Keeping PACE in Texas Texas Housing Conference July 28-30, 2014 Hilton Hotel Austin, TX

Presenters: John Fleming, Texas Mortgage Bankers Assoc. Tom Gouris, TDHCA Steve Minick, Texas Assoc. of Business David Robins, Thompson & Knight Moderator: David Mark Koogler, Mark-Dana Corporation

PACE in a Box 3 SB 385, Sen. John Carona and Rep. Jim Keffer The coalition: County Judges and Commissioners Association of Texas Independent Bankers Association of Texas South-central Partnership for Energy Efficiency as a Resource Texas Association of Business Texas Association of Counties Texas Bankers Association Texas Building Owners and Managers Association Texas Combined Heat and Power Initiative Texas Manufactures Association Texas Municipal League Texas Renewable Energy Industry Association US Business Council for Sustainable Development US Green Building Council Dozens of other organizations and companies

Energy in Texas Today ●Texas leads the nation in energy consumption, accounting for 12% of the nation’s energy use and is the fifth largest energy consumer in the world ●Demand for electricity has increased 20% since 2000

U.S. v. Texas Energy Consumption 5 U.S. Texas

Think Industrial: Texas vs. Nationwide Energy Consumption By Industry Texas 19% Texas 19% Remainder of U.S. 81% Remainder of U.S. 81% Texas’ industrial sector is a huge, untapped market for energy saving retrofits. 6

Texas Drought Impact 7

Texas’ Projected Water Demands and Existing Supplies 8

Projected Texas Population “More than 1,000 people…move to Texas every day.” Gov. Rick Perry, 12/29/

STOP: talking about the problem. START: talking about the solution! ●Texas Leadership is investing in water and power infrastructure – Water, Energy, Roads ●Investing in Building infrastructure – part IV of the solution ●By far the cheapest and most affordable supply we find will be the existing supply we can reallocate because of conservation ●Old approaches called for mandates or tax and incentive policies that distorted the market and reduced revenues to local governments ●New approach… 10

SB PACE Offers Solutions Barriers Scarce internal capital budget No access to, aversion to financing No investment-grade credit rating Lack of collateral assets that don’t fall under first mortgage Uncertain holding period Owner / tenant split incentives Skepticism savings/ROI will be realized No down payment and costs spread over time w/ savings Repayment security through senior lien position Backed by property, not by owner or equipment collateral PACE obligation transfers to the new owner upon sale Qualifies as NNN pass-thru cost ESCO/contractor guarantees or third party insures performance PACE Solutions 11

Example: Retrofit Bid for 5-Star Hotel 12 ECM DescriptionAnnual Dollar SavingsProject Cost Pay- back ElectricGasWaterO&MTotal Replace two 350 ton Chillers $5,000 $10,000$720, Add Cooling Tower Isolation Valves $5,000 $7, BAS for Central Plant $1,000$4,000$5,000$65, Convert penthouse DX systems to CHW $15,500$4,000$19,500$97, VFDs on 4 AHUs Economizer $750$3,000$3,750$50, Water Conservation Retrofits $1,000$5,000$25,000$31,000$255, Convert PIB/VAV boxes to EMCS Control $20,000 $80, Add DC Controls to AHUs in Penthouse $3,000$1,500$4,500$60, Lighting Retrofits $92,000$1,500$93,500$221, BAS Night Setback for Meeting Rooms $4, Totals$230,250$5,000$25,000$20,500$280,750$1,806,0006.4

PACE in a Box 13

Timeline 14 June 19, 2013 Gov. Rick Perry signed legislation allowing PACE Programs Legislation May 2014, Collaboration completes “PACE in a Box” resources in-a-box/ in-a-box/ Design Phase “PACE in a Box” resources available and cities and counties can begin steps to implement a PACE program Implementation

Status of PACE in Texas “PACE in a Box” is a toolkit of recommendations and templates for counties and municipalities to: ► Create viable, cost effective, user friendly, scalable, and sustainable PACE programs ► Encourage and support local discussions about forming regional or multi-jurisdictional programs 15

PACE in a Box Working Groups 16 Program Design Templates for Municipal Resolution Application Process Collection Process Overview / Flow Chart Program Underwriting Building Owner Qualifications Building Qualifications Project Qualifications Savings to Investment Ratio Technical Standards Energy Saving M&V Water Savings M&V Third Party Review M&V Resources Funding Platform Responsible Loan Making Attracting Capital Bonding Education and Training Education to Municipalities Marketing Campaign to Building Owners, Lenders, and Contractors M&V training

Regional PACE is best for Texas 1,200 Municipalities 254 Counties 24 Regional Councils of Government 17

