PACE ALTERNATIVES FINANCING MECHANISMS TO ACCELERATE ENERGY EFFICIENCY ERIC ENGELMAN ENERGY POLICY ANALYST CITY OF SAN DIEGO

OUTLINE Problem: EE Financing Market Gap PACE Issues and Potential Fixes PACE Alternatives Financing Programs: Government Grant/Rebate Program, On-Bill Financing, Loan Programs Loan Program Types: Revolving, Loss Reserve, IR Buy-down, Hybrid Commercial PACE

EE FINANCING GAP Financing Energy Efficiency: How do you overcome the up-front cost barrier???

Credit Card / Unsecured Loans Program Target: MISSING MIDDLE 6- 10% Home Equity / Savings EE FINANCING GAP Lower rate Shorter Payback People more likely to invest in EE

PROPERTY ASSESSED CLEAN ENERGY (PACE) ISSUES FHFA directed Fannie and Freddie to avoid purchasing mortgages with a PACE lien. What now?How Fast? 1.Legislative Fix: HR-5766 Quick/Unknown 2.Legal Fix: Various lawsuitsSlow 3.Institutional Fix: Dodd-Frank Wall Street Reform and Quick/Unknown Consumer Protection Act MAY NOT BE FAST ENOUGH…..ALTERNATIVES???

PROPERTY ASSESSED CLEAN ENERGY (PACE) FINANCING PACE would have overcome two main obstacles to EE retrofits: 1. Makes loans much less risky lowers interest rate 2. Eliminate the barrier for homeowners that think they may leave their home before EE improvements pay back

RESIDENTIAL PACE ALTERNATIVES: STRATEGIES TO GET THE INTEREST RATE DOWN Additional Tools On-bill financingCash Rebates Second Choice -- Government Supported Financing Revolving Loan Fund Interest Rate Buy-down Loan Loss Reserve Hybrid First Choice – No Government Support Self Financing (Cash from Savings) Secured Loan (Home Equity) TYPICAL MARKET RATE FOR UNSECURED LOAN: 11-15% ATTRACTIVE RATE TO ACCELERATE EE RETROFITS: 0-8% ATTRACTIVE RATE TO ACCELERATE EE RETROFITS: 0-8%

RES. PACE ALTERNATIVES: LOAN PROGRAMS OptionMechanismLeverageSustainability Revolving Loan Fund Program money used to make direct loans for retrofits. As funds are repaid, funds slowly replenished and additional loans made. Low-No outside capital Low-Only if interest rate is high enough to cover admin costs and loan losses Interest Rate Buy- down Credit Enhancement where program money subsidizes interest payments on loans from FI, reducing effective interest cost for homeowner. Medium-High: Uses private capital, depends on rate Not Sustainable- Funds are not replenished Loan Loss Reserve Fund Credit Enhancement where program money sits in a reserve to backstop some share of first losses to FI (e.g. 10%), lowering interest rate FI demands. Medium-High: Uses private capital, depends on rate Medium-: Funds left over in reserve can be used again to leverage new private capital pool, depends on loss performance.

Sustainable Connections - Whatcom County, WAMichigan SAVESPennsylvania Keystone HELP General Info Year Initiated Number of Loans Made To Date40, Launched August 4th, 2010Launched mid-September Residential/CommercialResidential & Commercial Residential Interest Rate Buydown (Yes/No) (Amount) Yes - 3.0% rate buy-down on 60 month loans, and a 2.0% rate buy-down on 120 and 180 month loansNoYes - Up to 7% Interest Rate to Customer Based on credit score: 800 & Up, , $10, %, 4.75%, 6.5% <$10, %, 5.25%, 7.25%7% Fixed Tiered (6.99% - Energy Star Equipment, 5.99% - Advanced Energy Efficiency, 4.99% - Whole House Upgrades) Loan Loss Reserve Details Leverage Capital Source (Public/Private)Private - Banner BankPrivate - Various Local Credit UnionsPublic - Pennsylvania Treasury Organizational Loan Guarantee RequiredNo LFR Capital SourceARRA FundsCombination of State & ARRA FundsARRA Funds Size of LLR Fund$1 million$3 million$1.2 Million LLR Percentage10%5% % of First Losses Paid by Grantee90%80%100% Total Loans Supported$11 million$60 million$24 million Secondary Market InvolvementNone Currently Currently Attempting to Sell Loan Portfolio Loan Criteria Loan Size Limits$3,000 - $20,000$1,000 - $12,500$1,000-$15,000 Loan Term $3,000 to $4,999 5 year, $5,000 to $9,999 5 to 10 year, $10,000 to $20, to 15 year term For loans less than $5,000, terms are 12 months for every $1,000. Borrowers can select terms up to 120 months for loans of $5,000 or more.Up to 10 years Loan Type(Secured/Unsecured)Unsecured Income ThresholdsNone <$150,000/year FICO RequirementsUp to lender680+ (options available for )640+ (750 Average) Debt-to-Income RequirementsUp to lenderUp to 50% Loan-to-Value RequirementsUp to lenderNone Maximum Payback Periods on ImprovementsNone Program Design Program Administrator (Gov/Non- profit/Lender)Non-profit - Sustainable ConnectionsNon-profit - Michigan SAVESLender - AFC First Provide Contractor/Auditor Training Utilizing local contractors and coordinating with local community college to provide training and certifications.YesYes, through lender Front End Audit/ Back End Audit - Subsidy?Front-end audit with a $500 subsidy (owner pays $100) Front-end audit or owner can select individual improvements from a pre- qualified list - No subsidyAudits required only for whole-house loans Apply for Loan First / Audit FirstAudit first before loan application Loan application first in most instances Sources:

DESIGNING LOAN PROGRAMS SETTING THE RATE Energy savings may not cover loan payment Program participation to slow Too High Will attract homeowners away from other funding sources that are viable Doesnt leverage program dollars enough Too Low

DESIGNING LOAN PROGRAMS IDENTIFY TARGET RATE Match to Energy Savings Relies on housing stock EE data Varies widely, program target should be well defined Homeowner survey Ask homeowners what rate they are willing to bear Answers may have limited validity, surveys do not simulate context /information of EE retrofit decisions Talk to Contractors Have the best sense of what is needed and what homeowners will pay But contractors will want to go as low as possible

PACE ALTERNATIVES: COMMERCIAL PACE Commercial Mortgages not subject to some of the legal challenges raised by FHFA Not purchased by Fannie and Freddie Commercial Mortgages would require lender consent to implement PACE, overcoming first lien issue BUT other potential issues FHFA: PACE assessments unlike traditional assessments (size, duration, lack of community benefits) FHFA needs to clarify whether its direction could change lending standards for commercial mortgages OCC: Guidance mentioned commercial properties in its statement that raised safety and soundness concerns OCC: Directed national bank lenders to take steps to mitigate exposure including securing additional collateral for commercial properties. Two interpretations: Lending standards should be increased throughout a community that undertakes PACE simply require banks to carefully underwrite commercial properties that are requesting permission for a PACE lien

PACE ALTERNATIVES: COMMERCIAL PACE Increases cash flow and economic value for lender, consent is reasonable Would likely not require government funds for assessment Municipal government serves as collector of assessment

PACE ALTERNATIVES: COMMERCIAL PACE Commercial Property Lender Local Jurisdiction Loan Assessment Payments Potential Structure

PACE ALTERNATIVES FINANCING MECHANISMS TO ACCELERATE ENERGY EFFICIENCY ERIC ENGELMAN ENERGY POLICY ANALYST CITY OF SAN DIEGO