Tuesday, July 20, 2010

PACE Financing: Accelerating Adoption

by William Dinkel and Claudia Girrbach
This is the second of a two-part interview with Dennis Tsu, who manages Business Development for Commercial PACE with Renewable Funding.

In part one of our interview, we introduced PACE – Property Assessed Clean Energy. PACE provides business and residential property owners with financing for renewable energy or energy efficiency investments that is repaid through a property tax assessment.

As we learned in part one, PACE was established to overcome the financial hurdle faced by property owners by eliminating the high upfront costs that often derail green projects. Although PACE is an innovative financing approach, it will only be effective if it is adopted.

In this portion of the interview, we address the barriers to widespread adoption. Like most sustainability efforts, adoption requires engaging multiple and diverse constituents, including the following:

• Sponsors – State governments

• Management – Cities / counties and PACE administrators

• Consumers – Property owners

• Influencers – Property Leasers, contractors, architects, engineering firms, product suppliers, media

• Other interested parties – Lenders, voters, federal government

William Dinkel: Who are the key players and what roles do they play in making PACE available to every property owner?

Dennis Tsu: First, each state legislature needs to understand the benefits of PACE and then pass the appropriate legislation to enable the establishment of PACE programs. As of today, there are, 20+ states that have passed PACE-enabling legislation, and another five to ten that are actively debating whether to pass PACE legislation in their state legislatures.

Once legislation is passed, then the cities and counties need to set up their own PACE programs. The cities and counties may administer the program on their own or select a third party. Here in California, a statewide program [Note 1] to administer PACE  was implemented that any jurisdiction may opt into. Some jurisdictions are still choosing to implement their own independent program.

The administrator can play various roles – from arranging financing to establishing the process to request and reviewing funding applications; this is the role that Renewable Funding plays: we sign contracts with various counties, cities, or municipalities to help them implement and administer these programs.

Once the program is underway, property owners, as well as contractors, need to be made aware of the program and how it works.

WD: Why is it necessary to pass legislation to create PACE programs? What does the legislation consist of?

DT: The only way that a legislature can pass a law establishing a special tax district – which is required to put PACE in place – is if there a greater public good that the tax district is addressing. The greater public good, in this case, is the reduction of greenhouse gases.

Unlike some legislation on greenhouse gas reduction which can be controversial, PACE is a great way for government to address climate change; PACE is a low-cost program and it encourages capital investment, creates jobs, and supports energy independence.

WD: Do you feel that there is a lack of understanding about energy efficiency investments?

DT: Yes, there’s no question that the energy efficiency industry is evolving on how to educate and market to consumers and businesses. We need to convince people that swapping out incandescent bulbs for LED lighting isn’t a fringe, lunatic kind of thing. To close the deal, we need to clearly and simply articulate that energy efficiency investments make good business sense. This story is made more compelling with PACE since the property owner has no upfront costs and gets to pocket the energy savings from day one.

There is also a need to educate state and local governments, property management firms, local power utilities, architects, and more.

At Renewable Funding, we have been working with legislators, private companies, and industry consortia to provide information on the need for energy efficient projects and the importance of PACE.

WD: How has the recent “debt crisis” affecting the financing of PACE?

DT: As we know, a large part of the current economic crisis was caused by mortgage problems, making the parties holding mortgages wary of other debt holders. Since PACE is based on property tax assessment – which in most legal structures is senior to the mortgage debt – PACE funded debts are paid first in case of default, ahead of the primary mortgage holder.

We believe that PACE financing does not place lenders at risk, and there’s a lot of evidence to back that up. Several of the large ESCOs (Energy Service Companies) have published studies on this. The Clinton Climate Initiative is also doing a lot of work in this area and has published some documents and recommendations. And many vendors of energy efficient lighting, HVAC, roofing, etc. have also published their own case studies and examples.

Unfortunately, the cloud of the debt crisis has cast a shadow over PACE. Fannie and Freddie [Federal Home Mortgage - Note 2] have challenged the underlying concept of PACE financing for residential properties and this is definitely having an impact on PACE residential financing programs across the country.

However, commercial properties and commercial real estate lending are totally independent of Fannie and Freddie - and this may end up benefiting and accelerating PACE Commercial financing programs - both here in California and across the country.  There's lots of discussion around this happening real-time now.

