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Innovation: Tax Lien Financing
OTHER PARTS OF THIS ARTICLEPt. 1: CCI Partners with ESCOs on Performance ContractingPt. 2: Performance Contracting How ToPt. 3: This Page
CCI's retrofit program has been "addressing market transformation over the last 18 months, and we are working with them to create the ability for private, commercial real estate to do multiyear retrofits," says Peter White, director of the private sector for Johnson Controls, another ESCO working with CCI. The biggest challenge to get these private projects done is that many are owned by "unrated LLC shells," which are entities put in place to protect ownership and allow multiple owners to come together and operate as an organization with limited personal liability, says White. The result is that it is difficult to get financing for multiyear projects, because the people putting up the money have no guarantee, when buildings change hands, that long-term projects will continue uninterrupted or that they will be paid for.
"CCI has been championing tax-lien financing," White says. Tax lien financing — known as PACE, for property assessed clean energy — allows organizations to use third-party lenders to finance retrofits, which will allow building owners to embark on 10-, 15- or 20-year projects.
"Many cities, counties and states are picking up the torch for tax-lien financing," says White. With tax-lien financing, a financial institution creates a third-party loan with either a bank or the original mortgage holder of the property, usually at advantageous terms. The city or county then assesses a tax lien against the building equal to the annual savings guaranteed by the ESCO and transfers the money directly to the lender. The property owner will continue to pay that lien, which is equal to the projected energy savings each year as a result of the retrofit, until the money owed to the lender is paid off.
Thus, the tax lien becomes the vehicle through which the property owner pays down the debt that has been made to finance the retrofit. With a tax lien both the debt and the value of the retrofit can easily be transferred to a new owner, should the building be sold before the project is completed.
So far 21 states have passed PACE legislation, and tax lien structures may vary at city, state, and county levels. Says White, "Many [energy] systems are old and tired and in need of capital infusion. We help people with building transformation and rebranding. A key thing we do as an ESCO is put together no-risk business opportunities with funding that preserves cash for people to pump into their core business. We make them more efficient to mitigate risk."
Municipalities have been willing to get on board with tax-lien financing, says White, because in tough economic times these retrofits create green jobs and create a better local environment while also positively impacting climate change.
Another factor that could lead to wider use of performance contracting in the private sector is model language hammered out by the Building Owners and Managers Association (BOMA) International and the Clinton Climate Initiative to make it easier for commercial building owners to use performance contracts.
"The private sector, through the use of BOMA documentation and PACE legislation is trying to overcome the hurdles [of financing long-term projects]," says Ari Kobb, director of green building solutions for the energy efficiency group of Siemens Industry, Inc. "Over time, performance contracting will be one of the lynch pins of how we achieve the goals of the Clinton Climate Initiative — how we drive reductions into these huge, growing cities with both public and private buildings."
Innovation: Tax Lien Financing