Green Building Law Blog : Green Building Lawyer & Attorney : Shari Shapiro: Calliope Communications, LLC

In Part 3 of GBLB's green finance series (find Part 1 on Top 10 Rules of Green Finance here and Part 2 on Alternative Green Financing Mechanisms here), I will address government incentives and other programs.  I will also highlight some factors that may make green incentives go from rare bird to endangered species. 

As always,  I am not a finance professional, and the goal of these posts is simply to give a high-level overview of government incentives.  As with all financial decisions, please consult your financial professional and attorney for advice specific to your project. 

The Good News About Government Incentives

1. Programs are available at almost all levels of government--The Federal government offers grants, tax breaks, loan guarantees and technical assistance for green building and renewable energy components of commercial, residential and industrial projects.  The Office of Energy Efficiency and Renewable Energy has a pretty user friendly site. States also run incentive programs, and many states have renewable energy credit trading programs (also known as RECs or green tags or SRECs, etc.) which enable producers of renewable energy to get an extra stream of income from their property. For special groups, like Native American Tribes and Veterans, additional resources are available.
2. Some programs come from unusual sources--Not all green building and renewable energy incentives come from government.  Utilities sponsor a lot of programs for both commerical and residential projects (for example, see the programs available from PECO here).  Some non profits and even faith-based organizations are providing green incentives.  A loyal Twitter follower highlighted this program by the Jewish Free Loan Association (available to those of any faith) that provides interest free loans of up to $5000 for energy efficient upgrades for homes and small businesses in the Los Angeles area.
3. Don't neglect technical assistance programs-- One of the most underutilized incentive is technical assistance. Of course, homeowners and businesses can access technical assistance programs, but also municipalities, small businesses  and Native American Tribes can get thousands of dollars in technical assistance for free or reduced cost.  For example, in New York Con Edison provides small businesses with a free energy audit. This can ensure you maximize the benefit of your green project both environmentally and financially. 

And The Bad News

1. The new House is seeking to cut almost all Federal green incentives--According to Green Building Chronicle,The Republican Study Group, made up of more than 100 GOP House members, is targeting the wholesale elimination of funding for:

• Department of Energy Grants to States for Weatherization, $530 million annually;

• EPA’s Energy Star Program, $52 million annually; and

• federal office space acquisitions (which have helped the government build a market for LEED-certified buildings), $864 million annually.

Just to be clear, in a bill seeking $2.5 TRILLION in cuts, these total savings would account for .14% of the savings.

2. States and municipalities are strapped for cash--Like the Federal government, states and municipalities are strapped for cash, and may cut their green incentives to provide things like trash pick up and police.  
3. Some programs are not worth the effort to apply--All programs require paperwork, verification and in some cases, prevailing wage rates.  Sometimes the benefit is not worth the hassle.  
4. Some programs reward green bling rather than cost effective green improvements--Some programs reward the installation of renewable energy components or other "green bling" as opposed to better  insulation or new windows.  It is key to do a cost benefit analysis of any proposed green project to ensure that it has the greatest return on investment.

For more information, the DSIRE database of Federal and state renewable energy and energy efficiency programs is always useful, and be sure to check your state and local environmental departments and local utilities.

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The first step to any green building or renewable energy project of any size is finding the financing to make it possible.  Since the bottom fell out of the economy, finding investors and financial institutions willing to finance building projects of any sort has been close to impossible.  Real estate finance prognosticators, however, indicate that 2011 will be a year to buy back into the real estate market.   According to a Wells Fargo report:

In 2011, we expect trends in commercial and residential real estate, two areas of the economy that have been significant drags on headline growth, to turn positive for the first time since the beginning of the recession. Despite being near record lows, housing starts will begin to gain momentum breaking 700,000 in 2011. The turnaround in housing is largely attributable to gains in employment, consumer income, as well as favorable demographic trends. Meanwhile, from the financing perspective, mortgage rates remain low and housing affordability remains high. Though broadly positive, these trends do not reflect a return to the boom years, which were characterized by excessive liquidity and perverse incentives.

Commercial real estate should begin to contribute to growth by the second half of 2011. Operating fundamentals for all major property types are either improving or showing signs of stabilizing. Leasing has picked up, rents are rising or stabilizing and sales have increased. Demand for high quality properties in choice locations remains exceptionally strong, which has helped pull prices higher for non-distressed deals. There are still plenty of troubled projects that need to be disposed of, however, and prices for distressed projects are likely to fall further once lenders become committed to cleansing their portfolios.

Green projects are an increasing percentage of new and rehab projects, and renewable energy projects have very attractive balance sheets in certain areas.  However, structuring financing for green building and renewable energy projects requires more legal creativity and effort than financing other types of more traditional projects. 

Let me give you an example.  Banks have been loaning money to companies to buy equipment for hundreds of years.  Every bank has a set of documents designed for this purpose, and a specific set of rules and requirements for deciding when to take on the financing risk, and how repossession would work in the event of default. 

Let's say Company A wants to borrow money from Bank B to buy a truck.  Company A gives Bank B information on the value of the truck, the value of Company A's other assets, and so forth.  Bank B goes to its set of standard form documents for equipment loans, confirms Company A's credit worthiness, and knows that it can repossess the truck and sell it for some known value in the event of default. 

Now let's say Company A wants to borrow money from Bank B to finance a solar array.  First, Bank B has to figure out what, exactly, it is financing.  Is a solar array equipment, like the truck, or construction?  Then, what value can Bank A put on the solar array?  The value of the solar panels on the resale market? The value of the electricity the solar array produces? How about the renewable energy credits (Banker A says to Banker B, "What's a Renewable Energy Credit?") Then comes the issue about how to handle default.  The solar array is worth a lot more in situ than it is as scrap, but Bank B has to figure out how to structure the relationship with its now-defunct borrower which would allow Bank B to get the benefits of the electricity and the RECs. 

The same concept is true for green building projects.  When examining a green building deal, what value, if any, should Bank B put on the potential energy savings from a high performance building?  Will the high performance building command higher rents?  LEED Certified or not certified? What happens in the event of decertification?

 A few rules for green project finance:

1. Find a bank or financial institution committed to green projects--Some banks now have financial arms that are dedicated to financing renewable projects.
2. Pick a model--It's easier to tweak an existing project finance model than to create a new one from scratch.  Construction? Equipment? 
3. Recognize the need for tweaks--Whatever the model (see #2), it will need to be tweaked for the unique features of green building and renewable projects.
4. Set out the deal terms in advance, particularly the obligations of the parties in the event of default.
5. Identify and address the roles of the lender and borrower with respect to any incentives or other government financing that is part of the project.  Each incentive has its own requirments regarding transferability and assignment, and ownership status is often an important factor.
6. Make sure your green project pencils out--Seems simple and obvious, but when seeking financing, it is important that the project actually be a wise investment. 
7. Provide as much data about the beneficial financial features of the green project as possible--The growing body of data about the financial benefits of green buildings and the balance sheets of renewable energy projects should enable borrowers and lenders to better evaluate the risks and benefits of green projects. 
8. Where available, use green specific financing tools, like energy efficient mortgages.  A good primer is available here.
9. Be prepared to cross-collateralize--There is so much risk aversion, that many financial institutions are seeks cross-collateralization of non-green projects to alleviate the fear, real or imagined, associated with financing green projects.  
10. Acknowledge a longer financing timeline--Getting all parties on the same page regarding the financing deal and the documentation may take longer than traditional projects.  But, as lenders and borrowers get more projects under their belts, this timeline will shorten.

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