PACE is a Win-Win-Win ●Property Owners – lower utility bills, energy independence (CHP) energy efficiency, property value increase ●Contractors – source of increase in business, more local hiring, best practices, keeping up with technology advancements ●Lenders – new loans, steady & stable process, fully collateralized, 1 st lien position, improved asset value ●State of Texas – reduced peak demand, improved grid loading, renewables as source, improved air quality, better water conservation ●Communities – increased economic development and jobs, improved building infrastructure, more appealing building stock 18

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PACE Project Underwriting and Technical Standards ●Eligible Properties – Existing Improvements ► Privately owned commercial real property - including not for profit real property such as private schools, medical facilities, churches, etc.; ► Privately owned industrial real property - including privately owned agricultural real property; or ► Privately owned residential real property with five or more dwelling units. ●Properties that are statutorily ineligible for PACE assessments include: ► Undeveloped lots or lots undergoing development at the time of the assessment; and ► Government owned real property. 20

●Eligible Property Owners ► Legal property owner; ► Current on mortgage and tax payments; ► Not insolvent or bankrupt; ► Holds a title to the property to be subject to a PACE assessment that is not in dispute; and ► Has consent of any preexisting mortgagee to the proposed PACE assessment through a written contract. 21 PACE Project Underwriting and Technical Standards

●Eligible Projects ► Permanently fixed to the real property ► Demonstrated capacity to decrease – −Water consumption or demand; and/or −Energy consumption or demand; and ► Useful life that exceeds the term of the PACE financing. ●Ineligible Improvements – Improvements that are not permanently fixed - For example, screw-in fluorescent light bulbs removable low-flow showerheads and faucet aerators. 22 PACE Project Underwriting and Technical Standards

●Length of Assessment term ●Useful life must be longer than the assessment term. ●Savings to Investment Ratio ► Projected savings must be greater than the cost of the PACE assessment over the life of the assessment (i.e., the SIR should be greater than one). ●PACE Assessment Cost to Assessed Building Value Ratio ► PACE assessment cannot exceed twenty percent (20%) of the assessed value of the property (Pace in a Box). 23 PACE Project Underwriting and Technical Standards

PACE Third Party Lending ●Two sources for financing PACE assessments secured by a property assessment lien ●Third-party lenders and public financing (bonds). 24

●Third Party Financing ► PACE Act requires the local government to: −Develop a model Owner Contract ( (a)(2); −Develop a model Lender Contract ( (a)(3; and −Adopt a plan for ensuring sufficient capital for third-party financing ( (a)(6)). 25 PACE Third Party Lending

●PACE in a Box third-party financing consists of: ► Model agreement between the local government and property owner regarding the qualified project and imposition of the assessment (the Owner Contract); ► Model Notice of Assessment Lien that will be filed in the real property records (either as a separate document or incorporated in the Owner Contract); ► Model participation agreement between the local government and third-party lender (Lender Contract); and ► Model certificate from the local government to the third- party lender certifying that the financing is for a qualified project and the assessment is authorized under the PACE Act (either as a separate document or contained in the Lender Contract). 26 PACE Third Party Lending

●Note and Credit Agreement - Interest rate, financing terms, and repayment terms ► Term may not exceed the useful life of the Qualified Improvements. ► No balloon payments. ► Payments may be monthly, quarterly, semiannual or annual. ► Delinquent installments incur interest and late penalties in the same manner as delinquent property taxes (Section (d)) ► Pre payment of PACE assessment financing may not be prohibited. ●Construction Advances ► Resemble the construction loan documents used by commercial lenders. 27 PACE Third Party Lending

●Participation Agreement (Lender Contract) ●Without recourse of the PACE loan by the local government to the third-party lender. ► The participation agreement: −No modification without the consent of the third-party lender; −Payments received in trust by the local government (or its representative) and segregated from the general revenues; −Timelines for local government (or its representative) to remit payments to the third-party lender; −Timelines for enforcement by foreclosure ; 28 PACE Third Party Lending

●The PACE Lien ► Notice of Assessment Lien (section ) filed in the real property: −Exists from the date on which the notice is recorded until fully paid; −Same priority status as a lien for any other ad valorem tax; −Runs with the land (the unpaid portion transfers to a new owner upon sale); −Is not eliminated by foreclosure of a property tax lien; and −Does not accelerate. 29 PACE Third Party Lending

●Ensuring Sufficient Capital From Third Party Lenders ► In the PACE in a Box model eligible third-party lenders may include: −Any federally insured depository institution such as a bank, savings bank, savings and loan association, federal or state credit union; −Any insurance company authorized to conduct business in one or more states; −Any registered investment company, registered business development company, or a Small Business Administration small business investment company; −Any publicly trade entity or; − Any private entity that: ■Has a minimum net worth of $5 million; ■Has at least three years experience in business or industrial lending or commercial real estate lending (including multifamily lending), or has a lending officer that has at least three years experience in business or industrial lending or commercial real estate lending; and ■Can provide independent certification as to availability of funds. 30 PACE Third Party Lending

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