Energy Upgrade Incentives in Cities

Sustainable energy financing districts offer commercial building owners and homeowners low-interest loans for energy-efficiency projects—a creative way for owners to finance solar, wind, or geothermal energy upgrades to their properties and for cities or counties Energy to meet their mandated need to reduce greenhouse gases and be energy independent.

More than a year ago, California passed Assembly Bill 811, giving all municipalities and counties in the state the ability to offer low-interest loans for energy-efficiency projects and solar panels to homeowners and commercial property owners secured by contract assessments levied on the owners’ properties. The bill helps close the gap between the willingness of property owners to retrofit their buildings or homes and their ability to afford such upgrades. Owners borrow money from a city or county participating in a contract assessment program to pay for their new energy-efficient products, and the long-term payment of the loans is linked to owners’ property taxes. A participating municipality or county may issue bonds secured by the contract assessments to raise money for the loans, access general and redevelopment funds, or otherwise raise capital.

The law has many benefits for property owners not found in other forms of financing, such as home equity loans. These advantages include the fact that the contract assessment runs with the land and is not required to be paid off when a participating property is sold. There is little upfront cost for owners and, unlike a second mortgage or home equity loan, the process to receive approval of a loan secured by a contract assessment may require limited documentation. Because the loan payments are tied to property taxes, the interest portion of the loan payments is tax deductible.

Palm Desert, a community of 51,000 residents located 14 miles (22.4 km) from Palm Springs, has the distinction of being the first city in California to establish a sustainable energy financing district. Now, many other public entities throughout the state are preparing to follow suit. Palm Desert gets 350 days of sunshine each year, so the potential for solar power is virtually unlimited. However, the cost to add solar panels to a home or business can be $30,000 or more. Other energy savers may be less expensive but still require a property owner to pay money upfront.

Palm Desert municipal officials realized that their constituents needed help to finance private energy projects that will contribute to the city’s five-year goal of cutting energy use by 30 percent by 2011. With a $1.5 million advance from the city’s general fund, Palm Desert’s AB 811 program allows residential or commercial real property owners to immediately experience a greatly reduced electric bill with no out-of-pocket expenses.

Under Palm Desert’s program, there is a minimum loan amount of $5,000 with no maximum limit. Property owners are not subject to credit ratings or credit checks. The interest rate is fixed at or near 7 percent and paid biannually (through assessment installment collected on the property tax bill). Loans can be used on a variety of energy-efficiency improvements as well as the materials and labor required to properly install them.

Specific improvements allowed for under the Palm Desert program include the following:

• air-conditioning and ventilation systems;
• pool pumps; l energy-efficient windows, doors, and skylights;
• window films;
• tankless water-heating equipment;
• white roofs and coatings;
• natural gas fuel cells; and
• solar systems.

The AB 811 program is one of several that the city offers to residents and businesses. Palm Desert staffs the program internally through its energy management department. Other municipalities, however, have opted to outsource their programs.

The city of Berkeley, for example, has established a pilot program called “BerkeleyFIRST” through its charter city authority, which exclusively funds solar photovoltaic electric system projects. Renewable Funding LLC was hired as the program’s third-party administrator. According to Renewable Funding, the company is “the pioneer in the turnkey administration and financing of the CityFIRST [City Financing Initiative for Renewable and Solar Technology] Program, a portable program that provides cities with comprehensive online application processing coupled with a financial package.” The BerkeleyFIRST program differs slightly from an AB 811 program in that Berkeley, pursuant to its charter authority, has enacted its own Special Tax Financing District Law that authorizes the levy of special taxes rather than assessments to provide for the repayment of loans granted to finance authorized solar energy projects for property owners.

BerkeleyFIRST has committed to 38 solar installation projects distributed throughout Berkeley during the pilot phase. During this phase, the city is evaluating the program and determining whether another round of financing will be made available.

Palm Desert and Berkeley offer examples of how cities can develop their own programs or outsource them. Other municipalities, however, may not have the staff or resources to create and/or administer a program or even oversee outsourcing. To meet this need, cooperative programs are now available.

Northern California’s Sonoma County Energy Independence Program is the state’s first countywide energy-efficiency financing district. Available to the nine cities in Sonoma County that choose to participate, the program handles all the staffing and financing. The Sonoma County program is unique in that the bonds will be sold to the Sonoma County Treasury, essentially making the county the bond issuer and bondholder.

The Sonoma County Energy Independence Program made its first loan last May. A homeowner was granted a loan of $25,500 for a five-kilowatt photovoltaic system. The county reports that there are another $6 million of applications for loans pending. Under the program, commercial property owners are encouraged to “reduce operating and maintenance costs through investment in energy efficiency and renewable energy.” Some 26 improvements are available to existing commercial properties under the program and five custom energy-efficient improvements are also available, including the following:

• building energy management systems;
• lighting control systems, including occupancy control and other efficiency systems;
• heating, ventilating, and air-conditioning duct zoning control systems;
• motors and controls to save energy for processing and manufacturing equipment; and
• customer electric vehicle plug-in stations.

In southern California, the Western Riverside Council of Governments, a joint-powers authority made up of 16 cities within Riverside County, is also developing an energy-efficiency financing district.

While the benefits of sustainable energy financing districts for commercial and residential property owners—as well as municipalities and other jurisdictions—are many, there are also challenges. Because AB 811 programs are formed under contract assessments, which differ from traditional assessments, it is unclear as to the priority of such contract assessment liens against the property, leaving some investors in such programs on the fence. A traditional assessment lien has a lien priority equal to that of property taxes, which is superior to private mortgages. Additional legislation has been enacted in an attempt to correct this issue.

The process to establish an AB 811 program is multifaceted and requires establishing the jurisdiction of the district, holding public hearings, designating the type of improvements to be financed, prioritizing the types of property owners who will receive financing, raising the capital, and marketing the program. Depending on staffing and budgetary resources, this process could take years. With states facing unprecedented financial problems combined with the depressed real estate market, many municipalities may not place an AB 811 program at the top of their priority list.

However, California’s energy shortage is not a short-term dilemma. AB 811 programs offer a significant resource to energy conservation problems that will face the state for years to come.