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Enabling Legislation
renewfinancial.com 2
AmendExistingLawCreateBrandNewLawProgramDesignIncludedNoProgramDesignIncluded
• BasePACEonexistingspecialdistrictlegislationorequivalent(Butlookoutfordealbreakers)
• ExpectPACEtoscale– Overlyburdensomelegislatedrulespreventgrowth
Enabling Legislation
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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
renewfinancial.com 4
• Easy – Districtcreatedatthestatelevel.Everylocalgovernmentisautomaticallyin.
• Moderate – Nolimitondistrictsize,butcountiesmustoptin• Harder – Nolimitondistrictsize,buteverylocalgovernment
mustoptin• Hardest – Everylocalgovernmentmustcreatetheirown
district
Program Design and Admin
renewfinancial.com 5
• Stateinvolvement– None,support($orother),sponsor• Sponsor– City,County,StateAgency,SpecialAuthority(Joint
PowersAuthority,PortAuthority,Inter-LocalAgency)• Competition- SingleProvider,MultiProvider
Program Design and Admin
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• 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
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1.PassEnablingLegislation
2.FirstPACEDistrictandProgram–Cityor
Countylevel
3.RegionalPACE
program
4.StatewidePACE
program
5.CommunitiescreateorjoinmultiplePACEprograms
6.Competitive
PACEmarketplacewithseveralprograms
BestPracticeIdentificationandIndustryStandardization(PossiblyAmendLegislation)
© 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
© 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
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
5©2014Renovate America, Inc. AllRightsR eserved.
PACEFinancing Overview:• Newwaytopayforenergyefficiencyandrenewableupgrades
• Financedmeasuresarerepaidovertimethroughavoluntarybenefitassessmentonthepropertytax bill
• Paymentsarefullyfixed andamortized
HowDoesResidentialPACEWork?
1. Statelegislationgrants authority tolocalgovernmentstoestablishPACEprograms
• Localgovernmentauthorizedtoplacechargeonpropertytorepayfinancingforenergy-efficientandrenewable-energy improvements
6©2014Renovate America, Inc. AllRightsR eserved.
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.
9©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
10©2014Renovate America, Inc. AllRightsR eserved.
Benefitsfor Contractors
• Training
• DedicatedSupport
• Software
• Quick approvals
• Higherqualityandmoreefficientproductsonmarket
• Consumerprotections
13©2014Renovate America, Inc. AllRightsR eserved.
BenefitstoGovernment Partners
PrivateCapitalFundsPublic PolicyObjectives
• Voluntaryforcounties andmunicipalities
• Participationcostscoveredby theprogram
• Notaxpayer/ratepayermoney
• Boostsmunicipal revenues
• Meetlocaleconomicorenvironmentalgoals
• Real-timeimpact reporting
• Dedicated support
• Consumerprotection standards
14©2014Renovate America, Inc. AllRightsR eserved.
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
15©2014Renovate America, Inc. AllRightsR eserved.
LocalImpactof PACE
Community ImpactEvery$100Kinvestedbyahomeownerhelpscommunitiescreatelocaljobs,stimulatetheireconomies,saveenergy,loweremissionsandprovideclearer air.
16©2014Renovate America, Inc. AllRightsR eserved.
Example:TheCountyofLos Angeles
• PACEisanimportantpolicytoolforhelpingtheCountyachievethegoalsoftheirCommunityClimateActionPlan (CCAP)
• TheCCAPholdstheCountyaccountabletodeliveringon California’s mandate toachieve 1990 GHGemissionslevelsby2020
• Contributestoagrowingandhealthylocal economybycreatingnewjobsthatcan’tbe outsourced
17©2014Renovate America, Inc. AllRightsR eserved.
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
18©2014Renovate America, Inc. AllRightsR eserved.
EconomicImpactHomesImproved 3,570JobsCreated 760AmountFunded $90.4MEconomicStimulus $156.6MEnvironmentalImpact1
EmissionsSaved(k-WH-e) 424.3MEmissionsReduced(ton) 117,910
WaterSaved(gal) 490.7M1.Impactsareprojectionsbasedonlifetimeofinstalledproducts
PACENational Landscape
19©2014Renovate America, Inc. AllRightsR eserved.
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.
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
22©2014Renovate America, Inc. AllRightsR eserved.