Property Assessed Clean Energy Financing. Benefits and Barrier Busting

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1 Property Assessed Clean Energy Financing Benefits and Barrier Busting

2 What is PACE financing and how does it work? Property Assessed Clean Energy PACE financing allows property owners to pay for energy efficiency, renewable energy, and/or water efficiency projects via an additional assessment on their property tax bill over a 5-20 year term. PACE is also referred to as tax-lien financing Provides capital to fund energy retrofit Contractor receives funds to do retrofit Local Tax Entity Pays special assessment on property tax bill Property Owner Capital improvements that saves energy costs Contractor/ESCO Property owners in a cash flow positive position 2

3 What makes PACE financing different? Secure for investors Seniority of the property assessment position, ahead of other liens/debt Default rate on property assessments is very low Lower cost of capital Seniority of lien, low property tax default rate, cure requirements and government subsidies or loan guarantees will enable low interest rates Transfers with ownership/turnover Turns triple net lease into a green lease Doesn t limit payback period to owner s expected holding period or tenant s planned occupancy. Future owners take on payments & savings Tax assessments qualify as an eligible pass thru expense under most triple net leases allowing landlords to pass thru retrofit costs to tenants who also benefit from savings May be off-balance sheet Property assessments are generally treated as an expense, not capitalized on the balance sheet as a long term liability. The accounting firms need to rule on this soon in the context of actual projects. One of s 10 breakthrough ideas for 2010 One of s 20 world changing ideas to build a cleaner, healthier, smarter world 3

4 PACE model overcomes key barriers Barriers Scarce internal capital budget No access to or aversion to financing No investment-grade credit rating Lack of collateralassets that don t fall under first mortgage Limited # of lenders experienced in financing energy efficiency/renewables Rates exceed internal cost of capital Balance sheet concerns Uncertain holding period Owner / tenant split incentives Skepticism re savings/roi Solutions Spread cost over years Repayment security thru senior lien position rather than borrower s credit Backed by property, not by owner or equipment collateral Local governments provide scale Low rates due to security / policy Maybe treated off balance sheet Transfers upon sale, turnover Qualifies as NNN pass-thru cost Contractor may guarantee savings 4

5 Why is PACE going viral? Building Owners Local Governments Retrofit Investors First Mortgagees ESCOs / Contractors No upfront cash needed Competitive cost of capital Solves credit rating, collateral issues Maybe off balance sheet Allows owners to pass thru retrofit costs to tenants Support local business and job creation Reduces city s largest carbon footprint segment: existing buildings Tax neutral; no risk to the general fund Very secure payback mechanism Securitizes energy efficiency (2 nd ary markets) Diversification via pooled bond Federal loan guarantees are likely Positive cash flow improves property owner s ability to service liabilities Increase valuation and marketability of asset Annual assessment payment is senior to mortgage in default Game-changing for private sector investment Longer payback projects Mortgagees prefer performance guarantees Harnesses markets to scale capital inflow 5