Financing Options

AB811 (City Finance Program)

Gov. Schwarzenegger recently signed Assembly Bill 811, giving all California cities and counties the ability to offer low-interest loans for energy-efficiency projects and solar panels to homeowners and small businesses. Residents would pay back the loans through assessments on property tax bills; if they move, the outstanding loan balance is taken over by the new owner. Without the law, some California cities might not have been able to offer the loans for solar panels and efficiency improvements such as insulation, double-paned windows and efficient HVAC systems. While “charter cities” such as Berkeley and San Francisco have supreme authority over municipal affairs, California’s 370 “general law cities” are bound by state laws that might have been prohibitive.

AB 811 was inspired, in part, by a program proposed by Cisco DeVries, chief of staff for Berkeley Mayor Tom Bates, in October of last year (e-Newswire, 10/31/07). For cities interested in developing a loan program, there are a variety of funding options, including using their general fund, issuing municipal bonds or partnering with a utility to get financing, Alex Traverso, a spokesperson for Assemblyman Lloyd Levine, author of AB 811, told Greentech Media. California cities are already racing to be the first to issue the low-interest loans. Berkeley’s effort, called “Berkeley FIRST,” is in the pilot stage. Palm Desert, meanwhile, which is working toward a goal of reducing citywide energy consumption by 30% by 2011 (Power Plug, 4/04/08), has already started a list of interested residents. The city plans to provide loans for as little as $5,000, with no upper limit, for energy-efficiency measures and installation of solar panels.

AB 811 (Recap) - What's In It for You?

• You, as the owner of residential or commercial real property, can immediately enjoy a zero or reduced electric bill with no out-of-pocket expense to you
• If you sell your home or business, the new buyer can assume the payments, as you benefit from the increased equity at sale
• Loans have a minimum of $5,000 and the maximum for residential is 35,000 with commercial maximum of 100,000
• Loans are not subject to credit ratings or credit checks
• The interest rate is fixed at or near 7% and paid bi-annually through your property tax
• Loans can be used on a variety of energy efficiency improvements and the materials and labor required to install them properly.

Efficiencies now include:

• air conditioning and ventilation systems
• pool pumps
• energy efficient windows, doors and skylights
• window films
• tank less water heating equipment
• white roofs and coatings
• Renewable energy sources now include:
• natural gas fuel cells
• solar systems

Traditional Financing

A home equity loan (sometimes abbreviated HEL) is a type of loan in which the borrower uses the equity in their home as collateral. These loans are sometimes useful to help finance major home repairs, medical bills or college education. A home equity loan creates a lien against the borrower's house, and reduces actual home equity.

Home equity loans are most commonly second position liens (second trust deed), although they can be held in first or, less commonly, third position. Most home equity loans require good to excellent credit history, and reasonable loan-to-value and combined loan-to-value ratios. Home equity loans come in two types, closed end and open end.

Both are usually referred to as second mortgages, because they are secured against the value of the property, just like a traditional mortgage. Home equity loans and lines of credit are usually, but not always, for a shorter term than first mortgages. In the United States, it is sometimes possible to deduct home equity loan interest on one's personal income taxes.

There is a specific difference between a home equity loan and a Home Equity Line of Credit (HELOC). A HELOC is a line of revolving credit with an adjustable interest rate whereas a home equity loan is a one time lump-sum loan, often with a fixed interest rate. When considering a loan, the borrower should be familiar with the terms recourse and nonrecourse loan, secured and unsecured debt, and dischargeable and non-dischargeable debt.

US traditional mortgages are usually non recourse loans. "Nonrecourse debt or a nonrecourse loan is a secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable." A US home equity loan may be a recourse loan for which the borrower is personally liable. This distinction becomes important in foreclosure since the borrower may remain personally liable for a recourse debt on a foreclosed property.

Home equity loans are secured loans. "The debt is thus secured against the collateral — in the event that the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to satisfy the debt by regaining the amount originally lent to the borrower." Credit card debt is an unsecured debt such that no asset has been pledged as collateral for the loan. Using a home equity loan to pay off credit card debt essentially converts an unsecured debt to a secured debt.

