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The Bond Buyer – San Diego Adopts Competing PACE Programs

The Bond Buyer

Wednesday, July 17, 2013  |  as of 1:02 PM ET

By Keeley Webster

LOS ANGELES — A program that uses bond financing to help commercial real estate owners finance energy retrofits on their properties took another stride forward as one of the leaders in the California industry placed a second $809,000 private placement bond.

Figtree Energy Financing released information Wednesday morning about the bond financing through a Property Assessed Clean Energy, or PACE, program that funds seven energy efficiency and renewable energy improvements in Fresno and Palm Springs.

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“Figtree’s success in financing these projects is sure to inspire property owners to investigate how PACE can improve their assets, increase cash-flow, provide a hedge against rising energy costs and benefit from any qualifying tax incentives,” said PACENow Executive Director David Gabrielson in a news release.

Figtree closed July 10 on the $809,000 private market bond with a Chicago-based commercial real estate finance company, according to Terri Steele, Figtree’s vice president of public affairs and media, who declined to name the company.

The projects financed are: solar, cool roof and lighting improvements at three commercial office properties in Fresno; an energy-efficient electrical upgrade for one light industrial property in Fresno; the nation’s first hybrid solar PV system at a Palm Springs resort hotel; solar PV to offset electricity use at a Palm Springs commercial office property and a energy-efficient HVAC system for a residential desert property.

The financing brings the total of Figtree-financed projects in California to more than $1.5 million since the company was founded in late 2011.

“We are tilling new soil here,” said Mahesh Shah, Figtree’s chief executive officer in an interview. “Getting to this point has taken considerable energy and tenacity.”

PACE was originally conceived in Berkeley, Calif., in October 2008 as a way to help homeowners pay the upfront costs of installing energy efficient technologies. Today’s PACE programs help both residential and commercial property owners pay for energy retrofits using longer-term financing, so the cost of the equipment can be paid through savings made through lower utility bills.

PACE programs stalled on the residential front, however, after the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, ordered the government-sponsored enterprises in July 2010 not to underwrite mortgages for homes with PACE loans. FHFA was concerned because the PACE liens are senior to the mortgage, so the PACE lender would be paid ahead of the bank, or Fannie or Freddie, in the event of a foreclosure. PACE liens are added to the property owner’s tax bill and stay with the property if it is sold, similar to the way that special assessments are done when new residential communities are built, to pay for infrastructure.

The state of California sued FHFA to reconsider its decision, but a judge ruled in FHFA’s favor earlier this year affirming the mandate.

With the uncertainty surrounding residential projects as a result of the FHFA mandate, Figtree and many other PACE finance companies, decided to focus on commercial real estate projects.

Sonoma and Riverside counties have continued with their residential programs, but most of the industry — including Figtree — has shifted to focusing on financing commercial real estate projects.

Shah’s company solved the problem of concerns from mortgage lenders by walking them through the due diligence on a proposed project before structuring the bond, he said.

The structuring of the bond will “make the packaging and sale of subsequent PACE bonds an indubitably more efficient process,” Shah said.

Figtree is forging a business model that will enable the company to aggregate projects into minimum $500,000 bond amounts and issue them in 60-day cycles.

The energy financing company has another $1 million worth of projects lined up for another bond it will privately place in 60 days, he said.

“There won’t be such a long waiting time, which has been a big issue with PACE funding,” Shah said. “We have created a structure so that on an ongoing basis it will be more efficient to issue bonds.”

The company has done a marketing outreach in different jurisdictions throughout California, engaged the capital markets and formed a new financing team since its inception.

“What we have done is create a whole new template with bond documents and a master indenture,” Shah said.

Over the past two years, Figtree has gone from operating in six markets to 36 markets in California.

It is also looking at opportunities to expand into Texas and Florida.

“We’re hoping Figtree’s California momentum compels municipalities across the U.S. to consider adopting PACE programs like Figtree’s to jumpstart job creation and clean energy adoption in their respective jurisdictions,” Gabrielson said.

The bonds placed so far using PACE financing are just the tip of the iceberg, according to Shah.

“We believe the market in California [for this kind of financing] is multi-billion,” Shah said.

The concept needed to have buy-in from the cities and the counties, the contractors and property owners, the mortgage lienholders — and then to reach the point where investors were willing to invest in this type of bond, he said.

A big driver for the market is that energy costs are continuing to rise while the cost of equipment needed to do energy-efficient retrofits like solar panels has been coming down.

“The costs are getting lower, so the economics on the projects look better,” Shah said.