California cities and counties are finding out that some local residents are willing to take on an additional tax to pay for solar panel installations on their homes and businesses.
Legislation last year made it possible for all municipalities in the state to form special assessment districts to fund renewable-energy projects and energy-efficiency upgrades on private properties. As a handful of cities and counties have made funding available, homeowners and a few commercial building owners quickly volunteered to participate in local programs.
Gov. Arnold Schwarzenegger signed Assembly Bill 811 into law on July 21. AB811 gives municipalities the ability to form special assessment districts in which individual property owners borrow money from their local government to install renewable-energy equipment, such as solar panels, or make other energy-efficiency improvements to homes or commercial buildings.
The funding mechanism is similar to mello roos taxes or other special assessments that appear on a property tax bill for infrastructure projects. The difference with a solar assessment district is that property owners must volunteer to participate in the programs and the amount of the assessment that appears on their twice-yearly property tax bills depends on the amount of money borrowed and the loan term.
“If you look at renewable energy and particularly solar power, the typical payback period without government financing is 10 to 20 years without incentives, but there’s a lot of benefits – it’s clean, renewable and it reduces greenhouse gases,” said Tony Liou, a director at El Segundo-based energy-efficiency consultant Partner Energy.
“One of the biggest hurdles is the upfront costs and financing for solar panels,” Liou said. “Real estate deals aren’t being done because of a lack of capital. Once you make more financing available for renewable energy, then homeowners and business owners will follow.”
As chief of staff to Berkeley Mayor Tom Bates, Francisco DeVries, now president of Oakland-based Renewable Funding LLC, was tasked with implementing a climate action plan and finding ways to reduce energy use in the city.
While providing some assistance to a neighborhood that was putting together a utility district to pay for putting utility lines underground, DeVries wondered if it would be possible to fund solar panel installations with a similar mechanism. He helped develop Berkeley’s Financing Initiative for Renewable and Solar Technology, or Berkeley FIRST.
The program allows property owners to borrow money from Berkeley’s sustainable energy financing district to install photovoltaic panels and repay the loan over 20 years through a special assessment on their property tax bills. The loan amounts cover the cost of installation after rebates from the state and federal government and utility companies.
Gail Feldman, sustainable-energy programs manager in Berkeley’s Office of Energy and Sustainable Development, said Berkeley FIRST has $1.5 million for its pilot program that began in November. The 38 participants, which include one commercial building owner, have until September to complete their projects.
Feldman has received a lot of calls from people expressing interest in participating in future rounds of financing, but she has not started a waiting list because the program could change after the Berkeley City Council reviews the program later this year.
“I speak to other cities every day,” she said. “There’s a lot of interest in this type of program and people are also looking at adding other things, like water conservation.”
DeVries left his job with the city of Berkeley a little over a year ago to start Renewable Funding, which helps cities and counties develop and administer financing programs for renewable-energy projects at homes and businesses in their communities.
While other states have passed laws like AB811, there are only four solar assessment districts that are at the point of funding projects in Berkeley, Palm Desert, and Sonoma County in California, as well as Boulder City, CO. Renewable Funding is working with San Francisco to set up a financing program for that city’s residents and businesses.
Sonoma County’s program is the first in a trend toward smaller cities or counties designing a shared program to cut administrative costs.
Renewable Funding, in partnership with the Royal Bank of Canada, is working with the California Statewide Communities Development Authority, the largest joint powers authority in the state, to help cities and counties do bond financing for a solar assessment district by pooling larger amounts of loans that will pay back the bond debt.
So far, about 80 California cities and counties have expressed interest in the statewide program. DeVries said the financing mechanism is in the final stages of development, so cities and counties may be able to join the program in the summer or early fall, making loans to homeowners and commercial property owners by early next year.
Warren Diven, partner in the public finance group at Best Best & Krieger LLP in San Diego, has been working with the Western Riverside Council of Governments, which is looking at putting together a solar assessment district for all of its member cities.
“There are a couple of things that might prove to be challenges,” Diven said. “For smaller cities, adopting an AB811 program can be expensive in terms of staff involvement and costs if they were trying to do it on their own.”
Also, once they get a handle on the administrative costs, municipalities have to figure out how to generate funds to make loans. They need to be able to aggregate enough $25,000 to $30,000 loans to put together a bond issuance large enough to attract municipal bond buyers. In the case of small cities and counties, it makes sense to partner with other local governments to put together an attractive bond package.
Palm Desert’s Energy Independence offers loans starting at $5,000 with up to a 20-year term at a 7 percent interest rate.
The first phase of Palm Desert’s program was funded with $2.5 million from the city and Phase II used $5 million in city funds. For Phase III, Palm Desert has an agreement with Wells Fargo for the bank’s purchase of $5 million in lease revenue bonds.
Money from the first two phases has been fully committed with loans of about $35,000 on average for solar installations and $10,000 for energy-efficiency upgrades.
