By Steve Rizer
California has launched what is believed to be the largest property assessed clean energy (PACE) program in the United States, but how successful will CaliforniaFIRST be in fostering commercial energy and water improvements both within the state and, perhaps eventually, nationwide?
On Sept. 18, 14 California counties and 126 cities in the state launched CaliforniaFIRST, allowing commercial property owners to use municipal bonds to finance energy-efficiency, water-efficiency, and renewable-energy upgrades, which owners repay through a special assessment on their annual property tax bills. Through a public-private partnership, private capital will be used to supply upfront funding for the work so as not to strain the budgets of local governments.
CaliforniaFIRST is a program of the California Statewide Communities Development Authority (CSCDA), which was created in 1988 to provide California’s local governments with a tool for the financing of community-based public-benefit projects. Sponsored by the California State Association of Counties and the League of California Cities, CSCDA has more than 500 California cities, counties, and special districts as members. CaliforniaFIRST is administered by Oakland, Calif.-based Renewable Funding, which is considered the industry leader in PACE administration. Renewable Funding launched the nation’s first PACE program in Berkeley in 2008. The firm advises the U.S. Department of Energy (DOE) on commercial PACE financing and operates commercial PACE programs for local governments in such places as San Francisco to Melbourne, Australia.
CSCDA believes there is “a huge potential for energy and cost savings in the commercial building market.” In making this argument, CSCDA cited a DOE conclusion that if all U.S. businesses and institutions conducted cost-effective upgrades, they could reduce their average energy use by 25 percent. DOE researchers determined that the cost of this work would total more than $100 billion, which would be offset through lower energy bills.
However, at an address before the National Association of State Energy Officials’ Financing Task Force earlier this year, Lawrence Berkeley National Laboratory’s Mark Zimring offered the following sobering update on commercial PACE activity nationwide: “PACE is still in [its] early stages, and there are only 10 programs currently operating and very few projects actually financed…. Project sizes have ranged from $5,000 to $12 million. In general, it’s taken many programs a long time to launch.”
Zimring additionally listed the following challenges associated with PACE:
- Long program development cycle and high startup costs. There is a need for significant deal flow (a lot of applications or projects ready) to make the economics of program setup work.
- Mortgage holder consent/acknowledgement requirement. Because PACE obligations hold a senior position and in the case of default the mortgage holders may not be made whole, mortgage holders are reluctant to give consent. Getting consent from the mortgage holder has been a big challenge for many. In cases where the building owner has a good relationship with the mortgage holder (e.g. a bank), they have been able to get consent more quickly.
- The U.S. Office of the Comptroller of the Currency in July 2010 issued a statement about the concern over commercial PACE, which creates some regulatory uncertainty and is making some lenders hesitant. The statement can be accessed at the following webpage: http://www.occ.gov/news-issuances/bulletins/2010/bulletin-2010-25.html.
