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Banks OK with 'clean energy financing districts'

March 12, 2011

A bill passed by the state Senate that would allow federal grants and private investments to finance residential and business clean-energy projects has the blessing of the Indiana Bankers Association.

Just why are banks so concerned about solar-panel or geothermal systems?

Because virtually identical measures introduced in both the House and Senate would have allowed debt of a project lender, such as private investors, to take precedence over existing mortgage debt.

That could have been a crushing blow to banks, which typically trail only municipalities in collecting property taxes when owners default on mortgages.

But the Senate version, sponsored by Sen. James Merritt, R-Indianapolis, was amended to put mortgage lenders ahead of project funders the day before the bill passed Feb. 22. It since has been referred to the House.

“If we don’t have that priority, we’re not going to make the loan,” IBA lobbyist Amber Van Til said. “Or it will have to be priced accordingly.”

Translation: higher mortgage rates to compensate for the additional risk of not being repaid in a foreclosure.

The Senate version and House Bill 1457, which has been assigned to a study committee, were filed as a way to help property owners make clean-energy upgrades that otherwise wouldn’t be practical.

Sponsors originally put lenders of clean-energy projects ahead of banks because they intended for municipalities to be the funding providers.

Both measures would have allowed municipalities to form “clean-energy-improvement financing districts” to foot the bill for clean-energy retrofits. A special tax levy would be placed on the property.

Merritt’s bill was gutted in committee, however, removing its original authorization to allow municipalities to issue bonds to fund improvements. Instead, SB 260 allows municipalities to solicit private equity, federal grants and loans.

Concerns were raised about risks to taxpayers from homeowners who default.

“The banking industry is very effective in talking about mortgages being a first priority,” Merritt said. “That would have hampered the bill, if we did not amend the initial language of the bill that came out of committee.”

The Indiana chapter of the American Institute of Architects supports the measure but preferred the bill in its original form. The chances of the bill actually creating economic development opportunities would improve if investors were listed as senior lien holders, argued Jason Shelley, executive director of AIA Indiana.

“It doesn’t have the teeth that we would like to see,” he said, “but at least something’s moving.”

Forms of the legislation have passed in at least 23 states as a way to make clean-energy and energy-efficiency upgrades affordable by stretching payments over 20 years or more.

Currently, investments such as solar panels, which can cost $30,000 or more, are not practical for homeowners because many don’t live in a house long enough to earn a return on the investment.

In such a district, however, a property owner might be inclined to make a renovation because the cost would be inherited by a subsequent owner of the house, with the special levy remaining on the house.

“The key is not that the program itself is bad,” Van Til said before the bill was amended. “It has great merit. The problem is with the lien structure.”

Indeed, such financing techniques, better known as Property Assessed Clean Energy, or PACE, face challenges on the national level, as well.

The Federal Housing Finance Agency in July essentially put a halt to PACE financing for home retrofits and renewable energy projects in the United States.

The agency, which oversees lending activities of mortgage giants Fannie Mae and Freddie Mac, issued guidance to lenders across the country stating that PACE programs are risky and inadvisable.

The agency’s position that the liens would trump the bank mortgage, meaning banks would be at risk of losing more money, reflects the concerns of the Indiana Bankers Association.

At least one state, Maine, has altered its program to make energy loans junior to existing debt.•

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