When deciding upon a type of loan, the borrower should also consider if the debt is dischargeable in bankruptcy. For instance, US student loans are "practically non-dischargeable in bankruptcy".

This is a revolving credit loan, also referred to as a home equity line of credit, where the borrower can choose when and how often to borrow against the equity in the property, with the lender setting an initial limit to the credit line based on criteria similar to those used for closed-end loans. Like the closed-end loan, it may be possible to borrow up to 100% of the value of a home, less any liens. These lines of credit are available up to 30 years, usually at a variable interest rate. The minimum monthly payment can be as low as only the interest that is due.

Typically, the interest rate is based on the Prime rate plus a margin.

Unsecured Financing

An unsecured loan is a loan that is not backed by collateral. Also known as a signature loan or personal loan.

Unsecured loans are based solely upon the borrower's credit rating. As a result, they are often much more difficult to get than a secured loan, which also factors in the borrower's income. An unsecured loan is considered much cheaper and carries less risk to the borrower However, when an unsecured loan is granted, it does not necessarily have to be based on a credit score. For example, if your friend lends you money without any collateral, meaning something of worth that can be repossessed if the loan isn't repaid, then your credit score has zero to do with it, but rather the value of your friendship is at stake. Therefore the real meaning of an unsecured loan is that it is not backed by any object of value and is lent to you based on your good name. For financial institutional purposes, they may want to look at your credit score because they are not your friend and it is strictly a business transaction, therefore your good name may be associated with your historical payment history on prior debt, reflecting in your credit score.

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Power Purchase Agreement (PPA)

A legal contract between an electricity generator and a power purchaser. The power purchaser purchases energy, and sometimes also capacity and/or ancillary services, from the electricity generator. Such agreements play a key role in the financing of independently owned (i.e. not owned by a utility) electricity generating assets.

The seller under the PPA is typically an independent power producer, or "IPP." Energy sales by regulated utilities are typically highly regulated, so that no PPA is required or appropriate.

The PPA is often regarded as the central document in the development of independent electricity generating assets (power plants), and is a key to obtaining project financing for the project.

Under the PPA model, the PPA provider would secure funding for the project, maintain and monitor the energy production, and sell the electricity to the host at a contractual price for the term of the contract. The term of a PPA generally lasts between 5 and 25 years. In some renewable energy contracts, the host has the option to purchase the generating equipment from the PPA provider at the end of the term, may renew the contract with different terms, or can request that the equipment be removed.

One of the key benefits of the PPA is that by clearly defining the output of the generating assets (such as a solar electric system) and the credit of its associated revenue streams, a PPA can be used by the PPA Provider to raise non-recourse financing from a bank or other financing counterparty.

Commercial PPA providers can enable businesses, schools, governments, and utilities to benefit from predictable, renewable energy.

In the United States, the solar power purchase agreement (SPPA) depends heavily on the existence of the solar investment tax credit, which was extended for eight years under the Emergency Economic Stabilization Act of 2008. The SPPA relies on financing partners with a tax appetite who can benefit from the federal tax credit. Typically, the investor and the solar services provider create a special purpose entity that owns the solar equipment. The solar services provider finances, designs, installs, monitors, and maintains the project. As a result, solar installations are easier for customers to afford because they do not have to pay upfront costs for equipment and installation. Instead, customers pay only for the electricity the system generates. With the passage of the American Recovery and Reinvestment Act of 2009 the solar investment tax credit can be combined with tax exempt financing, significantly reducing the capital required to develop a solar project. Moreover, in certain circumstances the federal government will provide a cash grant in lieu of an investment tax credit where a financing partner with a tax appetite is not available.

Solar PPAs are now being successfully utilized in the California Solar Initiative's Multifamily Affordable Solar Housing (MASH) program. This aspect of the successful CSI program was just recently opened for applications.