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

You are a good green company.  You have dutifully installed a solar array on your facility, and use the energy it produces to power your manufacturing process. 

You proudly proclaim on your website, in your SEC filing or on your product packaging that you "use renewable energy."  You calculate your Carbon Footprint and deduct the emissions that would have been generated using conventional fuel.  

If, like most companies, you have sold the renewable energy credits (RECs) attributable to the renewable energy, you will potentially be in violation of Section 5 of the FTC Act (15 U.S.C. Sec. 45) (“Section 5”), which prohibits “deceptive acts or practices in or affecting commerce.” 

The Federal Trade Commission released the long-awaited fourth edition of the "Green Guides" on October 11, 2012. The purpose of the Guides is to provide a framework for companies to truthfully and non-deceptively market environmental and “green” products, packages, and services. A copy of the Guides is available here.

The Guides address green marketing in general and specific applications, including renewable energy (Section 260.15).  In one of the more controversial aspects of the Guides, the FTC advises that:

If a marketer generates renewable electricity but sells the renewable energy certificates for all of that electricity, it would be deceptive for the marketer to represent, directly or by implication, that it uses renewable energy.

Guides at § 260.15(d).

The FTC has concluded that renewable energy stripped of its carbon reduction and other environmental benefits is just energy. Thus, even if a company has a renewable energy installation on its facility, and uses the energy from that facility to power its manufacturing process, if it sells the renewable energy credits, it still would not be able to represent that it used renewable energy. In addition, any carbon offsets or emissions reductions could not be included in the company's calculation of its environmental impact.

This counter-intuitive result was roundly criticized in comments on the Guides:

Most commenters agreed that it would be deceptive for a marketer to represent that it uses renewable energy if it sold all the renewable attributes of the energy it uses. Most who addressed this issue, however, disagreed with the Commission’s proposed guidance. They argued that, even when a firm sells RECs, it should be able to market its role in generating renewable energy.

The FTC, in its response, defended its position regarding RECs, but said that a company hosting a renewable energy facility and selling the RECs would not be violating the FTC Act if it describes fully and accurately its role in the transaction.  Most companies, however, are not doing this. 

There is some evidence that the FTC is increasing its enforcement of false environmental claims. The FTC brought claims against four national retailers, including Amazon, Macy’s and Sears, that were allegedly selling textiles as made of bamboo when they were actually made of rayon. The companies settled with the FTC on or about January 3, 2013, paying a total of $1.26 million in penalties for the false advertising.

The FTC brought claims against Sherwin Williams and PPG for deceptively marketed their paints as free from volatile organic compounds (VOCs). According to the FTC, the base paints were VOC free, but tinted paint (which most customers buy) contained VOCs. The FTC settled the claims in October, 2012, and the companies were forced to change their marketing practices.

Given the frequency with which the Renewable Energy/REC rule is broken, it would be impossible for the FTC to police all of the violators.  However, In the context of other green marketing claims, the FTC may scrutinize a companies' representations about renewable energy and greenhouse gas reductions.  For companies that make public disclosures in Securities and Exchange Commission filings, this could be of even greater concern.

• Email This
• Print
• Trackbacks
• Share Link

I have tried to make simple and clear many complex legal topics before, including class action law suits and IRS tax-free bonds, but never have I faced this great a challenge. 

Apparently, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), which are in charge of setting new accounting standards for companies, have set in motion a rulemaking process which would require companies to list leases as assets and liabilities on their books.  These leases would include Power Purchase Agreements, Sale-Leasebacks of renewable energy installations and ESCO contracts. 

By putting these transactions "on the books," it has a variety of implications, including increasing the debt ratio of many companies, and increasing the disclosure and transaction costs associated with those efforts.  These implications may mean that companies are less willing to do renewable energy and energy efficiency transactions, and ESCOs and other companies have a harder time benefitting from the transactions. 

 The folks over at the National Renewable Energy Laboratory have done a detailed analysis of the rule changes here and Forbes had a more user friendly (if less detailed) piece here. 

• Email This
• Print
• Trackbacks
• Share Link

The United States is at a precipice with respect to public motivators for the green economy. Essentially, the carrot of public incentives or investment and the stick of potential mandatory regulation of carbon emissions are slated for elimination at the same time. 

Although we cannot know what this two part challenge to the green economy will do, it will certainly change its trajectory for the foreseeable future. 

First, of course, are the proposed revisions to the 2011 budget.  With respect to green building, slated for cuts are most programs that promote green building or which invest Federal dollars in green buildings directly:

• $3 billion of EPA funding overall
• $1.6 billion (nearly 20%) of the Federal Building Fund at the General Services Administration (GSA)
• $786 million (over 35%) of the Energy Efficiency and Renewable Energy (EERE) office at the Department of Energy (DOE)
• $250 million in funds for the Department of Housing and Urban Development (HUD) HOPE VI program, which leverages private sector dollars to transform existing blighted public housing into vibrant and livable communities.
• $10 million for the Energy Star program at the Environmental Protection Agency (EPA).