Pat Conlon, director for the Office of Energy Management for the city of Palm Desert, said almost all of the transactions have been with homeowners, with the exception of one business property owner who received financing for a $540,000 solar panel installation.
“The commercial folks are very leery about adding any assessments to their property taxes,” Conlon said. “They’re trying hard to hold on to their tenants that they have now and the tenants are trying very hard to hold on to their businesses.”
Palm Desert’s program has a waiting list of about 261 applicants interested in the city’s third phase of funding. Phase I sold out in three weeks and Phase II sold out in five weeks. The city planned to open funding for its $5 million third phase on June 25.
Boulder and Berkeley only use privately raised funds for their programs. Sonoma County uses up to $100 million that is set aside in reserves for its water and other departments. After the loans are made, the county will sell bonds to recover the funds. San Francisco wants to focus on raising capital in the private market.
DeVries said most cities and counties are reluctant to use their own dollars for solar assessment districts because city budgets are running deficits all over California and because of general risk aversion.
The best and most efficient way to deliver capital for solar assessment programs is also up for debate. The most obvious source of capital for cities and counties is the municipal bond market, but with a lack of reasonable bond insurance, interest rates on capital raised in the bond market is fairly high.
Renewable Funding is looking at other tools to deliver capital to programs. For some Southern California cities, the company is helping to set up a relationship with a community development bank. Other cities are looking at federal tax credit bonds for renewable-energy investments that were made available under the American Recovery and Reinvestment Act of 2009, but those economic stimulus funds are limited.
All of the solar assessment districts that are operating now are looking to fund both residential and commercial projects, but the focus for commercial buildings has been mostly on smaller properties because the larger buildings need larger loans with more complicated underwriting.
San Diego Mayor Jerry Sanders announced in December that the city was initiating its San Diego Clean Generation program in the wake of AB811.
Rachel Laing, a spokeswoman for Sanders, said the city issued a request for qualifications earlier this year for third-party companies that would package loans and sell municipal bonds to fund the loans on behalf of the city. Nine vendors responded and three were moved into a request-for-proposals process that closed on June 19.
If a company is selected in mid-July as planned and a contract with the city is approved in September, solar panels could be funded and installed by Christmas.
San Diego is targeting homeowners and small business owners because the program may not be cost effective for the owner of a large commercial building, Laing said. The city has gotten hundreds of calls from people who want to participate in the Clean Generation program. San Diego expects to have several hundred people in its pilot program.
Mike Hansen, an associate in the San Diego office of Sheppard Mullin Hampton & Richter LLP, said solar assessment districts answer the question for commercial building owners of why they would invest in something like solar panels if they might not own the property for more than a few years.
“You have the benefit of the long loan term, but you don’t have the responsibility of all the installment costs if you’re not going to own the building for long,” Hansen said.
He noted that AB811 gives cities and counties a financing mechanism that could help them meet the state’s goal of reducing greenhouse gas emissions in California to 1990 levels by 2020 as laid out in Assembly Bill 32. Schwarzenegger also set a goal of putting solar panels on 1 million homes by 2017.
However, Hansen said AB811 doesn’t allow the use of solar assessments for properties in the midst of development, but if the developer still owns the property once construction is completed, then the developer can access the financing available in solar assessment districts.
James Hughes, a Los Angeles attorney, said AB811 amended a law from 1911 that established the use of local special assessment districts to fund infrastructure projects in newly developed areas.
There are three major differences between the 1911 and 2008 laws. AB811 allows special assessment districts to fund renewable energy only for existing buildings, not new development; it allows a special assessment to be levied on a contractual basis for individual property owners; and it allows municipalities to finance small projects rather than massive infrastructure programs.
Elizabeth Watson, partner in Los Angeles at Greenberg Glusker Fields Claman & Machtinger LLP, said AB811 was written with both residential and commercial property owners in mind. Watson said there is legislation proposed now to include agricultural properties and pending legislation that would allow assessment districts for water-efficiency improvements.
Hughes said legislation also has been written to include new development in solar assessment districts. “All of these bills show the Legislature is committed to utilizing this kind of financing and expanding it,” Watson said.
DeVries said there is tremendous interest at the federal level from Congress and President Barack Obama’s administration in solar assessment districts and other programs like it.
Renewable Funding was part of a delegation that asked Congress to amend the tax code so that participants in solar assessment districts could take tax credits for renewable-energy projects while using financing backed by municipal bonds. Now the industry is asking Congress for additional legislation that will help bring down interest rates for bond-financed loans.
Conlon of Palm Desert said U.S. tax code allows cities and counties to get tax-exempt financing to fund public improvements, such as streets and fire stations, but the Internal Revenue Service doesn’t consider renewable-energy projects on private property to be a public improvement, so bond sales to finance those projects cannot be done with tax-exempt bonds, which are sold at lower interest rates and are easier to insure.
“We’re asking Congress to let cities and counties sell tax-exempt bonds for these programs in the upcoming energy bill,” Conlon said. “If we could get tax-exempt financing, we could drop the rate from 7 percent to 6 percent overnight.”
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