Green for Green

Alternative financing for sustainable development

Back Longreads Jul 1, 2012 By Paul Hagey

Developers looking to build in the Capital Region are finding cash in emerging green-financing products. Some reward energy-efficiency upgrades, and others leverage public-private partnerships. Opportunities for these types of programs are increasing, yet the market struggles to assess consistently the opportunities sustainable construction provides.

But change is coming, and the Sacramento region is at the forefront.

To start, yGrene Energy Fund Inc., a company offering unlimited, private financing to develop clean-energy districts in cities across the country, announced last year the development of Clean Energy Sacramento, a pilot community that would coordinate private investment in energy-efficient retrofits to existing properties. Barclays bank has invested $650 million in the nationwide endeavor.

But even with this type of burgeoning momentum for new financing strategies, “There’s a real disconnect” in the market, says Michele Skupic, vice president and national director of sustainability at Fidelity National Financial Inc./FNF Green. “There’s amazing resistance for (energy) improvements, a lack of empirical energy data and so many different shades of green for energy efficiencies that the financial market is having a tough time valuing green projects correctly.”

In the financial world, it all comes down to numbers. And right now the numbers aren’t clear for green.
For one, the industry lacks a simple, nationwide metric to compare green projects. National programs such as Energy Star and the U.S. Green Building Council’s Leadership in Energy and Environmental Design are, for all intents and purposes, meaningless; their rankings don’t necessarily relate to energy performance. But the day is coming for a universal building-performance metric, Skupic says.

There’s also a behavioral X-factor when considering energy costs. Two identical buildings can exhibit drastically different performance, depending on tenants’ habits and demands.

Nonetheless, statistics show sustainable development is good business. A 2011 McGraw-Hill Construction study reveals the return on investment in green buildings averaged 9.2 percent for retrofits/renovations and 9.9 percent for new projects. The study also found building values increased 6.8 percent for green retrofits/renovations and 10.9 percent for new construction.

This growing understanding of how to evaluate credit-worthiness of green projects may be an indication that sustainable development is turning a corner.
Three major projects in the Capital Region demonstrate how green design can attract alternative financing in a gridlocked borrowing market.

John Grant, owner of Auburn Gold Country RV Park, has 66 parking spots and is booked consistently year-round. This year, to help offset the high amount of energy that RVs drain from his park, he installed a $473,000, 107-kilowatt photovoltaic solar system at his foothill campground using funds from Placer County’s property assessed clean-energy program, mPower Placer.

mPower Placer (short for Money for Property Owner Water & Energy efficiency Retrofitting), is using $33 million in county funds to invest in local, commercial energy and water-efficiency upgrades. The county’s PACE fund, which functions essentially as a line of credit on the county’s treasury funds, was unanimously approved by the Placer Board of Supervisors in the fall and winter of 2008.

Each project’s financed amount is amortized and added to the property owner’s property tax bill each year until paid in full. Repayment periods are set at five, 10, 15 and 20 years at a fixed interest rate that is currently 6 percent. If the property is sold, the equipment and the unpaid amount stay with the property.

Since its launch in early 2010, Placer County has funded 16 projects, including upgrades to lighting, windows and doors, and heating, ventilating and air-conditioning systems, totaling $1.1 million.

The program, designed to work with residential and commercial properties, received a jolt in July 2010, when the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, became concerned about adding priority liens (which PACE loans call for) on residences already grappling with a chaotic market. The agency called for states and counties to pause the program until it could be studied more.

“That put a cloud over the program,” says program administrator Jenine Windeshausen, Placer County’s treasurer and tax collector. The county received 20 applications a week in the first six weeks it was active until that ruling, she says. Currently, Placer County, among other California entities, is engaged in a lawsuit against the agency to free PACE programs for residential use.

Regardless, mPower Placer is up and humming along for commercial properties.

Grant, the RV park owner, opted for a 20-year loan and says there’s no way he could have afforded his solar-powered system without the PACE program, which supplied the $332,000 up-front investment. His numbers break down like this:

• On top of the PACE funding, Grant acquired about $142,000 from a federal Recovery Act-related grant for solar upgrades.
• He took advantage of another federal solar incentive program that allowed him to write off 50 percent of the system’s depreciated value (over its lifetime) in the first year, more than $188,000.
• He also would receive a nearly $40,000 rebate from Pacific Gas & Electric.

Using a projected energy savings of $33,575 a year, Grant estimates, after grants and rebates, the solar system would cover his costs — $124,227 — in just over three and a half years.

With such a quick payback, no up-front costs and profits expected soon, Grant says he is pleased by the energy-efficient investment Placer County made in his business: “I’m grateful that the county — rather than taking the money and investing in Wall Street — invested in their own backyard,” he says.

Over in Yolo County, UC Davis is building West Village, a 225-acre campus extension that includes single-family homes, student apartments and mixed-use buildings housing 800 faculty, students and staff. The $280 million project is a partnership between the university and private development group West Village Community Partnership, led by San Francisco-based Carmel Partners.

The campus maintains ownership of the land and has a lease agreement with the development group, which will own and operate the buildings and collect rent.

“There’s amazing resistance for (energy) improvements, a lack of empirical energy data and so many different shades of green for energy efficiencies that the financial market is having a tough time valuing green projects correctly.”

