

Delinquent status of taxes or any mortgages on property

Existence of involuntary liens on property

Recent default or foreclosure history Recent bankruptcy history Property is “underwater” Unacceptable projects or contractors Unqualified Owner

Assessment Board Startup

Separately formed “political subdivision” board from the sponsoring municipality

CEDB Created by ordinance Appointed Board members Powers include, but are not limited to:

Issuing bonds or otherwise borrowing money to finance PACE programs

Entering into Assessment Contracts with Property Owners

Recording liens for assessments due under Assessment Contracts

Clean Energy Development Boards

Created by one or more municipalities Administers the PACE program

Energy Efficiency Improvement Renewable Energy Improvement via Assessment Contract

Between Board and Property Owner (and/or lender, manager)

Property Owner agrees to annual assessment in exchange for financing of Energy Efficient or Renewable Energy Improvement

Ordinance or order adopted by municipality

Should address both residential and commercial/industrial properties

Should work in concert with the municipality’s current zoning and land use requirements

May establish program guidelines, application requirements and financing criteria (e.g. the protections identified as “best practices”)

Jurisdictional cooperation, aggregation

Municipalities may cooperate to form a regional boards and may cooperate to aggregate special assessment revenues into a larger bond financing. Such cooperation may allow projects to be financed on a tax-exempt basis even without an allocation of QECBs - Chapter 353 real property tax abatement Chapter 100 industrial revenue bonds Other dev. lease/purchase structures

the Board Contract

Description of the Project, including estimated energy cost savings

Verification and accountability measures Amount financed cannot exceed final project

costs Acknowledgment by Property Owner of special

benefit received and agreement to pay annual assessments for up to 20 years

Records binding future owners of property Special requirements if property is subdivided in the

future

Assessment security

Annual assessments due under Assessment Contracts are paid and collected in the same manner as property taxes

Senior tax lien status; no acceleration In case of foreclosure, outstanding PACE

assessments (and other property taxes and assessments) will be paid prior to mortgage.

i.e.: If property owner uses PACE to finance a $20,000 project through 20 years of annual assessments, but defaults in Year 2, only the Year 2 assessment is outstanding.

Recording and reporting

The municipality will record an assessment. Auditors report metrics to boards The current property owner and any

future owner will make payments inside their regular property tax bills.

The payments over the life of the assessment will fully cover program costs.

Boards report to Mo. DNR annually

PACE-MO Municipality(or cooperating groups

of municipalities, counties)

Start Up Funding Grants, LLR, local

lenders

DNR & MuniOversight, reporting

PACE Board(Clean Energy Development

Board)

3-5 person, appointed by Mayor

PACE Board(Clean Energy Development

Board)

3-5 person, appointed by Mayor

PACE ProgramPACE Program

Ongoing FundingBond Issues & Fees

Property Owners

Commercial, Residential

efficiencyContractors

Consultants or

Hired Staff

Assess.contract w/board

(Payment Collection)

Sample: .

Bonds

Local Board #2

May do gap funding with local banks

Local Board #1

Local Board #3

May aggregate communities

ie: EIERA

OWNER

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O

O

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Assessment Assessment Assessment

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. .White House Policy

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“In sum, PACE programs have the potential to increase the accessibility and affordability of energy saving measures, consequently lowering energy bills to owners and reducing the environmental footprints of participating localities. Adoption of best practices, including strong contracting standards in the selection of those doing the retrofits, will help deliver the type of market transformation we need to see retrofitting scale up and achieve our goals. “

Key….

Establishing Coalitions with

Municipalities and consumers Identifying start up funding “Packaging” with other programs, incentives Embedding quality assurance Providing measurement and metrics

Application

Critical components of the application Form which gives info on property,

ownership, mortgage liens, and proposed retrofits.

Lender notification/consent, Bids from approved contractors Energy audits to verify target savings Application fees if any

Typical Lender Requirements

Clear Title: Participants must prove they are the owners and have no agreements that conflict with the assessment

No uncured defaults Participation requires that…

Property taxes are current No outstanding tax liens on the property No notices of default for the past three years Property is current on all mortgage debt No negative equity financing

FANNIE MAE 5/5/10 Letter - current residential barrier

Fannie Mae has received a number of questions from seller-servicers regarding government-sponsored energy loans, sometimes referred to as Property Assessed Clean Energy (PACE) loans. PACE loans generally have automatic first lien priority over previously recorded mortgages. The terms of the Fannie Mae/Freddie Mac Uniform Security Instruments prohibit loans that have senior lien status to a mortgage. As PACE programs progress through the experimental phase and beyond, Fannie Mae will issue additional guidance to lenders as may be needed from time to time.

