Environmental Law: Financing Tool Offers Help With Energy Upgrades
In 2012, Connecticut passed legislation which gives property owners access to 100 percent upfront, low-cost, long-term financing for building energy upgrades. Commercial & Industrial Property Assessed Clean Energy (C-PACE) is an innovative financing program to increase access to cleaner, cheaper, and more reliable energy. The Clean Energy Finance and Investment Authority (CEFIA) was empowered by legislation to administer the program.
CEFIA, the successor organization to the Connecticut Clean Energy Fund, is a quasi-public agency and commonly referred to as the nation's first "green bank." CEFIA programs are funded from a variety of sources including a surcharge on residential and commercial electric bills. CEFIA is focused on transitioning clean energy programs away from less efficient government-funded grants, rebates, and other subsidies, and toward loans and financing programs that promote and leverage private capital investment in clean energy and energy efficiency.
C-PACE is available to commercial and industrial properties, as well as to multi-family properties with five or more units. The program allows building owners to access affordable financing to undertake qualifying energy efficiency and clean energy improvements on their buildings and repay the investment through an additional charge ("benefit assessment") on their property tax bill. Benefit assessments are a familiar tool in municipal finance, often levied on real estate parcels to finance public benefit projects including street paving, water and sewer systems, and street lighting. Similar to a sewer assessment, capital provided under the C-PACE program is secured by a lien on the owner's property and paid back over the term of the assessment.
Like other benefit assessments, C-PACE is non-accelerating, the repayment obligation transfers automatically to the next owner if the property is sold and in the event of default, only the payments in arrears come due. This arrangement spreads the cost of clean energy improvements – such as energy efficient boilers, upgraded insulation, new windows, or solar installations — over the expected life of the improvements.
The idea of "PACE" financing was first born in 2005, and the first program was implemented in Berkley, Calif., in 2008. Connecticut is a good market for PACE financing because we are faced with the highest electric costs in the lower 48 states, while also having some of the oldest most inefficient building stock.
Connecticut's C-PACE program has a number of legislative requirements and structural components which set it apart from other PACE programs around the country. This has led to a strong start from a program that was just launched earlier this year.
First, C-PACE is limited to commercial, industrial and multi-family properties, avoiding the currently uncertain space of residential PACE financing, as the Federal Housing Finance Agency has taken the position that Fannie Mae and Freddie Mac should avoid purchasing loans encumbered by PACE liens (halting many residential PACE programs around the country). By focusing on commercial and industrial properties, CEFIA is providing this financing tool to building owners who can take advantage of larger energy savings.
Second, and perhaps most fundamental, are the technical requirements of Connecticut's program. All energy measures together must meet a Savings to Investment Ratio (SIR) of greater than one, meaning that projected lifetime savings from the energy measures must exceed the total investment over the full term of the C-PACE assessment, inclusive of financing costs.
The SIR component is essential because building owners see an instant decrease in operating expenses, an immediate return on investment, and the property becomes more attractive to current and potential tenants and future buyers, providing a point confidence to existing mortgage holders. CEFIA has also instituted technical underwriting standards for C-PACE that provide a robust framework for measuring and verifying energy savings estimates, providing confidence to existing mortgage holders and the capital providers financing these energy projects.