City of Los Angeles

Commercial Retrofit Financing Program

Large Commercial Buildings
Overview of Municipal Financing

! In 2008, the CA State Legislature passed

Assembly Bill 811
! AB 811 allows municipalities to issue bonds to finance
energy & water efficiency projects in existing buildings,
and collect debt service payments through voluntary
special assessments placed on the property tax bill
! The municipality makes payments to bond investors as
assessments are collected
! The assessment by definition creates a super-priority
lien on the property (subject to existing lien-holder
consent)

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 20 States Now Have Similar Legislation

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Hawaii and Florida are believed to have pre-existing authority
but have introduced HB2643 (HI) and HB 7179 (FL) just in case.

*Note: list of emerging programs is not exhaustive

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LA Program Summary

! CRA/LA proposes to develop a PACE financing program

to incentivize private financing of energy efficiency
retrofits for large commercial buildings in the City of LA

! CRA/LA will administer the program on behalf of the City

! First large-scale commercial retrofit program in the country

! Significant potential to leverage public and private capital

! Significant potential for energy savings and green job

creation

! Help City meet aggressive State and City GHG emissions

reduction targets

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 Why Existing Buildings?

Age of US Building Stock

25%
90% > 20 years old

20%

15%

10%

5%

0%
1990-1995 1980-1989 1970-1979 1960-1969 1946-1959 1920-1945 Earlier

Year Built

*Source: Lawrence Berkeley National Laboratory

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 Why Existing Buildings?

! Buildings contribute 50 – 70% Typical Building Lifecycle Costs

of GHG emissions in urban
areas
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! There is excess energy and

savings trapped in existing
buildings, typically 20 – 50%

! Existing buildings use an

average of 25% more energy
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Why Commercial Buildings?
! Huge Potential Market Impact
! 179,465 commercial buildings in Los Angeles

! Huge Potential Environmental Impact

! Commercial customers consume 57% of total energy in LA

Power Usage in City of Los Angeles

Residential 7,664,151,881 kWh 31%

Commercial 14,114,463,865 kWh 57%

Industrial 2,367,714,148 kWh 10%

Other 472,004,941 kWh 2%

Total 24,618,334,835 100%

! Huge Financial Opportunity

! Potential energy savings and increased net cash flow represent
significant opportunity to leverage private financing

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 Financial Returns

14.7% IRR 13.5% IRR

Annual Savings Total Project
Total Project
($/yr) with NO with Tower-free
Tower-free Cooling
Cooling
$500,000 12.4% IRR
New Energy
Management
System
$250,000
12% IRR
New High
Efficiency Chiller
$100,000
12.5% IRR
Virtual Chiller
! IRR Plant
Chiller Controls -1.4% IRR
$50,000 Optimization Tower-free
Cooling
22.5% IRR
Refrigerant 11.9% IRR
$25,000 Additive Water & Sewer
13.4% IRR Conservation 500 tons
Variable Speed CO2 saved
Chilled Water Pumping

1 2 3 4 5 6 7 8 9 10 15 20
*Source: CCI Analysis, Confidential Client IGA, 600k SF, Office Campus - Tampa FL Simple Payback
(yr)

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Commercial Retrofit Challenge

! Challenges
! Limited access to capital
! Buildings owned by unrated, limited liability “shell entities”
! Collateral fully pledged under a mortgage and potentially
mezzanine investment
! Retrofit lenders have no security or dedicated repayment
source for their investment
! “Split Incentives” between owners and tenants
! Energy efficiency is still “new”
! Elevated hurdle rates…

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How Municipal Financing Can Help

! Removes “first cost barrier”

! Assessments (and energy savings) survive

transfer

! Provides retrofit lenders with repayment security

! May solve the “split incentive”

! Enhanced marketability

! Enhanced NOI

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 Risk Management

Risk Factor Do Nothing Retrofit

Utility Rate Risk Increase Decrease

No Change /
Business Risk / Uptime Decrease
Increase
No Change /
Re-Tenanting Risk Decrease
Increase
No Change /
Cap Rate at Disposition Increase
Decrease
Negative Exposure to Pending Legislation Increase Decrease

