Getting The Green To Go Green Financing solar and other energy efficiency infrastructure California Society of Municipal Finance Officers Annual Conference February 19, 2009 San Francisco, CA

Tim Seufert NBS, Moderator Wade Crowfoot City/County of San Francisco Chris Lynch Jones Hall Craig Hill Northcross Hill & Ach Presenters

Introduction and Overview “Green finance began on the fringes of social activism and has grown to a significant sector of the financial market.” Rachael Simonoff Wexler, Esq. Law firm of Goodwin Procter

Underlying Public Purpose  Reduce Emissions  Increase Energy Independence

Broad Range of Financing Options  Federal and State programs  Interest free financing CREB's and QECB's  Grants and other programs  Private sector financing  SMUD's Solar Shares  Charter City programs  Assessment and Special Tax

How Can Cities Help?  Barriers that cities can address  Confusing process, costs, vendors  High up-front cost  City policies and program menu  Expedited permits  Low-cost or zero-cost solar fees  Analyze “solar potential”and set targets  Marketing, screening, potential solar maps  Step-by-step assistance  Rebates and direct financial assistance  Financing programs

City Financing Programs  Property owners pay for energy projects on their property tax bills  Additional property tax = cost of individual project + administrative expenses  City secures upfront funding for projects through issuance of bonds [loans]

Benefits of City Financing  Addresses financial hurdles for small-scale solar/energy efficiency projects  Little or no upfront cost to property owner  Tax/assessment transfers with property ownership  Property-based tax/assessment not directly based on credit of the individual homeowner  Special tax/assessment in primary credit position ahead of any mortgage  Lower fixed-rate interest on borrowed funds than through traditional home equity loan  Utility cost savings can cover most of special tax/assessment from first year

Legal Structure

Legal Framework  Goals:  Financing cost administered through property tax bill  Little or no upfront cost to property owner  Tax/assessment obligation transfers with property  Benefited property serves as security  Not only solar improvements

Existing Legal Options 1.General Obligation Bonds  Allow public improvements to be financed by all taxable property in a jurisdiction on an ad valorem basis  Requires two-thirds vote of registered voters  These bonds could be tax-exempt 2.Special Assessments  Allow public improvements to be financed by selected parcels on a special benefit basis  AB 811 provides existing authority for “Contractual Assessments”

Existing Legal Options 3.Special Tax Financings  Mello-Roos Act allows public improvements to be financed by selected parcels  Already allows financing of certain improvements (e.g., seismic) to private property  Flexible annual special tax formula  No special benefit calculation required  Berkeley and San Francisco have adopted Special Tax Codes  Charter Cities can adopt similar code  AB 1709 (2008 legislative bill) for general law cities

Special Tax/Assessment Financing  Allows financing of private improvements on property tax bill  Special tax/assessment stays with the property  Special tax/assessment obligation collected through tax collection or foreclosure  Allows property-by-property tax/assessment based on -  Cost of solar & energy efficiency improvements  Share of administrative expenses

Financing Mechanism  Local public agency forms financing district  Property owners agree to pay special tax/assessment by annexing into financing district  Special tax/assessment equal to:  Amortization of cost of improvements over 20 years  Administrative costs

Tax Benefits  Interest on special tax/assessment bonds issued to finance improvements on private property  Not exempt from federal income tax  Exempt from California personal income tax  Property owner can deduct the interest component of its payment on federal and state income taxes  Similar to home equity line of credit or mortgage payment

Issues to Consider  Relationship with Installer  Solar vs. Energy Efficiency  Existing Mortgages  Federal Energy Tax Credit  Tax-Exempt Bonds  Limitations of AB 811  Applies to existing development only  Limited to cities/counties  Regional Solutions

Financing Details

The 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 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 Details  Each application will be treated as separate “bond” secured by annual special tax or assessment  Aggregation of participating properties will create diversification  Pool of Special Tax/Assessment revenues secured all bonds  Financing partner has ability to sell Bonds once aggregation creates market efficiencies  Each bond may have different interest rate  Bond will pay semi-annual special tax payments collected by through property tax bills

Typical Residential Project  $32,000 Solar System  CSI Rebates of ~$7,000  Approximate 3.5kw system  Upfront Administration fee of $550 (included in financed amount)  Interest rate of 6.75% (Fixed)  20-year special tax  Equivalent monthly property tax cost: ~$210 (before income tax deduction)

Berkeley FIRST  City currently running Pilot Program (40 applications)  Reservation/application completed  Initiate contract with installer  CSI rebate submitted for approval  Installation completed  City signs off electrical permit (no verification of system performance)  Final project cost/financing amount determined  Special Tax calculated based on interest rate  Unanimous consent of property owner  Special Tax recorded against property  Funds released from financing source to City for payment to property owner or installer

How The Funds Flow

Berkeley FIRST Issues  Who participates  Project size/funding amount limit  How to handle special tax delinquencies  Over-collect on all parcels  Fund reserve out of each project at time of payment  How to fund reserve funds  Internal/external administration  Ongoing administrative costs = 5% of annual special tax  Covers County collection and Financing District administration  Long-term financing source  Palm Desert funded internally from reserves  Banks  Traditional Bond  What does Aggregation of little bonds look like in future

Open Issues With Program  Administration of Financing Program  Internal staff versus outside private company  Financing Source  Reliable funding source and stable interest rates  Sufficient capital to handle demand from community  Policy Decisions  What type of solar or energy efficiency project to include  How much debt burden is allowable  Is special tax prepayment allowed

Wrap up and Q&A