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

Because of the enormous popularity of last week's post on green project finance--Let's Make A Deal--Top 10 Rules Of Green Project Finance--I have decided to do a series on the various aspects of green project finance. 

Today we will discuss alternative financing mechanisms for green projects.  Over the next few weeks, I will do posts on incentives available for green projects, an update on the PACE controversy, and the basics of renewable energy finance.  If you have suggestions for other posts you would like to see as part of this series, feel free to email me. 

Please note, I am not a finance professional, and the goal of these posts is simply to give a high-level overview of potential financing mechanisms.  As with all financial decisions, please consult your financial professional and attorney for advice specific to your project.  And now, without further adieu, a primer on alternative green financing mechanisms.

Basically, there are only a few mechanisms for financing projects.  Self-finance (your bank account); equity finance (someone else's bank account); debt finance (the bank); government finance (Uncle Sam's bank account); and grant finance (your parents' third party bank accounts). 

These basic mechanisms are no different for green projects.  However, there are some interesting variants that have developed for financing green projects of various types. Many of the financing concepts are not mutually exclusive.  To the extent that one of the models, like energy efficient mortgages, is applicable mostly to a specific sector, it can be used as a model for a specific project's financing arrangement with a particular financier. 

Leases

For commercial scale (and even residential) green and renewable energy projects, variants on leases have become an interesting project financing model. Essentially, a provider leases the equipment (typically  to the owner of a facility through a long term lease), which reduces the up front costs.

There are a wide variety of leases available, and the decision among which lease is the best solution is largely based on tax and payment considerations.  Most leases radically reduce or eliminate up front costs.  Some leases allow the lessee to take advantage of the tax incentives, renewable energy credits and depreciation on the green equipment, others do not. 

For a great overview of lease variants for renewable energy projects, see here.

Performance Contracting

Performance contracting is essentially a loan from the provider of the green/renewable equipment (known as an Energy Services Company, or ESCO) that is paid for out of the savings or benefits of the green project.  For example, suppose you want to install energy efficient improvements on a facility which will cost $1000 and will save $100 per year.  Typically, the ESCO arranges the financing, and you pay the ESCO through reduced energy bills, sharing the energy cost savings over a predetermined length of time, after which all of the energy savings revert to you.  The ESCO often guarantees the energy savings from the project. This mechanism is used for both energy efficiency and renewable energy projects, and can be used with projects of almost any scale. The DOE has a handbook on performance contracting available here.

Grants In Lieu

 As part of the Stimulus bill, the Department of Treasury made available "1603 grants" which are grants in lieu of tax credits which reimburse up to 30% of the cost of installing certain renewable energy projects. Environmental Leader summarizes the 1603 grant program here:

The grant is 30 percent of the full cost of the intended solar system. Without the grant, system owners could still claim the 30 percent as a tax credit, but some businesses weren’t profitable enough to make use of the full tax credit. This grant now keeps all businesses eligible for the 30 percent incentive, not just those with enough profits (or those with financing partners with enough profits).

The full description of the program is available from the Department of Treasury.

 Energy-Efficient Mortgages And Energy Improvement Mortgages

A form of debt financing, energy efficient mortgages (and their friend, Energy Improvement Mortgages) work on the premise that implementing energy efficiencies on a property will free up cash which can pay down a debt.  The Department of Energy has a great handbook and other resources available here. HUD has qualifications guidelines, approved lenders, etc. available here.

Mortgageloan.com has a nice overview here:

Green, or “Energy efficient” mortgages, let you borrow extra money to pay for energy efficient upgrades to your current home or a new or old home that you plan to buy. The result is a more environmentally friendly living space that uses fewer resources for heating and cooling and has dramatically lower utility costs...At this time, Energy Efficient Mortgages aren’t second mortgages. Though they are created separately from your primary mortgage, they are ultimately rolled into your primary mortgage—so you only make only one payment per month.

Technically, energy efficient mortgages:

give borrowers the opportunity to finance cost-effective, energy-saving measures as part of a single mortgage and stretch debt-to-income qualifying ratios on loans thereby allowing borrowers to qualify for a larger loan amount and a better, more energy-efficient home.
 

And energy improvement mortgages:

are used for existing homes and allow borrowers to include the cost of energy-efficiency improvements in the mortgage without increasing the down payment.
 

The problem with energy efficient mortgages is that they are pretty small scale. For example, the FHA program only backs EEMs for one to four units.

