Getting The Green Getting The Green To Go GreenTo Go Green

Financing solar and other energy Financing solar and other energy efficiency infrastructureefficiency infrastructure

California Society of Municipal Finance Officers California Society of Municipal Finance Officers Annual ConferenceAnnual Conference

February 19, 2009February 19, 2009

San Francisco, CASan Francisco, CA

Tim SeufertTim SeufertNBS, ModeratorNBS, Moderator

Wade CrowfootWade CrowfootCity/County of San Francisco City/County of San Francisco

Chris LynchChris LynchJones Hall Jones Hall

Craig HillCraig HillNorthcross Hill & AchNorthcross Hill & Ach

PresentersPresenters

Introduction and Introduction and OverviewOverview

““Green finance began on the fringes of Green finance began on the fringes of social activism and has grown to a social activism and has grown to a significant sector of the financial market.”significant sector of the financial market.”

Rachael Simonoff Wexler, Esq.Rachael Simonoff Wexler, Esq.Law firm of Goodwin ProcterLaw firm of Goodwin Procter

Underlying Public Underlying Public PurposePurpose

Reduce EmissionsReduce Emissions Increase Energy IndependenceIncrease Energy Independence

Broad Range of Financing Broad Range of Financing OptionsOptions

Federal and State programsFederal and State programs Interest free financing CREB's Interest free financing CREB's

and QECB's and QECB's Grants and other programs Grants and other programs Private sector financing Private sector financing SMUD's Solar Shares SMUD's Solar Shares Charter City programs Charter City programs Assessment and Special TaxAssessment and Special Tax

How Can Cities Help?How Can Cities Help?

Barriers that cities can addressBarriers that cities can address Confusing process, costs, vendorsConfusing process, costs, vendors High up-front costHigh up-front cost

City policies and program menuCity policies and program menu Expedited permitsExpedited permits Low-cost or zero-cost solar feesLow-cost or zero-cost solar fees Analyze “solar potential”and set targetsAnalyze “solar potential”and set targets Marketing, screening, potential solar mapsMarketing, screening, potential solar maps Step-by-step assistanceStep-by-step assistance Rebates and direct financial assistanceRebates and direct financial assistance Financing programsFinancing programs

City Financing ProgramsCity Financing Programs

Property owners pay for energy projects Property owners pay for energy projects on their property tax billson their property tax bills Additional property tax = cost of individual Additional property tax = cost of individual

project + administrative expensesproject + administrative expenses

City secures upfront funding for projects City secures upfront funding for projects through issuance of bonds [loans]through issuance of bonds [loans]

Benefits of City FinancingBenefits of City Financing

Addresses financial hurdles for small-scale Addresses financial hurdles for small-scale solar/energy efficiency projectssolar/energy efficiency projects Little or no upfront cost to property ownerLittle or no upfront cost to property owner Tax/assessment transfers with property ownershipTax/assessment transfers with property ownership Property-based tax/assessment not directly based on Property-based tax/assessment not directly based on

credit of the individual homeownercredit of the individual homeowner Special tax/assessment in primary credit position ahead Special tax/assessment in primary credit position ahead

of any mortgageof any mortgage Lower fixed-rate interest on borrowed funds than Lower fixed-rate interest on borrowed funds than

through traditional home equity loanthrough traditional home equity loan Utility cost savings can cover most of special Utility cost savings can cover most of special

tax/assessment from first yeartax/assessment from first year

Legal StructureLegal Structure

Legal FrameworkLegal Framework

Goals:Goals: Financing cost administered through Financing cost administered through

property tax billproperty tax bill Little or no upfront cost to property ownerLittle or no upfront cost to property owner Tax/assessment obligation transfers with Tax/assessment obligation transfers with

propertyproperty Benefited property serves as securityBenefited property serves as security

