PACE 101: Legislation, Program Design and Program ...pacenation.us/summit-2017/wp-content/uploads/2017/02/All...PACE 101: Legislation, Program Design and Program Administration Jeremy

PACE 101: Legislation, Program Design and Program Administration

Jeremy HutmanFebruary 13, 2017

Enabling Legislation

renewfinancial.com 2

AmendExistingLawCreateBrandNewLawProgramDesignIncludedNoProgramDesignIncluded

• BasePACEonexistingspecialdistrictlegislationorequivalent(Butlookoutfordealbreakers)

• ExpectPACEtoscale– Overlyburdensomelegislatedrulespreventgrowth

Enabling Legislation


LegislationWritten↓ ↓

ProgramLearning↓ ↓

Source:PACEnation.us

Programs need a flexible feedback loop to respond to the market

Avoid program design, bond, underwriting, consumer protection and administration requirements in initial legislation

District Formation


• Easy – Districtcreatedatthestatelevel.Everylocalgovernmentisautomaticallyin.

• Moderate – Nolimitondistrictsize,butcountiesmustoptin• Harder – Nolimitondistrictsize,buteverylocalgovernment

mustoptin• Hardest – Everylocalgovernmentmustcreatetheirown

district

Program Design and Admin


• Stateinvolvement– None,support($orother),sponsor• Sponsor– City,County,StateAgency,SpecialAuthority(Joint

PowersAuthority,PortAuthority,Inter-LocalAgency)• Competition- SingleProvider,MultiProvider

Program Design and Admin


• ProgramAdministrator– Public,Non-Profit,Private• CapitalSource– Public,Private,Single,OpenLender• Collection– Public,Private• EligibleProperties- Non-Residential,Residential,All• EligibleMeasures– EE,RE,Water,Wind,EV,Seismic

Sample PACE Development in a State


1.PassEnablingLegislation

2.FirstPACEDistrictandProgram–Cityor

Countylevel

3.RegionalPACE

program

4.StatewidePACE

program

5.CommunitiescreateorjoinmultiplePACEprograms

6.Competitive

PACEmarketplacewithseveralprograms

BestPracticeIdentificationandIndustryStandardization(PossiblyAmendLegislation)

Thank YouJeremy Hutman

[email protected]

© 2016 PFM 1

PACE 101:

Financing Structures and

Administrative Fees

February 13, 2017

Felicia WilliamsSenior Managing ConsultantPFM Financial Advisors LLC

601 S. Figueroa St.Suite 4500Los Angeles, CA 90017

[email protected]

© 2016 PFM 2

PFM PACE Experience

© 2016 PFM 3

Financing Structures

• Local Jurisdiction Funded• Operations: Staff operates Program or contracts with Administrator• Funding Source: internal funds or reserves; can aggregate and

securitize to make new funds available• Considerations: (+) lower rates and fees; (+) ability to earn higher

returns on reserve funds; (+) local control; (-) increased risk• Examples: CT Green Bank, SCEIP, MPower Placer

• Investor Funded• Operations: contracted with Administrator or combined

Administrator/Investor• Funding Source: warehouse credit line and/or investor capital• Considerations: (+) increased lending capacity; (+) expanded marketing

capability; (-) less control; (-) less competitive rates and fees• Examples: EnergizeNY, WRCOG/CA/SANBAG HERO, CSCDA

OpenPACE, and many more

© 2016 PFM 4

Financing Structure

Program Agency

CapitalProvider

PropertyOwner

Contractor Investor

Improvements

Project Funding

Securitization

Local FundedInvestor Funded

© 2016 PFM 5

Closing Costs and Fees

Administrative

Application Approval Underwriting and processing

Program Sponsor Reimbursement for staff time and operating capacity

Bond Counsel Legal documents – program formation, assessment contract, bond indenture / purchase contracts

Municipal Advisor Program financial structure, verification, ongoing analytics, data management

Assessment Engineer Maintenance of tax roll data, payment tracking, fund requisitions

Recording Contractual assessment recorded on public record

Trustee Deposit accounts and fund disbursement (annual fee)

County / Other Servicer Assessor tax roll updates, fund establishment, collections (upfront + annual)

Financing

Financing Fee Payment to capital provider for use of funds, if applicable

Capitalized / Prepaid Interest Interest payment(s) to bond investors to cover period between closing and 1st tax payment since tax roll is typically updated annually

