generic pace introduction.06.25.10

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PROPERTYASSESSEDCLEANENERGYPROGRAMS(AB 811)

O PPORTUNITY O VERVIEW

June, 2010


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Contents

INTRODUCTION...........................................................................................................................3 Benefits to Municipalities and Local Governments: ..............................................................4 Benefits to Property Owner: ....................................................................................................4 Benefits to All Stakeholders: ....................................................................................................5

THE PROGRAM ............................................................................................................................5 FINANCING CONSIDERATIONS ............................................................................................... 9

PROGRAM ORGANIZATION CHART ..................................................................................... 10 CONCLUSION .............................................................................................................................11 CONTACT INFORMATION....................................................................................................... 11 PROGRAM CONCEPTS..............................................................................................................12


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INTRODUCTION

In July 2008, California ushered into effect a new era of opportunity for clean and renewableenergy financing with the passage of Assembly Bill 811 (AB 811). This legislation allows citiesand counties to create a taxing authority, within their boundaries, in order to provide fundingto private property owners for specific energy efficiency and/or renewable energyimprovements to their private property. AB 474 expanded this authority in 2009 to provideeligibility for water efficiency projects as well. Funding to private parties is repaid through acontractual assessment on the improved property. The AB 811 bill summary reads as follows:

AB 811 would authorize all cities and counties in California to designate areas within whichwilling property owners could enter into contractual assessments to finance the installation ofdistributed renewable generation, as well as energy efficiency improvements, that arepermanently fixed to the property owner's residential, commercial, industrial, or other real

property. These financing arrangements would allow property owners to finance renewablegeneration and energy efficiency improvements through low-interest loans that would berepaid as an item on the property owner's property tax bill. The contractual assessments couldnot be used to finance the purchase or installation of appliances that are not permanently fixedto the real property. (California Public Utilities Commission Published Reports 2008)

To date, at least twenty other states have passed similar legislation, with several more undernegotiation. Nationally, this type of financing has commonly become known as PACE, PropertyAssessed Clean Energy. (www.pacenow.org )

These programs allow local municipalities to encourage property improvements that provideenergy saving technologies and features. Funding is provided to property owners for approvedtechnologies and authorizes contractual assessment lien placement on the improved property;the assessment lien remains an obligation associated with the property upon transfer. Thisstructure overcomes the two greatest deterrents to private property owners completion ofenergy-related improvements by offering :

Minimal up-front costs Repayment obligation stays with the property upon sale or transfer from

current owner

Local municipalities are given the right to provide funds directly to owners, charge interest andfees, and collect the repayment via semi-annual property taxes (as regularly scheduled.)


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Benefits to Municipalities and Local Governments:

1. INCREASED REVENUES TO MUNICIPALITY from application fees,permit fees, product sales taxes, business license fees and interest

participation.2. Private capital funding source removes municipal obligation.3. Readymade vehicle to fund and expedite shovel ready projects.4. Provides economic benefit to everyone in the chain.5. Low cost of funding made available at a time of economic duress.6. Job Creation participating regions experience an increase in well paying Green Collar

jobs that number in the thousands.7. Potential to locally staff administration and application processing in each participating

municipality.8. Qualified local contractors will be retained to perform all elements of labor and

installation of funded systems.9. Resultant installed technologies will reduce consumption of energy resources, relievestress and load on aging local utilities infrastructure and forestall diversion of municipalcapital to fund immediate expansion of the energy grid. (In Palm Desert alone, AB-811improvements have helped the city reach about one-third of its five-year goal forenergy reductions, pulling close to 67.5 million kilowatt hours of power off the grid.Kauffman 2009 )

10. A direct and measurable reduction of the regions Carbon Footprint is seen almostimmediately as a result the new green energy sources and their associated savings inenergy use come online.

11. LEED (Leadership in Energy and Environmental Design) Accredited Professionals willpromote and conduct owner focused education seminars to detail the benefits ofenergy saving, self sustaining and renewable projects, and the financing optionsavailable to property owners. Additional education and training will also be offered toparticipating municipalities, interested stakeholders and the labor pool. This trainingwill include classes on green education, and a comprehensive blue to green collartraining program designed to facilitate the retraining of the area labor force fromtraditional employment in non-green jobs to positions in the sustainable constructionand maintenance field.

Benefits to Property Owner:

1. Readily available source of capital to purchase and install energysaving technologies .

2. Relative ease of funding approval.


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3. Owner/occupant will enjoy a lower cost of operating expenses, avoid market drivenspikes in energy costs and an increase in the quality of inside air (dependent uponimprovements installed). . . resulting in an overall increase in occupant satisfaction andproperty value.