Not only solar improvementsNot only solar improvements

Existing Legal OptionsExisting Legal Options

1.1. General Obligation BondsGeneral Obligation Bonds Allow public improvements to be financed by all Allow public improvements to be financed by all

taxable property in a jurisdiction on an taxable property in a jurisdiction on an ad valorem ad valorem basisbasis Requires two-thirds vote of registered votersRequires two-thirds vote of registered voters These bonds could be tax-exemptThese bonds could be tax-exempt

2.2. Special AssessmentsSpecial Assessments Allow public improvements to be financed by selected Allow public improvements to be financed by selected

parcels on a special benefit basisparcels on a special benefit basis AB 811 provides existing authority for “Contractual AB 811 provides existing authority for “Contractual

Assessments”Assessments”

Existing Legal OptionsExisting Legal Options

3.3. Special Tax FinancingsSpecial Tax Financings Mello-Roos Act allows public improvements to be Mello-Roos Act allows public improvements to be

financed by selected parcelsfinanced by selected parcels Already allows financing of certain improvements Already allows financing of certain improvements

(e.g., seismic) to private property (e.g., seismic) to private property Flexible annual special tax formulaFlexible annual special tax formula No special benefit calculation requiredNo special benefit calculation required Berkeley and San Francisco have adopted Berkeley and San Francisco have adopted

Special Tax CodesSpecial Tax Codes Charter Cities can adopt similar codeCharter Cities can adopt similar code AB 1709 (2008 legislative bill) for general law AB 1709 (2008 legislative bill) for general law

citiescities

Special Tax/Assessment Special Tax/Assessment FinancingFinancing

Allows financing of private improvements on Allows financing of private improvements on property tax billproperty tax bill

Special tax/assessment stays with the propertySpecial tax/assessment stays with the property Special tax/assessment obligation collected Special tax/assessment obligation collected

through tax collection or foreclosurethrough tax collection or foreclosure Allows property-by-property tax/assessment Allows property-by-property tax/assessment

based on -based on - Cost of solar & energy efficiency improvementsCost of solar & energy efficiency improvements Share of administrative expensesShare of administrative expenses

Financing MechanismFinancing Mechanism

Local public agency forms financing Local public agency forms financing districtdistrict

Property owners agree to pay special Property owners agree to pay special tax/assessment by annexing into tax/assessment by annexing into financing districtfinancing district

Special tax/assessment equal to:Special tax/assessment equal to: Amortization of cost of improvements over 20 Amortization of cost of improvements over 20

yearsyears Administrative costsAdministrative costs

Tax BenefitsTax Benefits

Interest on special tax/assessment bonds Interest on special tax/assessment bonds issued to finance improvements on private issued to finance improvements on private property property Not exempt from federal income taxNot exempt from federal income tax Exempt from California personal income taxExempt from California personal income tax

Property owner can deduct the interest Property owner can deduct the interest component of its payment on federal and component of its payment on federal and state income taxesstate income taxes Similar to home equity line of credit or Similar to home equity line of credit or

mortgage paymentmortgage payment

Issues to ConsiderIssues to Consider

Relationship with InstallerRelationship with Installer Solar vs. Energy EfficiencySolar vs. Energy Efficiency Existing MortgagesExisting Mortgages Federal Energy Tax CreditFederal Energy Tax Credit Tax-Exempt BondsTax-Exempt Bonds Limitations of AB 811Limitations of AB 811

Applies to existing development onlyApplies to existing development only Limited to cities/countiesLimited to cities/counties

Regional SolutionsRegional Solutions

Financing DetailsFinancing Details

The Credit ProcessThe Credit Process

• Application should include two components• Property Review

• Clear Title• Current on property taxes and any other

taxes/assessments• Applicant Review

• Delinquency of any mortgage or other property-related obligations

• “Desktop” appraisal to confirm sufficient value in property (policy on how much debt burden)

• Individual credit score should not be necessary

The Funding ProcessThe Funding Process

• Financing amount determined by project cost and property owner election

• Project cost less any CSI/local rebates or cash contribution

• Interest rate determined at time of project completion (prior to funding)

• Special tax calculation determined (based on each applicant)