Status

DoE and FHFA have issues to work out over the upcoming months regarding residential applications of PACE.States improving on commercial standards and practices may help build confidence among Fannie May members.Commercial applications are unaffected by Fannie May.

Summary

PACE  is an innovation that solves the financing problems associated with

energy efficiency & retrofit investments PACE benefits virtually all stakeholders,

including owners, communities and existing lenders, while creating job growth, with no credit risk to municipalities

PACE has the potential to dramatically accelerate the energy retrofit of our nation’s building stock

Design best practices QA, audit-centric program – buy-in up to DNR Develop Board start-up kits for cities Identify gap funding and loan loss security Standardize audit, contracting and M&V Provide efficient bond issuance Design competent underwriting standards, contracts Assure adequate consumer protections Leverage public-private collaborations, outreach Explore commercial opportunities first Aggregate cities, contracts and loans

Needs

Program Design Design/ development of program guidelines, creation

of clear underwriting standards, alignment with local goals and policies, and integration with existing funding programs.

Technology/ website set-up and customization. Marketing/ market demand analysis; promotional

and outreach campaign coordination. craft a start-up boilerplate board kit and contract. Assistance applying for state and federal

funds/grants. Consumer outreach

NeedsAdministration Design Education & Marketing: development of materials,

workshops, and direct outreach. Application Processing: property/project screens and

underwriting. Customer Service: addressing property owner and

contract questions. On-Going Technology and Reporting Management:

tracking of program goals. Origination and Closing Process Management: project

quality assurance, closing documentation, and funding disbursement.

Audit / metrics / QA / reporting qualifications

Needs

Financial Services

Adaptable Financing Structures

Cost Recapture

Recommendations to accelerate and standardize the process and program statewide Statewide “best practices” for assessment boards to be

formulated first Assessment Board Implementation Start-up Kit to be

developed and distributed statewide Loan Loss and start-up funding to be secured for statewide

access Competent underwriting standards to be developed Consumer protection standards established Municipality or gov. subdiv. creates a Clean Energy

Development Board Board helps market PACE with business associations,

engineers, auditors, contractors, bankers, realtors, broker-property managers, etc)

Property owner gets an energy audit and applies to board for project funding – may apply on-line or through local banks

Recommendations continued….

Board promulgates standard boilerplate agreement with banks to provide initial project consulting and financing subject to certain standard underwriting criteria & best practices

Board approves project and initiates a PACE contract with property owners based on audit, REM report and improvement contract.

Improvements executed, contractors paid, QA standards met Board sells micro-bond to bank for cost of project; proceeds of

micro-bond sale are then paid to contractor; micro-bond is secured by special assessments due under the assessment contract; additional loan loss security may draw down cost of funds further

EIERA/others may periodically issue a large portfolio bond to refund various micro-bonds issued by Boards throughout the state - alternately, large boards could issue bonds themselves to refund the micro-bonds; assessment contract revenues pledged to bonds. 

Short list of Stakeholders

Property owners, tenants, managers, brokersFacility management, vendors, consultantsUtilities, regional councils, municipal leagueBond companies, underwriters, attorneysCities, counties, and other gov. districtsESCOs, engineers, auditors, consultantsSchools, bankers, realtors, trade unionsClimate, alternative energy advocatesImprovement contractors and trades

PACE Concerns & White House Solutions PACE Programs, Historical Precedent PACE Bloomberg Law Article on PACE Land-Secured Districts The 10 Must Haves for PACE State Enabling Legislation Barclays Capital Memo – PACE Seniority is Mandatory “Recovery Through Retrofit” Report White House PACE Policy Framework/Best Practices VP Biden YouTube Announcement Secretary Chu YouTube Announcement Secretary Donovan YouTube Announcement

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PACE Resources

Contact: JamesTrout@JamesTrout.com

Other info links www.renewmo.org pacenow.org www.dsireusa.org MissouriPACE.org http://www1.eere.energy.gov/wip/solutioncenter/

financialproducts/PACE.html

Financing, incentive linkshttp://www1.eere.energy.gov/wip/solutioncenter/financialproducts/PACE.html http://apps1.eere.energy.gov/buildings/publications/pdfs/corpora

te/bt_comm_tax_credit.pdf www.dsireusa.org