4. As a major U.S. corporation has discovered in the implementation of their connected

workplace initiative, in addition to the cost savings and expense smoothing benefits ofgreen energy, occupants/workers in integrated commercial green project buildingssee a measurable increase in productivity, collaboration and employee satisfactionwhile reducing real estate and technology costs. (Cisco Systems, Inc., Cisco on Cisco2009 )

Benefits to All Stakeholders:

Triple Bottom Line:

Environmental ResponsibilitySocial Equity

Economic Benefit

All will benefit from the increased quality, reduced consumption, and net savings enjoyed fromnew environmentally friendly sources of energy and other installed green technologies.

THE PROGRAM

Our team will design, launch, fund, manage, and administer the Program. In order to fund thepayments to property owners, we will utilize funds from our capital partners, professionalmanagers, or capital markets. Four key aspects to ensure the ongoing use and relevance of the Program are: Structure,Scheduling, Accountability and Scalability.

Structure of the Program ensures that projects, procedures, standards and guidelines aredocumented and consistent for all participants. A well-structured Program also enjoys greatermarket acceptance and will result in attractive financing options.

Scheduling provides financing team members and participating stakeholders with timelines forkey tasks related to program development, implementation, funding, and ongoingadministration.


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As Program Manager, PACE America is responsible for all interaction with the municipality forimplementation, administration and funding of the Program. These Program functions include:

Program design and launch- documentation of eligible projects and allowable financing terms- minimum and maximum funding amounts- application processing procedures- Program Handbook- County/City responsibilities defined

Legal documentation assistance to assure prompt validation action for funding County /City staff and supervisors / council liaison Support for any required election proceedings Marketing program design & support


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Education program design & support Funding application documentation Underwriting standards and procedure establishment Online processing and tracking

Assist underwriter and counsel in preparation of preliminary official statement /placement memorandum Prepare presentations to rating agencies and/or credit enhancement providers Provide ongoing administrative support to initiate subsequent rounds of financing Ensure proper reporting of tax liens Identification and definition of eligible projects Establishment of procedures to ensure best practices Establishment of contractor verification procedures Preliminary auditing and post installation commissioning for projects

Education and outreach to contractor and vendor constituents in Program area Secure funding for immediate disbursement upon project verification Privately place or publicly offer aggregated assessments to long-term investors

In the event a public bond sale in the capital markets is desired, we will work with a recognizedmunicipal bond firm, as underwriter. The underwriter would be responsible for bondunderwriting services related to financing. If needed, these services may include:

Evaluate most cost-effective debt model Works with financing team to evaluate credit enhancement and ratings strategy Prepare presentations to rating agencies and/or credit enhancement providers Assist counsel in preparation of preliminary official statement / placement

memorandum Pre-market the bonds to potential investors Sell bonds to fund property-owner assessments Provide post sale analysis and support Make a market in the bonds Issue refunding debt when appropriate to maintain balance of investor capacity

In order to effectively structure and document the program, additional financing teammembers would be selected. We will work with the individual municipalities to make certainthat our selections are aligned with preferences of the municipalities. We would anticipate, at aminimum, engagement of the following professionals (along with their respective roles):


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Program Counsel 1 Prepare Program implementation documents, fundingapplications, project description standards, guidelines and performance measures

Bond Counsel 1 Prepare bond documents and file validation documents Disclosure Counsel 1 Prepare preliminary official statement and provide financing

team with legal advice regarding disclosure and complianceissues

JPA Counsel1 Prepare Joint Powers Authority documents and define process for inclusion of multiple participating cities

Trustee Disburse payments for funding and debt service

1 Legal counsel duties will be critical to the overall success of the Program. It is conceivable that theseduties could be performed by one or more firms acting in different capacities.

FINANCING CONSIDERATIONS

Our team is prepared to implement a completely turnkey program for cities and counties. TheProgram, as we envision it, will consist of one or more contractual assessment program jurisdictions. Property owners within the jurisdictions will be able to finance energy and waterefficiency improvements, based upon completed energy audits, with funding that will be repaidover the course of up to twenty (20) years through contractual assessments on their propertytax bills. In order to qualify for funding the property-owner will have a preliminary energy auditto identify appropriate improvements and their relative benefits; thus, providing opportunitiesto encourage deeper whole-house energy projects. These audits will be provided at a nominalfee to assure property owner commitment. Audit fees will be reimbursable through project

financing if desired by the property owner.

Funding will be provided through the most cost effective of the following: (i) funded directly atthe time of project completion through issuance of mini bonds by the City (or other municipalentity) that will receive funding from a direct lending facility or private fund, or, (ii) public bondsale to fund the purchase of aggregated mini-bonds based upon approved assessment projects.The contractual assessments paid by the property owners will service the debt on the bonds,fund a reserve account, and cover annual administration costs of the Program.No municipalcredit support or debt service obligation will be required.