WD: How has Renewable Funding’s experiences prepared it for large scale roll-out?

DT: Renewable Funding’s president, Cisco DeVries, spearheaded the first PACE financing program while working as Chief of Staff under Berkeley Mayor Tom Bates. It was then, when looking to finance solar array for his own home, that Cisco was faced with the problem that stymies many green projects: the high upfront cost. This led Cisco to begin laying the groundwork for what would come to be known as CityFIRST, a "turnkey" model that cities could adopt to access on-demand financing for energy projects.

From these beginnings, Renewable Funding and the model of PACE financing have made significant progress over the last two years, and we are ready to scale-up to facilitate financing of energy improvements on a national level.

Note 1: Statewide administrator, California First

Note 2: Editor's Note: Last update July 19

Fannie MAE and Freddie MAC stated they would not purchase mortgages with PACE liens attached to them and have advised lenders across the country that PACE programs are risky and inadvisable. California's attorney general, Jerry Brown --- supported by Governor Arnold Schwarzenegger --- sued the U.S. mortgage agencies in an effort to revive PACE. A house bill was also introduced recently to protect PACE programs. Federal legislators forwarded a letter to President Obama that urges him to use his executive authority to resolve issues created by Federal Housing Finance Agency (Fannie and Freddie).

Related Posts

PACE Part 1: Affordable Financing for Green Projects

Our Guest Blogger - William Dinkel

William Dinkel is an avid researcher and blogger on green technologies and energy efficient solutions. Also a passionate sportswriter, William was published on the NYTimes "Off the Dribble" blog. William works at Hewlett-Packard in Silicon Valley, and holds a BS in Computer Engineering from California Polytechnic University, San Luis Obispo.

Our PACE expert - Dennis Tsu

Dennis Tsu is a consultant, assisting Renewable Funding in developing the market for PACE Commercial projects - energy efficiency and alternative energy projects on commercial (office, industrial, multi-family residential, mixed-use, hotel/lodging, etc.) properties. He has over 30 years of sales and marketing business experience, including several doing solar PPA development. He has a BA from Princeton University, and an MBA from the Stanford Graduate School of Business.

1 comment:

  1. It is 2010. The clock is ticking. Greenhouse gas emissions must to be stabilized by 2015. The earth is heating up more rapidly than predicted. The U.S. is way behind schedule on this. Perhaps Fannie Mae's CEO Michael Williams, Freddie Mac's CEO Charles Haldeman and FHFA's Edward DeMarco should take a look at http://www.global-warming-forecasts.com/2015-climate-change-global-warming-2015.php

    For those of you who have an opinion and who would like to share your sentiment about the PACE decision, you can reach these key decision-makers at:

    Charles Haldeman Jr.
    Freddie Mac
    8200 Jones Branch Dr.
    McLean, VA 22102-3110
    Toll Free: 800-424-5401
    703-903-2000 Fax: 703-903-4045

    Michael Williams
    Fannie Mae
    3900 Wisconsin Ave. NW
    Washington, DC 20016-2892
    Toll Free: 800-732-6643

    Edward DeMarco
    Acting Director
    Federal Housing Finance Agency (FHFA)
    1700 G Street, NW 4th Floor
    Washington, DC 20552
    Email: director@fhfa.gov

    Or you can write to:

    Senate Committee on Environment and Public Works
    410 Dirksen Senate Office Bldg.
    Washington, DC 20510-6175

    Select Committee on Energy Independence and Global Warming
    See http://globalwarming.house.gov/
    B243 Longworth House Office Building
    Washington, DC 20515
    Fax: 202-225-4092

    PACE would increase the resale value of buildings. $171. Green building sales prices are $171 per square foot higher than non-green buildings. “According to a recent study by CoStar, green buildings that are certified under the LEED rating system …are sold for higher sales prices. …LEED certified buildings command sales prices of $171 per square foot more than the sales prices for buildings that are not LEED certified.” (Julie Stamato, Senior Attorney, “Building Green: A Win-Win for All,” Theodora Oringher Miller and Richman PC)

    (Julie Stamato, Senior Attorney, “Building Green: A Win-Win for All,” Theodora Oringher Miller and Richman PC, September 2008)