Financing Energy Improvements in Public Buildings Post “Stimulus.”

There has never been a better time for local and state government entities (including public schools) to start their energy efficiency and renewable energy projects. The American Recovery and Reinvestment Tax Act of 2009 (ARRTA), passed by Congress in February, significantly expands the financing options available to state and local government agencies, including public schools. With the expanded authority granted by ARRTA and previously by The Energy Improvement and Extension Act of 2008 (EIEA), a public agency or institution can theoretically get 0% interest financing. For qualified projects, in lieu of interest on a bond, the Federal government would provide the bondholder tax credits for the interest normally paid. The local or state government or public school would only have to pay back the principal.

Financing is best tailored to the project and the project owner, however, there are several options available - from standard tax exempt lease purchase to power/comfort purchasing agreements - that provide the public entity the opportunity to leverage energy tax credits. Following are some of the options that may be applicable:

• Clean Renewable Energy Bonds (CREBs). CREBs are tax credit bonds used for capital expenditures incurred by governmental bodies, public power providers, or cooperative electric companies for a “qualified renewable energy facility.” Qualified facilities must generate electricity from a renewable source including wind; solar; biomass; geothermal; small irrigation; hydropower; landfill gas; marine renewable; and trash combustion. CREBs were first authorized in 2005. ARRTA extends the funding available from $800 million to $2.4 billion to be allocated as one-third to State, local, and tribal governments, one-third to public power providers, and one-third for electric cooperatives. To qualify, pre approval from the IRS is required. As described earlier, with CREBs, the borrower pays back only the principal of the bond, and the bondholder receives federal tax credits in lieu of the traditional bond interest, theoretically 0% interest rate.
• Qualified Energy Conservation Bonds (QECBs). First authorized in 2008 under EIEA, QECBs can be used by state, local, and tribal governments to finance certain types of energy related projects. Essentially, QECBs are tax bonds that can be used for “qualified conservation purposes” with a fairly broad definition including energy efficiency capital expenditures, research grants, and demonstration projects that implement or develop “green” energy technology that reduce greenhouse gas emissions and public energy efficiency education campaigns. Much like CREBs, QECBs are also theoretically issued with a 0% interest rate – the borrower pays back only the principal of the bond, and the bondholder receives federal tax credits in lieu of interest on the bond. ARRTA increases the limitations from $800 million to $3.2 billion allocable among the States by the Treasury on the basis of population.
• Qualified School Construction Bonds (QSCBs). Created under ARRTA, QSCBs are a new form of tax credit bonds issued by state or local government for the construction, rehabilitation, or repair of public school facilities or acquisition of land for a public school to be constructed with QSCB proceeds. A total of $22 billion is available for QSCBs ($11 billion in each of 2009 and 2010). QSCBs are issued at par value again with the bondholder receiving Federal income tax credit (taxable as interest income) in lieu of bond interest.
• Qualified Zone Academy Bonds (QZABs). In place before ARRTA, QZABs are a form of tax credit bonds whose proceeds are used to rehabilitate, repair, or equip schools, with a required 10% private matching contribution. As with QSCBs, QZABs are issued at par value with the bondholder receiving Federal income tax credit (taxable as interest income) in lieu of bond interest. ARRTA extends the limitation from $400 million to $1.4 billion for each of 2009 and 2010. A qualified zone academy is any public school (or academic program within a public school) below college level that is located in an empowerment zone or enterprise community and is designed to cooperate with businesses to enhance the academic curriculum and increase graduation and employment rates.

There are several other options that have been enhanced by ARRTA available depending on the specific project such as Build America Bonds, Recovery Zone Economic Development Bonds, and US Department of Energy Loan
Guarantee Program.

ARRTA also extends the business tax credits available for certain renewable technologies such as geothermal heat pumps (10%) and solar (30%). While public entities do not directly benefit from tax credits, alternative financing options such as Power of Comfort Purchase Agreements offer the ability to leverage such incentives. Under such agreements the renewable energy asset will be owned by a private for-profit entity as part of a design, build, own, operate and maintain agreement. The municipal or school entity would not pay any upfront cost, instead will enter into a service agreement (for solar electricity of conditioned space for example) with the private for-profit entity to use the asset for a monthly fee. The for-profit entity will take advantage of the tax credits and reflect that in the monthly service fee.

In summary, while some provisions such as tax credits are good for several years, many of the ARRTA enhancements are valid for 2009 and 2010 only. As such this is the best time to start your energy efficiency or renewable energy upgrades.