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Renewed Energy: Cities To Tap Muni Bonds For Green-Building Loans - Wall Street Journal

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by Cassandra Sweet

SAN FRANCISCO (Dow Jones)—California cities plan to use the municipal bond market to help property owners improve energy efficiency and install solar panels—and create jobs in the process.

A new green financing program, called Property Assessed Clean Energy, or PACE, puts banks together with cities or other local governments to provide loans to property owners to replace windows, doors and other materials to cut their energy and water use as well as install renewable energy systems like rooftop solar panels. The Obama administration has hailed the program as a way to cut people’s utility bills, reduce greenhouse-gas emissions and create new jobs in the construction industry, which has been hit hard by the recession. Banks are looking at PACE bonds as a new market for investors active in the municipal and asset-backed bond markets.

San Francisco plans to launch a PACE program and start accepting loan applications March 1. Mayor Gavin Newsom said he expects the program to generate about $150 million in loans and create 1,800 jobs over the next few years. Similar, smaller programs have been started in Berkeley, Palm Desert and Sonoma County, Calif., as well as Boulder, Colo.

“This green-financing program is going to create green jobs and fuel the next wave of energy and water efficiency and renewable-energy development in San Francisco,” Newsom said at a recent press conference.

San Francisco officials say the PACE financing program will help cut energy and water use and associated greenhouse-gas emissions. The city estimates that energy used by buildings accounts for 45% of its greenhouse-gas emissions. California offers rebates for home and business energy-efficiency and solar-power projects, as part of the state’s 2006 plan to combat climate change. Businesses can use those rebates to offset up to two-thirds of the cost of energy-efficiency improvements, and take out a PACE loan to pay for the rest, said Cal Broomhead, San Francisco’s energy and climate programs manager.

Venture capital-backed Renewable Funding LLC is helping arrange financing for San Francisco’s PACE program and similar programs in San Diego and other cities. The firm’s president, Francisco DeVries, helped pioneer PACE financing for home solar-panel installations a few years ago when he worked for the city of Berkeley.

“It opens the door to solving one of the great conundrums, which is that people could be saving money every day on their utility bills, but they’re not,” DeVries said.

Renewable Funding has lined up $10 million in financing from a group of regional banks to get San Francisco’s PACE program started, said the firm’s executive officer, Jack Bernard. He declined to name the banks because the agreements haven’t been completed. The firm is also working to arrange a second $100 million round of financing for the program, which will likely by underwritten by one or more large, national banks, Bernard said.

Once San Francisco approves the PACE loans, the city will set up a mechanism through which property owners repay the loan through a property-tax assessment, or lien attached to their property. If the owner sells the property before repaying the loan, the next owner takes over repayment. The loans will be aggregated and sold as a pool in the bond market, as a hybrid between an asset-backed security and a municipal bond, said Bernard of Renewable Funding.

Bankers said that while PACE bonds are new, they resemble other municipal bonds and are expected to carry relatively low risk. Because a PACE loan will be attached to a property as a lien, it will be first in line for repayment—ahead of the mortgage—in the event of foreclosure. Cities have used the same tax-assessment structure for decades to make loans and issue bonds for sewer upgrades and other improvements.

“Based on our research, we believe that a well-structured PACE program can offer attractive long-term financing of clean-energy projects nationwide,” said a banker at Barclays Capital (BCS), who asked not to be identified because of pending agreements.

San Francisco is expecting interest rates of between 7% and 8% for the loans, said Johanna Partin, the city’s director of climate protection initiatives.

By comparison, the average interest rate for a U.S. home-equity fixed-rate loan is about 8%, and about 9.25% in San Francisco, according to bankrate.com.

San Francisco Mayor Newsom said it was unclear how much demand there would be for the PACE loans, and that it will depend on the city’s ability to raise awareness of the program and its benefits.

Recurve, a San Francisco contractor that specializes in energy efficiency retrofits and green building, expects its business will double as a result of PACE programs in San Francisco and other cities, said Adam Winter, a senior vice president at the company.

Source:
Wall Street Journal