California Greenin'

San Francisco takes the most stringent building code in the country to the next level.
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From GreenSource
Nancy B. Solomon, AIA

GreenFinanceSF

It has been long recognized that one of the greatest barriers to comprehensive upgrades for energy efficiency is the initial expense of such a retrofit—despite the fact that, over time, the money saved by reduced operational costs far outweighs the up-front investment. Building on efforts by a few like-minded jurisdictions, plus support at the state and federal levels, San Francisco has structured a financing mechanism called GreenFinanceSF (GFSF) that may demonstrate one way to overcome this persistent hurdle.

 

 

GFSF is an example of a Property Assessed Clean Energy (PACE) or “AB811-style” program—the latter a reference to the California assembly bill number that formally authorized such an approach in the state. Generally speaking, a PACE program allows local governments to loan money to property owners to install both energy-efficiency and water-conservation improvements in addition to on-site renewable-energy-generation systems, then pay back the low-cost financing over 15 to 20 years through a special line item on their property-tax bills. Investors would fund these loans by purchasing local bonds issued for the purpose. The upgrades must be significant and permanently attached to the property, as the assessment remains with the property even if it is sold to another owner. Like other property-tax assessments for municipal improvements (including sewers and sidewalks), the loan repayment is secured by a “senior” lien on the property, so it must be paid first—even before the mortgage—in the event of foreclosure. Most if not all PACE programs include “nonacceleration” provisions, which means that only delinquent payments (i.e., those “in arrears”), plus penalties and interest—rather than the entire bond amount—need to be paid off in this situation.

Proponents of the approach believe it is a win-win situation. Property owners enjoy a relatively simple application process because the property itself is collateral, so they do not have to submit credit history or other personal-financial documentation. They can avoid the up-front costs of implementing extensive measures, eliminate the risk of having to sell their property before they can recoup their initial outlay, and reap the benefits of lower utility bills, the savings from which can be used to pay back the bond financing over time. In the meantime, jurisdictions benefit from lower greenhouse-gas emissions, less demand on the local electrical grid, and an increase in green-collar jobs and local economic activity. Finally, those who purchase the municipal bonds gain a new investment vehicle with little risk.

The concept for this mechanism emerged in 2007 in neighboring Berkeley, where officials reasoned that the existing statutes that already allowed jurisdictions to tax property owners for more traditional public-works improvements should also be applicable to energy-related improvements that benefit the general public. The idea made its way to the state: The assembly and senate passed AB811 in June 2008, and then-governor Arnold Schwarzenegger signed the bill into law the next month. Meanwhile, Berkeley conducted a successful but limited pilot program to install solar panels on residential projects with this method.

The idea moved on to Washington, D.C. An October 2009 paper developed by the executive branch, titled “Policy Framework for PACE Financing Programs,” states that the Department of Energy would provide “funding for model PACE projects.” A portion of this start-up money was to come from the American Recovery and Reinvestment Act (ARRA), which President Obama had signed into law in February 2009. Since then, 28 states and the District of Columbia have passed it and now have specific PACE-enabling legislation.

 

SOURCE: USGBC NORTHERN CALIFORNIA CHAPTER

San Francisco jumped at the opportunity, and put a residential PACE program in place by April 2010 that included not only energy but also water-efficiency measures. Unfortunately, explains Rich Chien, GreenFinanceSF program manager at SF Environment, in July of that year the Federal Housing Finance Agency (FHFA)—which now oversees Fannie Mae, Freddie Mac, and the Federal Home Loan Banks—complained about this lien being senior to the mortgage. Because of FHFA’s position on this issue, the city feared that  its residential PACE program might unintentionally create tighter lending practices for all residential properties within a designated district—even for properties that did not opt in. So, recounts Chien, “we stopped in our tracks and went back to square one to figure out how to use our ARRA funds within the allotted time.” 

 

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Originally published in GreenSource.
Originally published in November 2012

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