~JFF - Notes from Telecom with KK at The Desert Sun
Reporter K Kaufman at The Desert Sun in Palm Desert interviewed per developments on AB 811.
Postponed and delays in committee per notices on CA legislature site per bill progress
KK thinks there is a chance bill may not make it to vote in Senate this session.
Said she may do update within the next week or two.
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Financial analysis and valuation of sustainable, high-performance buildings with a focus on commercial real estate.
About Me
- JamesFF
- Wells Fargo commercial real estate appraisal manager/reviewer, member of the Wells Fargo Environmental Initiative team, LEED commercial building valuation, financing. NB- "The views expressed are mine alone and do not necessarily represent the views of Wells Fargo."
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Special Assessment District Energy Efficiency Financing
This weblog primarily tracks the impact of CA Assembly Bill 811, signed into law on July 22, 2008.
What is AB 811?
This new (signed July 21, 2008) law permits cities to finance energy conservation and energy generation upgrades to individual property (residential and commercial) via public funds which are repaid thru their property tax bill. It was modeled after an idea first considered in Berkeley in Nov. 2007 and later championed to go statewide by other cities including Palm Desert.
It is voluntary, allowing cities to opt in to create Energy Special Assessment Districts on individual property.
What is a “Special Assessment District?”
Special Assessment District property tax obligations have long existed to allow improvement of public spaces to pay for things like sidewalks, street lights other upgrades. Under this "traditional" scenario property owners agree to repay the city costs via a line item bill on their property tax bills for adjacent upgrades to public spaces. The logic of this payment schema is that the property values have by the improvement of adjacent upgrades due to the city’s expenditure and the benefiting nearby property owners should pay.
While certainly not a universal rule for all public space upgrades, it provides a process that allows a block or neighborhood to request and obtain improvements by agreeing to pay for them.
AB 811 extends this idea from the public space to the individual property parcel, an elegant, brilliantly simple leap that in 811's case targets energy use reduction on property as the "public" benefit.
What are the differences between this financing approach and a “typical” loan from a bank?
There are numerous significant advantages to this approach over "typical" financing.
Repayment flows with the land, not the borrower
The money repayment obligation flows with the land/property, not with a human borrower. Upon sale the obligation neatly transfers with title to the next owner and is independent of the new owner's "credit score" and there is no "due on sale" clause (typical of mortgages) triggering a repayment obligation upon transfer of title. This is very clean and neat compared to what would happen with a "traditional" bank loan.
The debt is more “durable”/lower risk
A property tax bill obligation are far superior in the debt hierachy to a "normal" loan from banks. The debt is treated exactly like your property tax bill and is not impacted by personal bankruptcy, death or other debt. The mechanism for non-payment is simple. Do not pay and the property will be seized and sold at a tax sale with the new owner continuing the repayment obligation. In addition to this being much more straightforward than a normal foreclosure it also does not trigger payment of the debt. The annual obligation continues allowing any new buyer to assume the debt under the same terms as when it was created. Again, no fuss no muss, simple.
Lower risk = lower interest rate
The highly secure nature of property tax repaid debt will have a big impact on municipal bonds that will be created by the city from these debt obligations. And as usual lower risk = lower interest rate, a big win for borrowers. The funds are ultimately secured by the city that extends the funds and the city credit rating might have an impact on the interest rate. Additional security of the repayment will be provided by the fact that most of the money spent will intend to save money by reducing energy bills. This saving has a net present value which adds worth to the land. The "debt" in this case is worth more (potentially) than it costs, adding net value to the land. Very nice for securing the debt position.
Lower green house gases = a Public Good
Electric power used by in buildings power is often (estimated at 70%) created by burning very dirty coal. Coal is still plentiful and cheap, very unlike oil which has now peaked and is becoming expensive. While high oil prices are working thru market forces to make oil use more efficient in the transportation sector (and to a certain extent electricity and natural gas), reducing building energy use is only really practical if you can reduce coal burning.
Reductions in green house gases [GHG] from coal fired electric utilities is a way that the 850 (and counting) mayors of the U.S. Mayors Climate Protection Agreement can meet their obligations. This creates a huge political will at the city level to promote energy reduction in buildings and create a public good via reduced GHG, all very within the spirit of AB 811.
What types of upgrades can these funds be used for?
Since repayment periods can extend a long time (20-30 years is often quoted) energy upgrades should be “long lived” (>10 years) like windows, insulation, ground sourced heat pumps or photovoltaic panels. Not-so-long-lived capital investments like central air conditions/heating systems, hot water heaters might need to have shorter repayment periods. Each city has the responsibility to define their own system of allowed upgrades and repayment plans. There might be many flavors of regulations + the type of upgrade allowed.
How will the money be made available?
Each city will design its own program so expect numerous versions. Some will review the proposal, require sign-off by city building inspectors and with the work be done by licensed contractors. There may be criminal charges for any upgrade removed from the property, but even if this is done, the property still owes the money via the tax bill and it will be repaid or the land, building sold to recover it.
Will the “return on investment” justify getting the loan?
This decision is made individually and it is expected there will be financial modeling done to help everyone make the calculations. In places like Palm Desert or hot desert environment the insulation of a highly efficient air conditioner can cut a $2000/mo utility bill in half and the numbers incenting upgrades are going to look very good. If you are an empty nester along the coast with a $75/mo electric bill, the decision might be personal, something like paying extra to buy green power.
AB 811 is pure (and very atypical) bottom up energy economics decisioning, very "wiki" style. It is the opposite of the typical top down corporate profit motive which favors centalization, large capital driven projects.
AB 811 it is a highly efficient use of capital, either saving power or creating it on-site and avoiding the typcial -30% energy loss of a centralized power grid.
Lastly it is up to each property owner to make the decision, Very libertarian. If you think it makes sense you do it and it impacts no-one else. If it is not for you you don’t and so be it.
[version 8-04-2008]