Functional Obsolescence Increase Decrease

Public Image / Reputation Increase Decrease

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 “Do Nothing” vs. Retrofit Scenario

Absolute Cash Flows Roughly Equal After Financing

1,000,000
During Financing Payback Period Payback Period
900,000
800,000
700,000
600,000
500,000
400,000 Cost Neutral Cost Avoidance
300,000
200,000
100,000
-
(100,000)
1 2 3 4 5 6 7 8 9 10
Year

Do nothing Retrofit
Absolute cash flow Debt service Cumulative cash flow
Utility cost + O&M Annual cash flow

*Source: CCI Analysis, USAA Real Estate IGA, 400k SF Office Building – Sacramento, CA

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Potential Benefits for the City

! Leverage Up to $70M of Private Capital

! Enable Financings of About 120 Projects

! Produce Significant Energy Savings:

! 288M kWh savings per year
! 139K tons of GHG emissions averted per year
! Electricity saved equivalent to that required to power 26,876 homes
for a year
! GHG reduction equivalent to taking 39,569 cars off the road

! Create or Preserve 835 Jobs

! Help City achieve its goal of reducing GHG emissions to 35%

below 1990 levels by 2030

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Los Angeles Program Design
! “Private Placement” Model
! City acts as a conduit for private investment
! Individual property owners negotiate financing terms with
investors of their own choice
! Owner-negotiated terms are reflected in a loan agreement,
funded through issuance of a bond by LA County
! Bond is sold to the investor that underwrote the deal in a
“Private Placement”
! Existing mortgagee may elect to underwrite and purchase
the bond itself
! Repayment is secured through a contractual assessment in
first position on the building’s property tax bill (subject to
mortgagee consent)

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Program Application Process

! Property owners submit the following:

! Project Summary and List of Measures
! Projected Energy Savings
! Amortization Schedule
! Measurement and Verification Plan
! Contractor Information
! Utility Incentives/Rebates Applied For
! Evidence of existing lien-holder consent

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 Program Mechanics

4. CRA/LA approves application

and forwards to County
CRA/LA County

6. County 8. County remits

structures bond coupon payments
according to to the investor
owner-
negotiated
terms, Investor
purchases the
1. Owner engages bond through
Contractor “private
placement”
EE Retrofit Building
Contractor Owner Lender Investor
5. Owner uses notification
2. Contractor conducts of eligibility to negotiate
audit and develops project-specific financing
scope of work terms with bond Investors
Encouraging Participation - RCx

! CRA will offer no-cost Phase I Retro-commissioning (RCx) to

building owners that implement a qualifying energy efficiency
retrofit project

! RCx gives building owners:

! Objective 3rd party opportunity assessment

! 3rd party consumption baseline

! Improved operational efficiency

! Capital budgeting plan

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 Leveraging Funds

! $3M in ARRA Energy Efficiency Sources and Uses of Funds ($M)

and Conservation Block Grant
(EECBG) formula funds

! $4.7M in State Energy

Program funds to fund loan
loss reserves, energy audits,
marketing, and administration

! CRA/LA will use funds to

establish $3.5M loan loss
reserve, which it is anticipated
can leverage up to $70M of
private capital

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Key Stakeholders/Partners
! Existing mortgage lien holders

! Retrofit lenders

! Building owners

! RCx and retrofit contractors

! Department of Water and Power

! Labor and job training partners (linkage to City’s green job

training initiative)

! Business and community groups

! Environmental and urban planning advocacy groups

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Next Steps

! Continued outreach to stakeholder groups (underway)

! County establishes county-wide contractual assessment

district (May 25)

! City establishes municipal financing districts within County

(after May 25)

! Develop program eligibility criteria and application

intake process (underway)

! Develop marketing strategy (underway)

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How to Get Involved

! Begin identifying potential projects

! Open up dialogue with existing lenders

! Begin to engage tenants

! USGBC CRE&F Committee

! PACE Now.org

! Contact CCI or CRA/LA

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 Contact Us

For more information about the commercial retrofit program, contact:

Jina Yoon

Manager of Capital Finance, CRA/LA

Phone: (213) 977-1750

Email: jyoon@cra.lacity.org

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