Santa Rosa-based effort joins with big names; $100 million for Sacramento
SANTA ROSA — Five years ago, co-founders of Santa Rosa-based Ygrene Energy Fund were trying to drum up local support for an innovative large-scale financing program to encourage real estate owners to embark upon energy-saving retrofit and renewable-power projects. And today Ygrene is leading a nationwide commercial property retrofit endeavor backed by a billionaire, a large investment bank, a high-tech manufacturer and two re-insurers and targeting $650 million in initial Sacramento- and Miami-area projects.
Ygrene, started by Alan Strachan and Dennis Hunter to help municipalities set up project financing programs for property owners that would be paid back via voluntary property-tax assessments, is leading a group consisting of Carbon War Room, a San Francisco-based nonprofit started by Virgin Airways founder Richard Branson; Barclays Capital; Lockheed Martin; Massachusetts-based energy industry re-insurer Energi Insurance Services; and Energi’s Germany-based parent, Hannover RE, the world’s third-largest re-insurer.
“All this means we can produce loans with very, very high credit ratings, even in this environment,” said Mr. Hunter, Ygrene’s chairman and veteran of the local banking and real estate development industries.
The group, called the PACE Commercial Consortium for the increasingly used property-assessed clean energy financing model on which it’s based, on Sept. 19 said it plans to offer $550 million in retrofit financing in Miami-Dade County in Florida and as much as another $100 million in Sacramento area.
“The PACE Commercial Consortium is the missing piece in the jigsaw puzzle for cities looking to implement green plans,” Mr. Branson said in the announcement.
This consortium has been in the works for more than 18 months, as part of Carbon War Room’s Green Capital Global Challenge, according to Mr. Branson. That effort was launched at the 2010 Winter Olympics to pull together billions of dollars of private money for local government-directed energy-efficiency programs such as PACE. Challenge Director Murat Armbruster brought the consortium members together at the nonprofit’s Creating Climate Wealth North America Summit this past May.
PACE-style financing programs have started in 26 states as well as Australia, New Zealand and potentially next year in the U.K. Yet major barriers for cash-strapped local governments have been program startup costs, a large enough pool for funding projects and packaging financing for sale on bond markets. That’s where third-party PACE financiers such as the consortium and San Rafael-based Clean Fund are moving in to help.
“These investments are 100 percent private capital,” said Brian McCarthy, Energi’s chief executive. ”There is no government debt or cost involved. The markets can supply this financing because the economics are sound, engineering performance is insured, the security is strong and clean energy capital assets are profitable.”
Mr. Branson estimated the global market for green retrofits of commercial and industrial properties is $1 trillion. “There is simply no other source of economic growth with these characteristics,” he said.
A Ygrene subsidiary in Florida earlier this month signed a contract with the Miami-Dade town of Cutler Bay to set up and administer a PACE financing program there as the starting point of a “Green Corridor” tax district in the county. According to the company, Miami and four other municipalities want to join the district.
A Sacramento-area PACE program is going to the City Council for consideration on Tuesday. Other cities in Sacramento County and the adjoining county of Yolo are considering participating. Ygrene has received serious interest from government officials in San Diego, Los Angeles, Chicago and Montgomery, Ala.
PACE Commercial Consortium members offer layers of assurances to investors and municipalities that insulation, lighting, window and other property upgrades as well as any added renewable-energy systems will provide the promised energy-use reductions promised. Commercial and industrial buildings have been estimated to account for 40 percent of energy consumption in the U.S.
Under the model, Ygrene negotiates a PACE program management contract with the local government agency to handle all the program costs from setting up the assessment districts to marketing to before-and-after energy audits to paying contractors to do the work. Ygrene does this with funds from a variety of sources, including a $100 million warehouse line from Barclays.
Barclays Capital’s role is to package a number of PACE assessments into securities that can be marketed on the bond market. The goal is for $1 billion aggregations of assessments, according to Mr. Hunter. However, financial sector’s experience with less-than-thorough underwriting standards made Barclays require “perfect” PACE assessment documentation, specifically a clear title record and no bankruptcies or other encumbrances of the property, he said.
To do that and allow property owners to quickly get project financing information, Ygrene developed an underwriting and public-information software that’s plugged into the massive data resources of the Fidelity National companies, whose chairman, Bill Foley, has based his growing wine industry portfolio in Sonoma County.
Though pension funds and others have expressed interest in this new class of asset investments, there has yet to be a sale of them, Mr. Hunter said. The county of Sonoma is pursuing its first sale of bonds.
“One or two sales of bonds will establish this class of assets, then it will be bombs away and banks will rush in to buy them,” Mr. Hunter said.
Lockheed Martin will offer engineering and project-management services for larger projects to meet and verify reduction targets.
Energi will investigate the engineering analysis and design underlying the PACE assessments then issue energy savings warranties, guaranteeing that the projects will achieve the savings promised. That backing allows smaller engineering companies without the financial horsepower to achieve investment-grade credit ratings to bid on projects that are destined to have high-quality investment ratings. Hannover Re will back those warranties.
Mr. Strachan and Mr. Hunter, founder of what was then called Sonoma National Bank, in 2006 created the Green Energy Loan program led by Exchange Bank, First Community Bank and three others. However, the program was based on residential solar installations and relied on home-equity loans. That was the year the housing market bubble started to burst, and such loans became impractical as property values plummeted.
Then came California’s PACE district-enabling law, Assembly Bill 811 of 2008. One of the first few PACE programs was the Sonoma County Energy Independence Program, or SCEIP. It was launched in March 2009 and has funded more than $50 million in projects to date. Recently retired county of Sonoma finance and tax chief Rod Dole, nationally recognized as a PACE pioneer, is co-chairman of Ygrene’s board of directors.
The attention of advocates for energy-efficient buildings has turned to commercial and industrial buildings after federal home loan regulators in the middle of last year objected to the security position under PACE assessments. The case is pending in federal court.
Clean Fund, which has a funding pool of more than $250 million, this fall is financing a $1.6 million bond through the Sonoma County Energy Independence Program, one of the first PACE programs started, for a 1-megawatt solar-electricity project at Sonoma Mountain Village in Rohnert Park. It is a first for this new model of owner-arranged PACE financing, rather than the local PACE program funding the project.
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