Other

Reserve fund(s)

• Two main types of fees• Administrative – processing• Financing – cost of capital

• Will vary based on financing size and structure: 3 – 8%• Bond issuance• Reserve fund

© 2016 PFM 6

PFM Team

Laura FrankeLos Angeles

David MooreOrlando

Lisa DanielMemphis

Jon CastaldoNew York

Heather CaspersonMinneapolis

Felicia WilliamsLos Angeles

Maria FigueroaLos Angeles

Topher LancasterLos Angeles

Brandon LewisNew York

2017 PACENation Summit C-PACE Basics

Jim Stanislaus, Co-Founder & CFO

February 13, 2017 3:30 – 4:00pm

Petros PACE Finance Overview

•  Petros PACE Finance, LLC (PPF) is an Austin-based lender focused solely on the nationwide commercial PACE market

•  Experienced leadership – Over 60 years of experience with specific expertise in lending and structured finance with institutional investors

•  National platform – Petros PACE Finance has closed C-PACE loans in Texas, Michigan, and Minnesota, California, Missouri and Colorado

•  Typical project size – Ranges from $500K to $50 million More info at www.petros-pace.com

2

Review of Lender Consent

•  Most lenders restrict borrower’s ability to modify the property and underlying mortgage.

•  Majority of C-PACE programs require lender consent prior to project execution.

•  Barriers to Obtaining Consent -  Lender misconceptions / Lack of experience with PACE -  Issues with borrower’s existing credit -  Seniority of PACE lien -  Lender Status Quo

•  Tips for Obtaining Consent -  Understand relationship between borrower and lender -  Proper outreach to lender -  Educate lender on financial benefits of PACE

3

Why Banks Should Grant Lender Consent

•  Improved debt service coverage ratio -  Enhanced ability to pay existing debt

•  Value of collateral increases upon completion of PACE project •  Lien assessments already factored into lender underwriting •  Additional market opportunities created (e.g., construction

term financing) •  PACE loans do not accelerate upon default •  Proven successful

-  Over 200 institutions have already provided consent

4

PACE Financing & Lease Economics

•  Challenges of Investing in Energy Projects Under Many Lease Forms -  Split Incentive

§  Landlord invests in energy capex but benefits realized by tenants •  Triple Net Leases: Taxes, insurance, and O&M costs passed through directly to tenants •  Gross Leases: same expenses passed through to tenants indirectly as increase in rent

-  Investment in core vs non-core activities §  Under a typical lease structure, energy projects face higher hurdle rates due to less

certainty in projected savings

•  How PACE Can Help -  Through PACE structure, cost/benefits are aligned with tenants and

landlord -  Often results in net savings for both the landlord and tenants -  No CapEx outlay by landlord and increased tenant cash flow -  No personal guarantees, no up-front cash payments (reduces risk)

§  Allows for investment in non-core activity

5

Project Development Best Practices

•  Buildings -  Redevelopments (renovations, retrofits, etc.); New Construction (state-specific) -  Missed/deferred maintenance

§  Last retrofit “X” years ago

•  Owner -  Owner-Occupied -  Non Profit -  Healthy Financial Standing

§  No Defaults/Bankruptcies §  Appropriate Leverage

-  Good relationship with mortgage holder (if applicable); lender consent

•  Partnerships -  Strong relationships with PACE-knowledgeable contractors and property

management firms to pre-approve eligible projects (i.e., SIR>1, CF positive financials, etc.)

6

Contact

Jim Stanislaus, CFO Petros PACE Finance, LLC [email protected] (512) 599-9026

7

How PACE Works

The Challenge

Whenitcomestoimprovinghome energyperformance• Thestatusquoisn’t working.• Everyyear,1in6homeownersupdate

asystemintheirhomesthataffectsenergyconsumption.

• Thevastmajorityofthetime theychoosealess-efficientoption.

Why?• Don’thaveaccessto cost-effective

credit• Don’tknowhowlongthey’llstay in

their home• Don’tknowwhichproductsto choose• Don’thavethetimeorabilitytogo

throughlengthyprocesses

2©2014Renovate America, Inc. AllRightsR eserved.

PACEasa Solution

3 3©2014Renovate America, Inc. AllRightsR eserved.

