Its New! Its Green! Its Finance! Property Tax Assessments as a Solar Finance Mechanism

Photo credit: istockphoto

I’ve spent quite a bit of time on the road recently. And there are a lot of great green finance ideas percolating out there (still…), but they all lack the key buzzwords: committed capital (heavy stress on the ‘committed’).

Nonetheless, its still good to stay on top of areas where financial innovations are being created that benefit green real estate indirectly: in “adjacent space” finance, like renewable energy, for example. Let’s take a look at one of the new green finance ideas that’s gaining traction: municipal financing of residential solar PV installations.

Green Financial Innovation from The Government?

Much buzz is out about the State of California Assembly Bill 811 (“AB 811”). When passed, the bill promises to authorize all California cities to be able to offer their residents solar PV financing using increased property tax assessments on their homes.

Now that Berkeley, the originator of this concept, announced such a program last October, several other cities including San Francisco, Santa Monica, Santa Cruz and Palm Desert have either passed similar programs or announced that they are on their way to providing similar financial services to their residents.

While they vary on the particulars, the municipal solar finance programs generally promise homeowners some appealing features:

• Long-term lower-cost financing: Homeowners would be able to get 20-years to pay for solar PV installations. The interest rate on the loans are priced off the City’s municipal bond rate, its own cost of capital, which can be quite lower than an individual consumer’s typical cost for credit. The potential tax deductibility of interest payments on this loan can make help to make muni solar financing an attractive option for homeowners.

• All credit is okay: The homeowner’s credit rating is not a qualification factor - the property’s tax capacity is. The repayment obligation stays with the property upon sale, so the loan benefits are transferable. The thinking here might be to help make solar financing more widely available to residents regardless of personal financial circumstances. Since property tax liens have priority over even first mortgages, then the repayment of the solar loan can be considered well-secured. However, ‘cash is king’, as the saying goes, so I’m pretty sure that some form of income verification and repayment ability of the individual consumer has to be factored into the loan decision.

Step-by-step Example

Here’s a sketch of how the loan would work for you in Berkeley, for example:

1. You go to the local bank for a loan for your solar PV.
2. The bank gives you the loan at the city’s municipal bond rate, approximately 5%, or processes the paperwork on the City’s behalf and then passes through the City’s money to you (the exact funding logistics are still being figured out).
3. The rate you pay is lower than what your bank would typically charge you as a consumer for a similar loan because the City is effectively borrowing “in bulk” from the bank on your behalf (aggregating your solar loan with those of all your neighbors) and the repayment obligation is considered pretty secure.
4. You make payments on the loan via an increased assessment on your property tax amount over 20 years.
5. Enjoy clean energy!

The Math

Mark Bollinger, of California Clean Energy did a fantastic write up recently on this, answering the question of “so is it really a good deal for the homeowner and to what extent?”

Basically, his analysis indicated that a municipal solar loan is a great deal for homeowners in comparison to the terms of typical unsecured consumer loans because the unsecured loans come with shorter repayment periods and higher interest rates. The range of pricing on comparable alternatives ranged from 0.5% to approximately 2.5% over the estimated cost of a muni solar loan in Berkeley.

Bollinger’s analysis devoted substantial time determining whether this type of financing would cause homeowners to lose access to the up to $2,000 tax deduction provided by the Federal Investment Tax Credit and worsen their economic deal overall. That’s a moot point now, since this incentive is set to expire at the end of this year anyway.

This type of program might become even more meaningful for advancing consumer adoption of solar energy, since as of 12/31/2008, there will be fewer financial incentives out there that can help cover the upfront cost of installing solar PV.

The Green Journey Take

We posted earlier this year about cities trumping the federal government as the drivers of innovation in managing climate change. Muni solar finance is a perfect example, deserving kudo’s for original, beneficial thinking with real (potential) impact.

Basically, if this financing program becomes available in your city, depending upon your city’s credit rating, it could represent a great subsidy – you get clean energy at the city’s cost of credit.

And there are potential strategic implications here for the financial community. Banks should think long and hard about the fact that this financial product is being initiated by sponsors with significant dollars, regulatory power and a great cost of capital. They are effectively being bypassed as a meaningful source of funds for a sector within the exploding renewable energy industry.  In this scenario, they function as mere vending machines for the city’s money – yes, muni solar finance could represent a form of disintermediation out of a key growth industry.

Of course, AB 811 has not finally passed yet, so we’re still dealing with these promising, isolated examples. But I think the horse is out of the barn on the concept and we’ll being seeing these great ideas take shape in one form or another.

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