With respect to renewable energy, the proposed Republican budget bill slates for reduction or elimination over $900 million in investment. Among the programs slated for cuts or elimination is the Department of Energy Loan Guarantee Program for clean energy start up companies, established during the George W. Bush administration.  According to Forbes, DOE officials have said that eliminating this program would do away with 20,000 jobs, along with the benefits for the environment.

In addition to the direct cuts, at least four different proposals are pending (potentially up for a vote this week) restricting or eliminating EPA's ability to regulate greenhouse gases.  If the EPA is restricted in its ability to regulate greenhouse gases, one of the most potent motivators for investment in reducing carbon emissions through renewable energy, green buildings and other carbon reduction techniques will be eliminated.  

 The question will become not whether renewable energy and green building can compete without government subsidy, but rather whether renewable energy and green buildings can compete in the face of continuing subsidy to competing technologies like coal, oil, etc. 

According to the Center for American Progress, the proposed Republican budget will make few changes with respect to the $40 billion+ Government support of these technologies through tax incentives and other mechanisms. Fox News was unable to get a commitment from House Budget Committee Chairman Paul Ryan (R-WI) that tax breaks for oil and gas companies would be eliminated:

WALLACE: A lot of Democrats that are already saying, even before they’ve seen your budget, that you do all of this balancing of the budget on the spending side, and unlike the President’s debt commission, you don’t do it on the revenue side. Do you eliminate tax breaks? Do you bring in new revenue by eliminating, for instance, tax breaks for oil companies?

RYAN: We don’t have a tax problem. The problem with our deficit is not because Americans are taxed too little. The problem with our deficit is because Washington spends too much money. … So we’re not going to down the path of raising taxes on people. […]

WALLACE: But for instance, you will not eliminate tax breaks for Big Oil and Gas?

RYAN: Those are the kinds of details that we’ll come out later with, that the Ways and Means Committee will work on. We’re not going to go into the little details of which tax expenditure goes and which tax expenditure stays.

 [You can watch this portion of the interview on You Tube]

The next few weeks will be historic ones with respect to America's green future.  For better, worse or otherwise, these are interesting times which will mean changes for everyone in the green sector in the United States. 

• Email This
• Print
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments (2)
• Trackbacks
• Share Link

The wild west is alive and well, and in New Jersey. 

I have a client there who consults with farmers who own wide swaths of land and with renewable energy companies that are looking to develop solar farms on that land.  He describes the phenomenon as a "land grab," where the renewable energy companies are trying to tie up the land available for large scale renewable projects, and landowners are trying to find the best deal for their land.  The land grab is fueled, in part, by the favorable incentives New Jersey provides for solar projects, and a renewable energy portfolio standard of 22.5% by compliance year 2020-2021.

California--the site of the original gold rush--is primed to see another one.  On September 24, California regulators raised the state's renewable energy portfolio standard, the requirement that power companies obtain a certain percentage of their power from renewable sources,  to 33 percent by 2020.  California's renewable energy portfolio standard was already 20%. 

The fever for gold in them there hills (and valleys and rooftops) could soon spread nationwide.  Sens. Jeff Bingaman (D-N.M.), Sam Brownback (R-Kan.), Byron Dorgan (D-N.D.), Susan Collins (R-Maine), Tom Udall (D-N.M.), and Mark Udall (D-Colo.) introduced the Renewable Electricity Promotion Act on September 23, which would: 

install a renewable portfolio standard (or renewable electricity standard, in D.C. parlance) requiring states to generate at least 15 percent of their electricity from renewable sources by 2021

 DSIRE has a nice map with all the portfolio standards for states nationwide.

What does this mean? 

Where green buildings are concerned, higher renewable energy portfolio standards will mean that utilities are looking for additional sources of reneable energy, so it will pay for large scale projects like big box stores, hospitals and manufacturing facilities to incorporate solar into their designs.

Also, because the real estate market has been largely dead for big projects, open space that might have once been yet another shopping mall or housing development may be more likely to go to solar farms and other large scale renewable energy projects. 

But, optioning land for renewable energy projects does not mean that all the renewable energy potential will be realized.  For example, Goldman Sachs, no stranger to the speculation business, has tied up land in Nevada for solar farming:

A Goldman Sachs & Co. subsidiary with no solar background has claims with the BLM on nearly half the land for which applications have been filed, but no firm plan for any of the sites.
 

For the policy makers, the key will be to incentivize projects coming to fruition, not to facilitate  pyramid scheme of tying up land with the hopes of flipping it to later developers of power projects. The task is to balance spurring the growth of the renewables market without creating a solar bubble in the process.  

• Email This
• Print
• Trackbacks
• Share Link