Michele Skupic, vice president and national director of sustainability, Fidelity National Financial Inc./FNF Green

Before the project broke ground, the university leveraged the project’s status as the country’s largest net-zero-energy community with a solar system managed by a smart grid to get $7.5 million in state and federal energy-related grants. Here’s how that total breaks down:

• $1.94 million from a U.S. Department of Energy program supporting community renewable energy projects.
• A $500,000 grant from the California Energy Commission for an anaerobic digester that converts waste into energy.
• A $2.5 million grant from the California Public Utility Commission (CPUC) via the Research, Development, Demonstration and Deployment wing of its solar initiative program.
• A $2.5 million grant from the CPUC via the commission’s solar initiative to enhance California’s solar energy portfolio.

In addition, the university invested $17 million in the form of off-site infrastructure — money UC Davis would recoup through a combination of rent and a service charge on tenant utility bills.

The West Village Community Partnership raised the $280 million using conventional financing, says Nolan Zail, senior vice president of development at Carmel Partners, and the university was a driving force behind securing that financing.

Wells Fargo, one in a group of construction finance lenders to the UC Davis West Village project, has invested $11.7 billion in green projects in the U.S. since 2005, its March 2011 environmental finance report shows.

Financial support for green projects by Wells Fargo is not completely by design, says James Finlay, vice president, appraisal manager and member of the bank’s environmental affairs team. Finlay says numerous studies show high-performance green buildings can cost little or nothing extra to build, are less expensive to operate and attract better, long-term tenants.

“The value reckoning comes when a market tips and green becomes the new normal demanded by the best tenants, and the older, inefficient buildings are discounted,” says Finlay. Wells Fargo likes the reduced risk of this longer view, he says, and supporting it has two positive results: It’s good for business, and it’s good for the environment.

About a mile north of the Capitol in Sacramento sits La Valentina Station, a low-income housing development by San Francisco-based Domus Development. The 1-acre, 81-unit project in the down-at-the-heels neighborhood of Alkali Flat would wrap up construction this summer. It’s adjacent to the Sacramento Regional Transit light-rail stop on 12th Street.

The $26 million project, funded with a mix of public and private money, features two buildings, and both include solar systems that would bring their energy consumption levels to near net zero. Natural gas would be used for heating and cooking.

There’s hope that the development, which would include ground-floor retail, will be a keystone in turning the blighted area around, according to Meea Kang, founding partner of Domus Development. The site used to house several auto body shops, which accounted for its Brownfield designation by the U.S. Environmental Protection Agency. The Sacramento Housing and Redevelopment Agency cleaned up the site with a grant before Domus began development.

Because of its two-decade vacancy, the redevelopment agency was eager to find a development that worked on the site, and contributed $7 million to spur on the green project. Another $11.8 million of the project’s cost was covered by a federal low-income tax credit.

CalRecycle provided a $631,000 grant as part of its CalReuse Remediation Program, which promotes residential projects on former Brownfields, and the Sacramento Municipal Utility District also supplied some funding on account of the buildings’ high energy-efficiency performance.

Whether they are capitalizing on the potential of energy-efficient upgrades or government-dollar incentives for renewable energy and sustainability or just tapping into the common sense of modern business, green projects are ripening in the Capital Region and doing so in ways the no-nonsense finance world is coming to terms with.

Pay it Forward
Financing products for the eco-friendly borrower

There are several up-and-coming financing strategies for green building, including some that stay off a company’s accounting books, keeping major liabilities like big capital upgrades off the balance sheet. Here are a few to consider:

A third-party contractor funds, implements and maintains an energy-efficiency and/or energy-generation system for a customer. The customer pays back the contractor’s loan with the energy-cost savings over a term of typically 10 to 20 years. Often, energy savings exceed the required loan payments, so there’s a win-win.

• Reduces the project risk for customers wanting to enhance their energy portfolio
• Can be combined with other incentive programs
• Established business model with a standardized system

• Requires substantial negotiation and documentation
• High transaction costs to verify baseline energy use, etc.
• Difficult to finance projects costing less than $500,000 because of complexity

A special-purpose entity is established by several investors to finance a large energy-efficiency and/or energy-generation project. The entity funds the improvement, and for a specified time (usually five to 15 years) the customer pays the entity back with energy savings.

• It’s an off-balance-sheet transaction, so the customer assumes little risk
• Customers realize energy improvements without putting out up-front cash

• Complexity around formation of a special-purpose entity makes for high transaction costs
• Potential need for an independent energy auditor
• Not suitable for smaller upgrades (i.e. at the residential scale)

Financing for energy upgrades is merged with a home mortgage. This strategy basically extends a mortgage with the costs amortized over a set period, usually from 10 to 30 years.

• Access to low-cost capital
• Can be combined with home purchase or refinancing
• Monthly energy savings typically combine to exceed the added amortized repayment amount

• Difficult for some homeowners to consider this while dealing with other issues associated with buying a home or refinancing
• Many lenders are not knowledgeable about the program
• High transaction costs decrease the program’s practicality for smaller projects

Local governments, when legally allowed by state law, provide upfront loans for energy efficiency and/or renewable energy upgrades. The customer pays back the loan at an interest rate of 6 to 8 percent on their property tax bill over a set number of years.

• Energy savings typically exceed loan payments
• Gives employment boost for municipality
• Tax lien structure helps secure relatively low interest rates

• Consent is required from the mortgage holder to implement the program
• Only available to property owners
• High legal and other administrative costs for municipalities to start the program.

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