• Consent of property owner to levy special tax• Financing source provides funds to property

owner upon completion of project

Financing DetailsFinancing Details

Each application will be treated as separate “bond” Each application will be treated as separate “bond” secured by annual special tax or assessmentsecured by annual special tax or assessment

Aggregation of participating properties will create Aggregation of participating properties will create diversificationdiversification Pool of Special Tax/Assessment revenues secured all Pool of Special Tax/Assessment revenues secured all

bondsbonds Financing partner has ability to sell Bonds once Financing partner has ability to sell Bonds once

aggregation creates market efficienciesaggregation creates market efficiencies Each bond may have different interest rateEach bond may have different interest rate

Bond will pay semi-annual special tax payments Bond will pay semi-annual special tax payments collected by through property tax billscollected by through property tax bills

Typical Residential ProjectTypical Residential Project

$32,000 Solar System$32,000 Solar System CSI Rebates of ~$7,000CSI Rebates of ~$7,000 Approximate 3.5kw systemApproximate 3.5kw system Upfront Administration fee of $550 Upfront Administration fee of $550

(included in financed amount)(included in financed amount) Interest rate of 6.75% (Fixed)Interest rate of 6.75% (Fixed) 20-year special tax20-year special tax Equivalent monthly property tax cost: Equivalent monthly property tax cost:

~$210 (before income tax deduction)~$210 (before income tax deduction)

Berkeley FIRSTBerkeley FIRST

City currently running Pilot Program (40 applications)City currently running Pilot Program (40 applications) Reservation/application completedReservation/application completed Initiate contract with installerInitiate contract with installer CSI rebate submitted for approvalCSI rebate submitted for approval Installation completedInstallation completed City signs off electrical permit (no verification of system City signs off electrical permit (no verification of system

performance)performance) Final project cost/financing amount determinedFinal project cost/financing amount determined

Special Tax calculated based on interest rateSpecial Tax calculated based on interest rate Unanimous consent of property ownerUnanimous consent of property owner Special Tax recorded against propertySpecial Tax recorded against property

Funds released from financing source to City for payment to Funds released from financing source to City for payment to property owner or installerproperty owner or installer

How The Funds FlowHow The Funds Flow

Special Taxes/ Assessments

Special Taxes/ Assessments

Special Taxes/ Assessments CSI Rebate

Bond ProceedsBond Proceeds

Installation Costs

Solar and energy

ef f iciency Bonds

Utility Home-owner

Installer

County Tax

Collector

Berkeley FIRST IssuesBerkeley FIRST Issues

Who participatesWho participates Project size/funding amount limitProject size/funding amount limit How to handle special tax delinquenciesHow to handle special tax delinquencies

Over-collect on all parcelsOver-collect on all parcels Fund reserve out of each project at time of paymentFund reserve out of each project at time of payment

How to fund reserve fundsHow to fund reserve funds Internal/external administrationInternal/external administration

Ongoing administrative costs = 5% of annual special taxOngoing administrative costs = 5% of annual special tax Covers County collection and Financing District administrationCovers County collection and Financing District administration

Long-term financing sourceLong-term financing source Palm Desert funded internally from reservesPalm Desert funded internally from reserves BanksBanks Traditional BondTraditional Bond

What does Aggregation of little bonds look like in futureWhat does Aggregation of little bonds look like in future

Open Issues With ProgramOpen Issues With Program

Administration of Financing ProgramAdministration of Financing Program Internal staff versus outside private companyInternal staff versus outside private company

Financing SourceFinancing Source Reliable funding source and stable interest ratesReliable funding source and stable interest rates Sufficient capital to handle demand from communitySufficient capital to handle demand from community

Policy DecisionsPolicy Decisions What type of solar or energy efficiency project to includeWhat type of solar or energy efficiency project to include How much debt burden is allowableHow much debt burden is allowable Is special tax prepayment allowedIs special tax prepayment allowed

Wrap up Wrap up andand Q&AQ&A