PACEishelpingsolvethemarketplace failure• Accessto financing• Overcomescostbarriersbyoffering100%financing• Paymentsspreadoutoverlifeofproduct,loweringannual paymentamount

• Lowerutilitybills may offsetassessment payments• Interestmaybetax deductible

• Transferability• Maybeabletotransferremaining balance

• Informedefficiency choices• PACEonlyfinancesEnergyStarrated products• Availableforunplanned,urgentsystemreplacements• Consumerfriendlyplatform

ThePowerof PACE

4 4©2014Renovate America, Inc. AllRightsR eserved.

ALawrenceBerkleyNationalLaboratory(LBNL)reportreleasedin2016titled,EnergyEfficiencyProgramFinancing:Whereitcomesfrom,whereitgoes,andhowitgetsthere,foundthatPACEfinancingisleadingthewayinresidentialenergyefficiencyloanvolumenoting:

“ahandfulofprogramsdriveaverylargefractionoftotalresidentialenergyefficiencyloanvolume.Thetwolargestprograms– theCaliforniaHEROPACEprogramandtheMassSaveHEATLoanprogram(zeropercentfinancing)– accountfor46%ofthetotalcapital loaned.”

• TheLBNLreportwasbasedon2014data.From2011to2014,theHEROprogramoriginated$400millioninfinancing.Sincethen,theHEROprogramhasoriginatedanadditional$1.7 billion.

• PACE,becauseitdoesn’trelyonpublicdollars,hastheabilitytoscaletomeet demandinawaythatisunparalleledbypubliclyorrate-payerfinancedefficiencyloan programs.

PropertyAssessedCleanEnergy(PACE) Financing


PACEFinancing Overview:• Newwaytopayforenergyefficiencyandrenewableupgrades

• Financedmeasuresarerepaidovertimethroughavoluntarybenefitassessmentonthepropertytax bill

• Paymentsarefullyfixed andamortized

HowDoesResidentialPACEWork?

1. Statelegislationgrants authority tolocalgovernmentstoestablishPACEprograms

• Localgovernmentauthorizedtoplacechargeonpropertytorepayfinancingforenergy-efficientandrenewable-energy improvements


2. Localgovernmentseither createaResidentialPACEprogramorjoinastatewideorother district

• May authorize private ResidentialPACE providers to operate in theirjurisdiction

3. Homeownersapplyfor, and ifqualified,receiveResidential PACEfinancingtoinstalleligibleimprovementstotheir home

4. Propertyowners repay ResidentialPACEfinancingthroughtheirpropertytax bill

PACEAdministration

Issuer PACEAdministrator

Treasurer/TaxCollector HomeownerContractorMunicipality

SelectsPACEAdministrator(s)andprovidesprogram

oversight

Workswithlocalgovernments toadopt

programs

Overseesapplicationprocess

WorkswithtaxcollectorsonPACEassessment

collection

Payscontractorafterprojectcompletion

Developsnetworkofcontractors

AdoptsPACEprogrambylocalresolution

CollectsPACEassessments

WorkswithhomeownerandPACEAdministratortoselectandinstalleligible

products

EntersintocontractwithIssuerforfinancing

Entersintocontractwithissuerforfinancing

CreatesstandardsforPACEadministrators,contractors,

andunderwriting

WorkswithPACEAdministratoronongoing

compliance

Receives regularprogramreports

Repaysissuerfinancingthrough PACEassessmentimposedandcollectedon

property taxbill

PACEResponsibilitiesPACEAdministrator

Contractor

Homeowner

Overseespricing reviewandconfirms termsof

financing through livecallwithpropertyowner

Installsproductsthatarecertifiedasenergy

efficient

Mustbelicensed,bonded,andinsured

SignsaCompletionCertificatebeforethecontractorispaid

Propertyownermustalsoreceivedisclosureform

modeledon“KnowBeforeYouOwe”anda3dayright

tocancelform

Additional protectionsforseniors

Mustabidebybusinesspracticeandmarketingguidelines

Provide disputeresolution, sellingandrefinancesupport for

homeowner

Issuer

Responsibleforcomplianceenforcement

Receives regularreportsonprogram

results

Adoptsconsumerprotection requirements,e.g.PACENation Standards

Workswith/auditsadministratorsonconsumerprotections,underwriting,contractor,requirements,producteligibility,andother

standards

Ensurescontractorssatisfyprogramrequirements,e.g.licensing,eligibleproducts,andrequiredpermitting

Implementsunderwritingrequirementsand

consumerprotections

HowResidentialPACECanWorkforProperty Owners

RenovateAmerica’sPACEprogram,HERO,ishelpingmorepeopleaffordtomakeenergy-efficientand renewableenergy-producingupgradestotheirhomes.Here’showit works:

2.Applyfor HEROHomeownerappliesforHEROfinancingonlineorbyphoneandcanreceiveapprovalduringtheirconversation.