While the actual financing could take different forms, we envision utilizing the followingmethods for pooling the assessments. At the Program level, likely through a Joint PowersAuthority, a warehousing bank, revolving fund, or private equity fund would provide fundingimmediately upon approved project completion to contractors. Upon reaching targetedaggregate amounts, the entire pool of assessments will be sold either through public sale orprivate placement as taxable bonds secured by the contractual assessment obligations.


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As a result of the continued economic downturn, most of the cities and counties are withoutexcess capital for such programs. These municipalities should welcome a ready source of capitalthat promotes economic prosperity and energy efficiency within their political borders.

Because the funding is secured by assessment lien, underwriting standards are expected to beheld to a minimum, but will likely include the following:

Property owners must be listed on the tax roll Property must be located in the program boundaries Property tax payments must be current Mortgage payments must be current Existing property liens must not exceed value (property is not upside-down) Consent of existing mortgage holder for commercial properties Assessment amount to value is acceptable Improvements must be appropriate and approved by Program prior to funding

PROGRAM ORGANIZATION CHART


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CONCLUSION PACE Americas team has built out a comprehensive slate of services andfunding, including private capital, which is looking forward to having an

opportunity to invest in these Programs.

We believe the Program model and funding solution identified will provide significant value toparticipating jurisdictions. Our approach works equally well for existing Programsand jurisdictions that have not yet begun. By layering our financing capacity over an alreadyestablished Program model, we will be able to provide consistent funding and managementrelief to the jurisdiction and its constituents. For new Programs, we are able to employ ourteam of professionals to provide a turnkey solution.

CONTACT INFORMATION

Laura FrankePrincipal

Clean Energy Advocates, Inc.1223 Wilshire Boulevard #310

Santa Monica, CA 90403310.560.1548 Office310.892.0177 Cell

[email protected]


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PROGRAM CONCEPTS Approved Improvement Property improvements that are approved for funding through the

Program. The approval will be given by program management to the

property owner upon preliminary approval of the amount requestedand verification of the improvements eligibility and appropriateness forthe property.

Mini-Bonds Each property owner lien, at the time of funding, is evidenced by thesale of a mini-bond by the municipality (or JPA) to the warehouselender. The warehouse lender holds the mini-bonds until they aresecuritized to and taken out by another investor.

Program Manager/Funding PACE America has built a team of professionals to provide the

comprehensive services needed by a municipality to initiate andoperate a successful Program. Municipality involvement will beminimally required at the discretion of staff and elected officials.

Program Requirements Each Program has the ability to define the improvements eligible forfunding, prioritization of projects, and identification of appropriateloading order to incentivize appropriate improvements. Someimprovements may be eligible for funding contingent upon otherimprovements being completed as well; i.e. leaky roof must be fixedprior to installation of solar panels.

Energy Audit- Pre Improvement A pre-improvement property evaluation will be prepared prior to

funding approval in order to verify the appropriateness and eligibility ofprojects requested for funding. This evaluation will determine theapproved improvements.

- Post Improvement A post-improvement property evaluation will be prepared prior to therelease of funds to assure that the approved improvements have beenmade and appropriately installed.

Revolving Fund A revolving fund exists as the aggregation point for all fundingoriginated by the Program. The revolving fund can receive funding fromthe warehouse line to provide fund as provided to the property owner.

The revolving fund may receive funding from different sources overtime in order to maintain consistent capacity to lend. Similarly,assessment repayments go back to the revolving fund to provide asustainable source of funds from internal (repayments) as well asexternal (warehouse) sources.


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Take-Out At such time as the warehouse line holds a significant amount of mini-bonds that have funded individual property owner assessments, themini-bonds will be securitized, or bundled, into a larger bond ($10-50million) that will then be sold to an investor. This take out is handled bythe PACE America team and will not impact the underlying assessmentsor their repayment terms.

Underwriting Requirements In order to approve the individual property owner funding applications,certain requirements will need to be met in order to meet creditsecurity standards, these are called underwriting requirements. Theseare likely to include the following:

Validation action completed Program Managed by PACE America Property owner verified on tax roll Property located in Program eligible boundaries Property taxes are current Mortgage is current Existing property liens do not exceed current assessed value Consent of existing mortgage holder for commercial properties Assessment to value is acceptable Improvements are appropriate and approved by Program Notice of lien required upon transfer of Property

Warehouse Line Warehouse line or refers to the initial funding provided to purchase themini-bonds, as issued in amounts to fund individual property ownerimprovements. This warehouse lender is investing short term, relativelysmall amounts, and will expect to have the assessments packaged andresold in a take out at some point in the future. Having a warehouse

line is vital to being able to fund assessments on an ongoing basisinstead of having to wait for the issuance of a larger bond by themunicipality. The warehouse provider can be a bank, private equity,mutual fund, other institutional lender, or the underlying municipality.

generic pace introduction.06.25.10

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