Many businesses that want to “go green” struggle with the substantial up-front costs coupled with the relatively long payback on such investments.
Some green upgrades offer short paybacks (often two years or less) through various incentive programs administered by the state’s utility companies, such as lighting retrofits, and many businesses have taken advantage of these programs.
However, more extensive, and often more complex, upgrades are kept in abeyance because of high costs, long payback periods or both. These projects often include solar installations, high efficiency insulation, replacement of older furnaces, boilers and HVAC systems, window replacements and water conservation.
While some of these projects may qualify for incentives and grants, the overall cost and payback remains too high for the project to gain priority over other business needs.
One way that many states (not Connecticut, yet) and municipalities have found to provide economic incentives to businesses for “going green” is through the use of PACE bonds. PACE stands for Property Assessed Clean Energy.
PACE bonds work by allowing municipalities to issue bonds, the proceeds of which are then used by private property owners (commercial and residential) to fund energy improvements on their property or install alternative energy power plants.
The municipality next adds a property tax assessment (similar to a sewer or sidewalk assessment) to the property to pay back the funds over a certain number of years (say 20). The assessment has a priority position over existing mortgages on the property similar to tax liens.
Usually the payments on the assessment coincide with the amount of energy savings recognized by the energy improvement. The assessment runs with the land, so subsequent property owners continue to pay the assessment (it is not due upon sale of the property to another).
In order for a municipality to issue PACE bonds, the state must authorize the bonds by statute. Many (24) states have already passed authorizing legislation which allows municipalities to issue PACE bonds. Around the country, PACE bond legislation enjoys bipartisan support and legislation has been passed in states controlled by both Republicans and Democrats.
In addition, the federal government, led by an effort by Rep. Steve Israel (D-NY), has been attempting to pass legislation that would provide a federal guaranty on PACE bonds. In the previous Congress, the House passed two bills which authorize the federal government to guaranty the bonds. However, the Senate has not passed the guaranty yet.
PACE bond advocates point to the fact that PACE bonds create badly needed local jobs, use private capital, not taxes or government subsidies, save money for building owners, increase property values, promote energy security without driving up energy costs, avoid the need to build costly new power plants, and that their use is voluntary — not a government mandate.
They also point to the potential reductions in CO2 emissions that come from the upgrades being funded by the bonds. According to PACE bond advocates, a typical residential energy retrofit can reduce CO2 emissions by 60-100 tons over its useful life and combined can reduce greenhouse gas emissions by 220 megatons annually.
While PACE bonds seem to be very positive, their current usefulness is limited to commercial properties.
In July 2010, the Federal Housing Finance Agency (FHFA) directed Freddie Mac and Fannie Mae not to underwrite mortgages on properties with PACE bonds and to tighten lending standards in municipal areas where PACE bonds are allowed. The FHFA cited concerns over defaults and the effect that the assessment will have on the recovery by the mortgage lender.
The FHFA action is currently being challenged in court by the state of California, where almost half of the counties have PACE bond programs. Once again, PACE bond advocates claim that PACE bond assessment represents only one percent of the property value on average and risk is further lowered by the increase in property value recognized through the energy improvements. Because of the FHFA actions, PACE bonds are mostly limited to commercial applications.
In addition to simply issuing PACE bonds, municipalities will often implement broader energy programs within their borders. This may include contractor certification programs, home energy audit programs, municipal purchasing of energy for business and/or residents within the municipal limits, public/private partnerships for the development of energy production projects and educational programs aimed at schools.
Overall, PACE bonds can be an additional tool to be used by the government to reach its energy goals. PACE bonds offer low costs and low risks to municipalities and provide critical capital to property owners that take advantage of the programs.
Brad N. Mondschein is chair of the Green Development practice at Pullman & Comley LLC. He is based in Hartford and can be reached at bmondschein@pullcom.com.