3.SelectProductsOveronemillionproductsqualifyfor HEROOnlycertifiedenergy-efficientproductsareeligible.

4.SignFinancingDocumentsHomeownerreceivesDisclosureFormmodeledonCFPBKBYOform.Homeowneraskedtoconfirm keytermsbyphoneandasks anyoutstanding questions.

5.Install& CompleteHomeownersignsoffwhentheprojectissatisfactorilycompletedandthenHEROpaysthe contractor.

6.Make PaymentsHomeownermakesHEROpayments throughtheirproperty taxes.

1.Equipment Failure/GoSolarHomeownercallsacontractorintheHEROnetworkwhohasagreedtomeetourconsumer safeguards.


WhoBenefitsfrom PACE?

10

©2014Renovate America, Inc. AllRightsR eserved.

BenefitstoProperty Owners

ProtectAccessto Credit

11

©2014Renovate America, Inc. AllRightsR eserved.

Payment through propertytax keeps home equity lineand credit card available Increase Affordability

Noupfrontcash,may lowerutilitybills,noprepaymentpenalties,andinterestmay

betax deductibleMayIncreaseProperty Values

Studiesshowenergyinvestmentsare

recoveredattimeofsaleorvalueof homeisactually increased

ProtectHousing

Lowerdefaultratesonenergyefficienthomes;deferred

maintenanceprojectsarefinally affordable

PACEHomesShowIncreased Value

A2016StudycomparingsalesofPACEandnon-PACEhomesshowed:

• PACEhomeenergyrenovationsrecovermorethan100%ofcost…comparedto58%to66%recoveryforbathandkitchenremodels

• PACEhomesincreasedin value$199- $8,883 abovecostofimprovements

• PACEhomessawnearlya$7,000premiumwhenpurchasedfromforeclosure


Benefitsfor Contractors

• Training

• DedicatedSupport

• Software

• Quick approvals

• Higherqualityandmoreefficientproductsonmarket

• Consumerprotections


BenefitstoGovernment Partners

PrivateCapitalFundsPublic PolicyObjectives

• Voluntaryforcounties andmunicipalities

• Participationcostscoveredby theprogram

• Notaxpayer/ratepayermoney

• Boostsmunicipal revenues

• Meetlocaleconomicorenvironmentalgoals

• Real-timeimpact reporting

• Dedicated support

• Consumerprotection standards


HowRenovateAmerica’sHEROProgramCompares ToCompetitive Products

HELOC UNSECUREDCREDIT

SinglePurpose Financing

FixedRateandFully Amortizing

Pricing Review

100%ConfirmationofTermsViaLivePhone Call

EnhancedDisclosure

RighttoVoidHERO Financing

FundingProvidedOnlyUpon CompletionofProjectandHomeowner Certification

Contractor Requirements

NoPrepaymentPenalty

Pre- andPost-FundingCustomer Support

Senior Care

Yes Sometimes No


LocalImpactof PACE

Community ImpactEvery$100Kinvestedbyahomeownerhelpscommunitiescreatelocaljobs,stimulatetheireconomies,saveenergy,loweremissionsandprovideclearer air.


