A clean and profitable idea…
Perhaps you’ve heard the latest news to come out of the nonprofit environmental group Carbon War Room, set up by Richard Branson, the British billionaire entrepreneur. The group’s mission is to seek ways to alleviate the world’s energy problems. The news is exciting for commercial property owners with older buildings that are in dire need of retrofitting. In the future, it’s hoped that residential property holders will be able to take advantage of the program, though it’s not available right now.
The basic plan…
While currently only being rolled out for commercial buildings in several select cities in the U.S., the program is designed for a country-wide roll-out in future years. The crux of the plan involves private companies offering to retrofit an owner’s commercial building at no up front cost to the owner. Too good to be true? Maybe. But then again, maybe not. The owner of the property will be paying for the upgrades through increased property taxes, in the form of a property tax surcharge that will continue even when a building is sold. Obviously, if the cost savings of the projected energy consumption after the retrofit is substantially greater than any new tax surcharge, it makes clear sense for any commercial building owner to partake in the program.
A brief history…
In the past few years, about half the states in the country passed laws permitting retrofitting of older buildings that are financed through property tax surcharges. These taxes are levied separate from an owner’s regular property taxes. There has been some historical precedent for this type of tax. For many years municipalities around the country have routinely created special tax area-specific projects – set up to specifically finance common area improvements like sewers or new water lines, for example. And these tax surcharges always went to households and/or businesses directly benefitting from the common area improvements. With this in mind, the same concept applies to this new plan, though only for commercial buildings right now.
Here’s how it works…
A consortium of stakeholder companies in different fields are at the core of the plan. This new approach to financing retrofits is known as Property Assessed Clean Energy, or PACE for short. Specialized energy companies are springing up to act as the “sales force” behind the retrofitting in a given community. They are given an exclusive contract to market all retrofits under the program in a geographical area. They then go out and individually market the program to commercial building owners whose buildings would benefit from a retrofit arrangement.
The retrofit might include all new energy-efficient windows and doors, new insulation, up-to-date lighting and mechanical systems. For larger operations, like plants or factories, this retrofit could include totally new operational systems.
In the next step, loans are secured (currently provided through Barclays Capital, one of the original planners of the program). Local contractors are then hired – ones that will offer a warranty that the utility bill savings being represented will come to fruition. In addition, another designer of the overall plan, Energi (an insurance underwriter) will ensure that this warranty is kept. As an extra measure of security, these insurance contracts will be backed up by Hannover Re, one of the world’s largest reinsurance firms.
As any given retrofit project is finished, these contracts will be bundled into long-term bonds, much like bonds that municipalities routinely issue. Barclays will end up marketing these bonds, mostly to institutional investors. And these bonds will be repaid through the tax surcharges on all the properties that are involved in the retrofit program.
Obvious benefits to investors…
A retrofit of a commercial building offers some rather obvious benefits to investors. Not only should the operating costs be cut substantially, but the attractiveness of the building to future investors is increased, thus increasing overall property value. And this could all be accomplished with no upfront capital outlays by the individual property investor. A real win-win scenario for the private investor as well as local communities throughout the country.
Will the plan filter down to residential properties?
The PACE program was initially begun with an eye on retrofitting most older homes throughout the country. However, the focus shifted to commercial buildings when the Federal Housing Finance Agency took a very protective position regarding the overall riskiness of the program. Basically, they felt that the program added too much risk to mortgages. (In most states, any lien from a retrofit would have to be repaid in front of a first mortgage in case of a foreclosure.)
With the collapse of the residential housing market over the past three years, the agency obviously views protecting existing and future residential mortgages as much more important than aiding energy policy in this country. Currently, there are ongoing legal and political challenges to the agency’s position. So for the time being, the PACE program only applies to commercial building retrofits.
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