With Washington stuck in gridlock on so many issues, innovative local government initiatives may offer the best hope for progress on job creation -- and energy independence. New programs recently announced by the cities of Los Angeles and San Francisco are both inspiring and instructive in this regard.
Working with the Clinton Climate Initiative (CCI) and the C40 Cities Climate Leadership Group (C40), both cities launched Property Assessed Clean Energy (PACE) programs to help property owners finance energy efficiency retrofits and renewable energy projects in existing commercial buildings. The programs forge public-private partnerships that aim to spur investment in our built environment, leading to significant energy savings and the creation of construction and engineering jobs. Together, Los Angeles and San Francisco Counties have two billion square feet of commercial building space that stand to benefit.
The potential market for energy efficiency retrofits in commercial buildings has been much discussed. The energy services firm Johnson Controls estimates that these buildings, on average, can be made 22 percent more energy efficient using commercially available technologies such as LED lighting. Capturing these savings would require $12 billion in annual project investment over the next decade. Yet, this potential has largely gone unrealized, due to the limited availability of capital for these improvements.
PACE programs address this challenge by allowing building owners to borrow funds from their local government to pay for qualified energy upgrade projects. Owners repay those funds (plus interest) through a tax assessment which is added to the property tax bill and secured by a lien on the property.
To date, local governments have borne the responsibility for arranging the up-front funds. But the Los Angeles and San Francisco programs utilize a different approach -- labeled "open-market PACE" -- in which the owner secures funds from private investors. Developed in large part by CCI and C40, the open-market model allows an owner to design a project on their own timeline and then negotiate financing of that project with any number of private investors. It is believed that this flexible approach will make PACE more attractive to commercial building owners, particularly those undertaking large, complex projects with long development cycles.
By leveraging the property tax system to secure repayment from owners, PACE investors can provide financing at more attractive rates and over terms up to 20 years, both of which were previously unavailable to owners for energy projects in existing buildings. The result is that owners can now more easily replace major equipment such as chillers and elevators, which have longer "paybacks" but which also lead to deeper savings.
In this era of government austerity, the programs represent a promising model for public-private partnership. They require no public funding beyond modest start-up costs; and once the local government sets up the program, the private sector can provide the investment capital.
To quell concerns about the property liens that result from PACE tax assessments, San Francisco and Los Angeles have taken great care to design programs that protect the interests of existing lien holders such as the first mortgagee. For example, both programs require written consent from existing lien holders before any tax assessment can be levied, further incentivizing owners to develop best-in-class projects that benefit all stakeholders in the property.
During the program development process, CCI and C40 facilitated active sharing of ideas and best practices between both cities, in an effort to quickly standardize the open-market approach. As a result, Los Angeles and San Francisco will utilize very similar transaction documents and eligibility requirements, allowing investors and contractors to work seamlessly across programs.
San Francisco and Los Angeles stand together with a wide range of local governments, entrepreneurs and investors that have already begun helping our nation put innovative financing tools such as PACE to work. The stakes are high: energy efficiency investment in existing commercial buildings could create 240,000 jobs in the U.S. over the next decade, and avoid some 128 million metric tons of annual CO2 emissions. Without question, PACE programs are gaining momentum and with effective implementation, have the potential to achieve these important results for our economy and environment.
Mr. Henderson is Director of Finance at the C40 Cities Climate Leadership Group, in partnership with the Clinton Climate Initiative.