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As I mentioned here, there has been a lot of tongue wagging on the internet about LEED performance issues.  Yesterday, Rob Watson, USGBC Board Member and Greenerbuildings.com Executive Editor responded. The gist of his response is that critics of LEED should really be participating in improving it:

The thing that really pisses me off is when people who should be helping something like LEED succeed cut it down. The only thing that benefits is the status quo. So stop your whining and moaning and put your energy into moving toward what Elaine Gallagher Adams calls the seeds of the municipal carbon economy where LEED is playing a key role in getting buildings beyond code minimum.

Many of Rob's points are good ones--tearing down LEED without providing constructive suggestions for how to improve the problem is about as useful as throwing rotten tomatoes.  Also, critiques coming from those that are not engaged in the processes for developing the standards--be it USGBC, ICC, ASHRAE, etc.--may not be fully informed about the efforts that are ongoing to fix the issues, and those critics certainly are not participating in the hard work that is necessary to build something, which is much more difficult than tearing down what others have done. As Secretary of the Delaware Valley Green Building Council, member of USGBC's legal advisory board and participant in the ICC green building code team, I try to do my part in being fully informed and active in the process of creating great green building standards.

However, Rob takes a very harsh stick to the dialogue about LEED and building performance:

People need to stop pretending they are providing any insight on issues LEED needs to deal with. Honestly, anyone who thinks that the issues of energy use per square foot, how to get at operations energy though a design standard, how to make energy modeling more representative of what actually happens in a building, etc. haven't been discussed at LEED since 1995, needs to stop sniffing whatever it is they're sniffing. Really . . . it's bad for you.

There is an important role for analysis and critique in any complex process.  Not only do outside observers from different points of view pick up on things that participants in the process may not see, they may have constructive suggestions about how to improve either the process or the underlying problem. 

But even thoughtless criticism has a place.  It serves as an important temperature gauge for the institution about how well it is communicating its message, and where opponents to a given position may have a toehold.  The gun-toting, expletive shouting health care contrarians may not have much constructive to say about how to fix the healthcare system, but they gave a big indication of the fact that Obama's message was not being effectively received, and where the plans needed to be shored up. 

The New York Times article was, as Rob and I have noted, old news to those of us who have been working in this field.  But it gives the USGBC an excellent opportunity to highlight the efforts it has made, as Rob notes, for years to manage the energy issues, and to spotlight buildings which are performing well.  When the Grey Lady is choosing to report on energy performance, you know you have made it into the mainstream.  Now the USGBC should take its publicity--good and ill--and, like Paris Hilton, use it to promote the brand and move green building forward. As Oscar Wilde once said, "The only thing worse than being talked about is not being talked about."

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Although many green building experts have been discussing the issue of whether green buildings are performing up to their claims for some time, the mighty grey lady spoke on the issue this week and set the blogosphere humming. The New York Times article comes in the wake of the USGBC's announcement that it would begin to track the performance of LEED buildings after they have been certified, and potentially to revoke the certification of those buildings which failed to perform, which also kicked up a lot of discussion. On top of all this, ACE announced that it would begin to guarantee the certification of green buildings it was involved with.

These events have an important nexus--risk of liability.  If the USGBC tracks building performance, failure to perform up to the requirements now brings with it the threat of decertification.  In the past, no one was really tracking the claims and there was no consequence for failure, except PR embarassment. Now that design professionals guarantee achievement of certification, failure to do so brings enhanced contractual liability as well (although ACE seeks to limit its liability to a refund of its LEED administration fee, it remains to be seen if this limitation would hold, especially if the failure to acheive certification were due to the professional negligence of ACE).

To protect against the risk of liability, professionals turn to insurance.  As I reported here on Monday, Argo Insurance Brokers and Lloyd's of London are looking to fill this niche by bringing to market the first green professional liability policy for architects and engineers.  Among other things, the policy includes technical consulting, site selection, water efficiency, and other sustainable services as "covered services" under the policy. In addition, it "specifically includes coverage for guarantees and warranties of achievement of green certification."  Thus, through the Argo policy, architects and engineers can now manage their risk. 

On the whole I think the Argo policy is progressive and a great tool for design professionals looking to go green.  If I were an owner, I would want the professionals I engage to have this coverage.  However, I would like to see more explicit language in the policy regarding the "coverage for guarantees and warranties of achievement of green certification," particularly as it relates to performance after certificate of occupancy.  The Argo/Lloyd's policy is probably just the first of its kind in this area, and it will be interesting to see the policy language develop over time.

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