For commercial property owners, replacing outdated energy equipment means an expensive upfront capital expense that only yields operational savings — such as lower utility bills and maintenance costs — over time. In an operating-expense budget of one to three years, most energy upgrades don’t
pass financial muster, and property owners continue to put resources into patching inefficient,
underperforming equipment. When the equipment ultimately fails, odds are it occurs outside
of regular mortgage- or business-financing cycles, leaving owners scrambling to cover these
costs with cash, equity or expensive credit options.
Green banks are public-private partnerships that have emerged in the past five years with
the aim of tackling this challenge head on as an opportunity for capital markets, particularly
conventional commercial banks. Connecticut Green Bank, the first green bank in the nation,
was established by the Connecticut Legislature in 2011 with the directive to create new
financing mechanisms for making buildings more energy efficient. Critically, it does so with
limited public subsidies.
New financial products
While subsidies for clean energy — in the form of tax credits or utility rebates — have existed for
decades, they only cover a portion of equipment upgrades, leaving the remainder on the shoulders
of property owners. Meanwhile, financial institutions have not picked up on what the Rockefeller
Foundation and Deutsch Bank Climate Change Advisors group estimated to be a $72 billion capital-investment opportunity in equipment replacement for commercial properties alone.
There are two key reasons for this. First, the vast majority of commercial-property ownership
companies are unrated, posing a credit-underwriting challenge for financiers at scale. Second,
conventional commercial banks are unfamiliar with clean-energy technologies, the construction
timelines associated with their installation and the risks related to energy-savings projections.
Green banks are public agencies that seek to leverage private capital by developing financial
products or underwriting procedures, thereby removing risks of clean-energy transactions for
private lenders. Green banks do not compete with conventional banks. Rather, they fill a gap in
capital markets, and create pathways for banks and private-lending institutions to become active
in clean-energy lending.
Green banks’ contributions to the marketplace span from providing loan-loss reserves and
interest rate buydowns, to creating structured-debt facilities. In the latter category, green banks
provide standard-technology and financial-underwriting guidelines, and sit at the bottom of the
capital stack as a credit enhancement.
Since the establishment of the Connecticut Green Bank, several others have been founded,
including the NY Green Bank, the Rhode Island Infrastructure Bank and the New Jersey Energy
Resilience Bank. The Coalition for Green Capital estimates that these green banks and others have
spurred more than $2 billion of clean-energy investments in the U.S. in the past five years.
One financing product that has been successfully supported by green banks is Commercial
Property Assessed Clean Energy (C-PACE). In many ways, C-PACE is the ideal public-private
partnership because it requires no deployment of green-bank capital and instead relies on
the public-agency status of green banks, as well as local taxing authorities, to create a secure
investment vehicle for private lenders.
C-PACE legislation, which has been adopted by more than 30 U.S. states, classifies energy-related upgrades to commercial buildings as a public benefit, similar to water lines or sewers.
This means the financing for these upgrades can be secured in a similar manner, as a long-term
special assessment on the property. As a special assessment, C-PACE payments are typically
billed and collected as part of property-tax bills.
In some states, current or past-due C-PACE payments are senior to other property liens, including
mortgages. Importantly, however, C-PACE financing does not accelerate and the payment obligation
transfers to the new property owner after a sale or foreclosure. In the event of foreclosure, mortgage
lenders are only subordinate to any current and past-due assessment payments, while the remaining
C-PACE loan amount stays with the property.
Genevieve Sherman is head of new markets and partnerships for Greenworks Lending.
She also is managing director of PACE Financial Servicing, which works with states
and municipalities to design, launch and administer commercial PACE programs.
Sherman spearheaded the implementation of the newly created C-PACE program at
the Connecticut Green Bank from 2012-2014 and was its director from 2015-2016.
Reach Sherman at (917) 968-0948 or firstname.lastname@example.org.
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