Example:TheCountyofLos Angeles

• PACEisanimportantpolicytoolforhelpingtheCountyachievethegoalsoftheirCommunityClimateActionPlan (CCAP)

• TheCCAPholdstheCountyaccountabletodeliveringon California’s mandate toachieve 1990 GHGemissionslevelsby2020

• Contributestoagrowingandhealthylocal economybycreatingnewjobsthatcan’tbe outsourced


EconomicImpactHomesImproved 19.2KJobsCreated 4,580AmountFunded $540MEconomicStimulus $936MEnvironmentalImpact1

EmissionsSaved(k-WH-e) 2.5BEmissionsReduced(ton) 649K

WaterSaved(gal) 2.2B1.Impactsareprojectionsbasedonlifetimeofinstalledproducts

Example:The CityofSan Diego • HEROintheCityhashelpedaccelerate

progresstowardtheir2020retrofitgoal(6,324unitsimplementingEE):• 1,500+HEROhomesretrofittedafter

13 months• Cityisontracktoachieve2035goals

by 2020

• LeverageactualHEROdataonsolarPVpenetrationtoinformnewconstructionthresholdsforsolarinstallationsintheCity

• Contribute to the City’s working groupon Climate Action Plan; providing policyinsights using real HERO data


EconomicImpactHomesImproved 3,570JobsCreated 760AmountFunded $90.4MEconomicStimulus $156.6MEnvironmentalImpact1

EmissionsSaved(k-WH-e) 424.3MEmissionsReduced(ton) 117,910

WaterSaved(gal) 490.7M1.Impactsareprojectionsbasedonlifetimeofinstalledproducts

PACENational Landscape


ResidentialPACE (R-PACE) CommercialPACE (C-PACE)- $3.3BillioninFunded Projects- 132,000 Projects- 29,000Jobs Created

- $332 MillioninFunded Projects- 988 Projects- 4,000 Jobs Created

Source:PACENationasofQ3, 2016

California,Florida,andMissourihavealllaunchedstatewideresidentialPACEprograms.TheopportunityforeconomicdevelopmentisevengreaterforresidentialPACE.AsofQ32016,therearenearly133 timesmoreResidentialPACEprojectsthanCommercialPACEprojects nationally.

PACE:Guidanceforthefuture


FHAandVAPACEGuidanceDOEBestPracticesGuidance

©2014Renovate America, Inc. AllRightsR eserved. 20

• First-everfederalhousingpolicytorecognizePACEasataxassessment

• ClearguidanceallowingPACEtoco-existwithFHAandVAmortgages

• Expandsaccesstorenewableenergy,energyefficiency,andotherhomeresiliencyprojectsforAmericanhomeowners

• Guidancebalancesnationalhousingpolicyprioritieswithnationalcleanenergyimperatives

• Guidelinesfocusonbestpracticesforprogramdesign,compatibilityofPACEwithenergyefficiencyprogramsandservices,andevaluationofprogramoutcomes

• Theupdatedguidelinesoutlineamorerigorousapproachtodeterminingpropertyownereligibilityandtheimportanceofconsumerprotections

• TheseguidelinesandbestpracticesshouldbeappliedinconjunctionwiththemostcurrentversionofindustryconsensusguidelinesdevelopedforPACEfinancing,inordertohelpPACEprogramsachievetheirenergyandenvironmentalgoals,aswellasbettereconomicoutcomesforparticipatinghomeownersandcommunities

ContractualSubordination• AddressesGSEissueforsomelendersatsaleorrefi

• Waivesproceedsfromapropertytaxforeclosureorsaleinfavorof1stmortgage/deedoftrust

• InCalifornia,alsowaivesrightofforeclosureatrequestofhomeownerorlender

• SupportofPACEAdministratoressentialtoassistinthetransaction

PACENation• ContinuedimprovementofConsumerProtectionPrinciples

• WorktowardsadoptionbyGovernmentPartners

• Creatinganationwidestandard

National Support

• AdvancedEnergy Economy• AirConditioning,Heating&Refrigeration Institute• AlliancetoSave Energy• BuildingPerformance Institute• CenterforSustainable Energy• EfficiencyFirst• EnvironmentalDefense Fund• HomePerformance Coalition• ICLEILocalGovernmentsfor Sustainability• InstituteforMarket Transformation

• NationalAssociationof Counties• NationalAssociationof Manufacturers• NationalLeagueof Cities• NaturalResourcesDefenseCouncil• RockyMountain Institute• Sierra Club• SolarEnergyIndustries Association• Urban Institute• USGreenBuilding Council• WorldWildlife Fund

“It’sraretofindpublicpolicythatisawin-win…ThePropertyAssessedCleanEnergyprogramorPACE,hasthepotentialtobethatrarepolicygeminwhicheveryone wins…”—MarkZandi,ChiefEconomistforMoody’s Analytics
