Panel Detail:

Wednesday, April 29, 2009
11:00 AM - 12:15 PM

Moderator:

Jeffrey Tannenbaum, Founder and President, Fir Tree Partners

Commercial and residential buildings are responsible for 40 percent of all greenhouse gas emissions annually in the U.S. Retrofitting the nation's aging building stock would drastically reduce the carbon impact, and now there's a tool to help make it happen.

The recent emergence of Property Assessed Clean Energy, or PACE, bonds has given cities and states the tools to lead the charge for improving energy efficiency. In the PACE framework, cities and counties form financing districts that could issue bonds to provide financing for residential and commercial property owners to voluntarily retrofit buildings and make improvements such as installing solar, wind or geothermal energy systems.

Property owners would repay the loans over 20 years through a special property assessment, with the paper secured by a super-senior position, much like any property tax. Up-front costs for owners are dramatically reduced, which improves return on investment and the internal rate of return and doesn't discourage them from opting in.

Dan Probst of Jones Lang LaSalle estimates that the potential market size for retrofitting buildings is anywhere from $600 billion to more than $1 trillion. About 75 percent of commercial buildings are more than 20 years old.

Challenges to embracing PACE bonds exist on financing and legal fronts. For financing, the question relates to how you enable these relatively small-scale financings that have local, non-standardized appearances to work within the large-scale municipal bond market.

Craig Hill of Northcross, Hill & Ach Inc. said a Department of Energy guarantee would enable a standardized, marketable product. The DOE guarantee would provide a Treasury bond surrogate with related liquidity and an interest-rate reference. It also would serve as a powerful catalyst for retrofitting with virtually no long-term credit risk –the bond has a lien not only on the revenue stream of the property but also on the property itself. Amory Lovins of the Rocky Mountain Institute said the DOE credit wrap would help provide the protocol for pooling, packaging and securitizing the savings from these retrofits.

Regarding the legal challenges to PACE financing, the panel was slightly less certain, given the infancy of the initiative. Hill mentioned that trying to move the retrofit lien ahead of the mortgage note in seniority can be difficult to do unilaterally. Cisco DeVries of Renewable Funding LLC said it depends on whether you set up the assessment district in a traditional manner. Then, DeVries said, it's "just like any other tax assessment," which frequently moves super-senior without the lender's consent.

Lovins likened the retrofits using PACE bonds to a "double whammy" because they increase the cash flows of the asset, leading to lower loss reserves because risk decreases, and increase the asset's value. The bonds have a lien on both. Because the program is opt-in and needs pull-through to make an impact, the key is for cities and counties to educate property owners and help implement retrofits. The policy goal should be for a transparent, easy-to-use, standardized and correctly incentivized process for retrofitting, using PACE financing with reliable, certified vendors doing the retrofitting.

When pressed further about lenders and their appetite to embrace the super-senior position of PACE bonds, Lovins compared it to health insurance. Would a health insurance company want to encourage its enrollees to exercise and eat right? "They should!" he said.

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