Fayetteville Launches Energy Improvement Program

FAYETTEVILLE -- A new financing tool is available for businesses and landlords planning to make energy efficiency upgrades to their properties.

City officials and representatives for the state's first energy improvement district formally launched the city's property assessed clean energy -- or PACE -- program Thursday.

The program allows property owners to borrow money for various improvements, including solar panels, energy efficient lighting, insulation, roofs and water heaters. Loans are paid over a period of up to 20 years via a special assessment on the owner's property tax bill.

"You're saving money from the energy expenses, and then you're paying that money back through your property taxes," Tom Applebaum, a representative for the newly formed company, A2E2 LLC, told about 25 contractors, energy auditors and other interested parties during a seminar Thursday at the Public Library.

A2E2 will administer the program and collect a commission on all loans. The Washington County Assessor's office will also charge a fee. The city isn't liable if borrowers default on their loans.

One of the attendees at Thursday's seminar, Bill Freeland, who owns Eureka Energy Audit in Eureka Springs, said the program has the ability to remove the upfront cost of energy improvement that can serve as a barrier for businesses wanting to upgrade.

Rather than a substantial down payment, as would be the case with traditional lending, borrowers can get a loan for 100 percent of the improvement and begin paying back the loan the following October when property taxes are due.

Freeman said the financing tool could be especially attractive to "mom and pop" businesses that don't have a lot of money set aside for capital improvement.

"A $500 or $600 per month savings for them is hugely important," Freeman said.

Another key aspect is the assessment stays with the property rather than with the borrower. Supporters say that makes the financing mechanism more attractive to business owners who don't know if they'll be in the same building for another 20 years.

Arkansas legislators in April 2013 enacted a law making the financing possible. The law enables cities, counties or the state to create energy improvement districts, which have the authority to issue tax-exempt bonds, loan money and link repayments to property taxes. Only two municipalities, Fayetteville and North Little Rock, have taken advantage of the legislation so far.

Fayetteville's energy improvement district formed about a year ago. Since then, its seven volunteer members set parameters for loans and selected an administrator for the program. The administrator, A2E2, formed as a partnership between the Arkansas Advanced Energy Association in Little Rock and Energy Equity Funding, a company administering St. Louis' program.

Fayetteville's energy improvement district will not immediately issue bonds. Instead, A2E2 will work with banks and other traditional lending institutions to provide loans to interested borrowers.

Steve Patterson, executive director of the Advanced Energy Association and a principal with A2E2, said interest rates will vary based on the length of the loan, its size and a borrower's credit history. Byron DeLear, chairman and CEO of Energy Equity Funding, said he expects rates to be in the 3 percent to 6.5 percent range.

DeLear said his company has administered roughly $10 million worth of the loans in St. Louis since summer 2013.

Energy Equity Funding's first project was a boutique pet store that borrowed about $100,000 to install rooftop solar panels. According to the company's website, the panels will produce more than 11,000 kilowatt-hours of electricity annually, enough to power 35 personal computers or 264 compact-fluorescent light bulbs each year.

DeLear also described a much larger project. Prologis, an industrial logistics real estate company, borrowed $1.4 million to retrofit a commercial office tower in San Francisco, where the company is headquartered. The money was used to replace lighting fixtures, install rooftop solar panels and overhaul the building's heating, ventilation and air-conditioning system. According to estimates, the upgrades are projected to reduce the building's utility bills by about $98,000 annually.

DeLear said, aside from monetary savings, the program's financing can grow property values, reduce energy consumption and create jobs for companies that would be doing the retrofitting.

"We view PACE financing as, say, five years from now, it's going to be a normal portion of every single real estate development," he added.

The financing mechanism isn't yet equipped for single-family homeowners in Fayetteville.

Because repayment is made as a special assessment on borrowers' property tax bills, a lien from the energy improvement district takes priority over a primary mortgage lender's lien.

That has caused concern for the Federal Housing Finance Authority, the agency regulating Fannie Mae, Freddie Mac and several home loan banks.

James Lockhart, the authority's former director, issued a 2009 guidance letter saying, "These loans create an additional potential for the loss of a home through a tax sale or foreclosure if the consumer cannot meet the extra debt burden."

Local supporters, including Mayor Lioneld Jordan, still want homeowners to be able to take advantage of the program eventually.

"We remain committed to developing a residential PACE program as soon as the federal government acts to remove barriers," Jordan said Thursday.

It's yet to be seen how many property owners will use the new financing tool.

None have signed up for the program yet, but John Coleman, director of the Northwest Arkansas regional office for Viridian, a green building consulting company, said Thursday he has several clients who have expressed interest.