Local Improvement Charges, Part II
By: Sonja Persram, BSc., MBA, LEED AP - Friday, June 15, 2007
Source: Sustainable Alternatives Consulting Inc.
(To review the first part of this two-part article, click here.)
In Canada, 90 percent of buildings are existing properties (the other 10 percent are new construction). Given the enormous concerns about GHG emissions and energy consumption related to climate change, as well as the logic of using green building measures like daylighting to reduce employee costs via productivity gains, it is vital to find a way to green existing buildings which bypasses some of the major challenges.
One such challenge is to help owners such that the costs of greening are covered by the savings. Another is to find a solution so that an owner does not postpone greening a property even if the ownership will only continue for a further few years.
Local Improvement Charges are a measure by which energy efficiency retrofits and renewables can be financed for existing properties and avoid the above concerns. LICs have been used by many municipalities in Canada to allocate cost segments of infrastructure development for community enhancement to the properties whose owners benefit most from the improvements. Examples of these projects have included purchasing green space, building a park, a new sidewalk, or replacing electrical poles on private property.
However, Yukon Territory applied the concept of Local Improvement Charges to finance both utility (telephone) connections and renewable energy sources in outlying regions.
What is unusual about LICs is that these costs are attached to an individual property, not to the owner, i.e. to the site or building, not to the person or entity owning it. The loans for these green energy purposes are re-paid through the owners' property taxes, which means that the existing building’s owner incurs both the benefits of greening (the savings and other financial benefits) while also paying for these benefits.
Pembina Institute, the original publisher of a 2004 report outlining the concept of using LICs for energy efficiency retrofits and renewables as well as a subsequent paper in 2005, identified challenges to establishing LICs for these purposes in provinces and other territories across Canada.
Natividad Urquizo, an Environmental Planner with the City of Ottawa, is conducting research to determine the city's property owners' potential market acceptance of LICs as a financing measure for energy efficiency retrofits and renewables, whereby the payments are financed by the energy savings. With positive feedback, and solutions to the challenges, Urquizo can proceed with a pilot project.
Rob Sampson, owner of White Label Mortgages, a company that specializes in innovative mortgage and home finance solutions, has partnered with Corpfinance International Ltd which specializes in innovative financings for the commercial and corporate and government sector. This collaboration facilitates an LIC financing model for both residential and commercial properties, with which they are already familiar from their re-leasing financing models.
A major concern identified by these proponents is that the municipality of Ottawa is not legally permitted to sell its debt – a challenge given that so far the best way for a municipality to minimize its costs and risks in setting up LICs for this purpose is to engage a financial company to buy the aggregated debt from the municipality. While the current Municipal Act allows municipalities to sell their assets - including loans receivable – LICs are not specified among these assets.
Additionally, Sampson notes there needs to be a regulation to modify the definition of Local Improvement Charges, so as to clarify that LICs can be used within owners' property boundaries for energy efficiency retrofits and renewables. Currently, LICs are used for common property outside of owners' boundaries but affecting multiple owners' properties. According to Sampson, these new regulations "do not need the approval of the Legislature, so they can be implemented even now while the Legislature is not sitting (via Orders-in-Council)."
Green measures increase property values – and, therefore, property taxes
One additional concern that has been noted - and solved - by green building practitioners and owners elsewhere – is that property values increase with the implementation of green measures, and this would be a disincentive for greening existing buildings – especially using an LIC financing arrangement. However, in the state of Arizona, for example, for the purposes of property tax assessment, the following energy efficiency and renewables measures are deemed to add no value to the property: Passive Solar Space Heat, Solar Water Heat, Solar Space Heat, Solar Thermal Electric, Solar Thermal Process Heat, Photovoltaics, Solar Cooling, Solar Pool Heating, and Daylighting. This kind of property tax 'holiday' for the incremental value arising from green measures is a crucial incentive for wide-scale proliferation of energy efficiency and renewables.
In order to implement Local Improvement Charges in Ontario, Sampson notes there are additional administrative challenges to be overcome.
The administrative system or process for the LICs' financing needs to be established and then set up. This includes outlining and implementing the paper flow and staffing needs and developing a program to accommodate the difference between monthly interest charged and the property tax payment cycle – e.g. quarterly. Legal trust agreements also must be developed to handle the pilot process. Sampson describes this method as follows, showing how his company would be involved:
a. A property owner approaches the city e.g. for a $30,000 loan to purchase solar PV panels
b. This owner then hires a city-approved energy consultant who conducts a due diligence process – which includes estimating the effectiveness of the measure (e.g. via engineering analysis) to determine the expected cost savings from using the solar PV. Sampson notes: "This establishes the expected conservation results which both the proponent and the city can use for monitoring and aggregation purposes. It also establishes the basic parameters of the LIC namely the amount term of repayment (consistent with the life of the investment) and the rate (the city or other entity may chose to subsidize certain rates for certain investments)."
c. Sampson’s company in a project pilot, buys this loan receivable from the city.
d. As part of the pilot, other such purchases of loan receivables are made by Sampson’s company, which then aggregates these assets into a trust of about $50-$100 million. At $30,000 per loan, this means between about 1,670 and about 3,340 owners would be involved in the pilot project. (As of 2001, there were about 390,000 single detached and semi-detached dwellings in the city of Toronto; about 979,000 in the GTA. And, LICs apply to dwellings as well as to commercial properties.) According to Sampson, the cost of setting up the trust is about $200,000-$300,000, but this is exclusive of all "marketing or communications costs incurred to get the program into the public domain and get parties interested in participating."
e. The method of financing this purchase comes from selling part-interest in the trust as a public bond (with the trust income based on the expected cash flow from the loan payments). This requires establishing a bond rating (Cost: around $100,000)
f. The entire system then needs to be tested with associated troubleshooting.
g. Sampson estimates the ballpark cost to develop and implement this system as ranging from about $250,000 - $500,000.
h. The concept needs to be designed, implemented, then if deemed successful, tendered out for the larger project.
i. Notes regarding financing the pilot project & admin setup costs:
- If the pilot project was conducted by the same company that does the project 'rollout', the admin set-up costs could be recovered via the difference between the buy-rate and the sell-rate for the debt.
- What is problematic, is that the City of Ottawa and other Municipalities are reluctant to proceed with a sole sourced vendor and do not have the resources to commit to financing the set up costs on their own. This means that unless the entire admin costs could be covered, then the company that sets up the concept would pay to do this, then could lose the opportunity of recovering those sunk costs via the implementation of (at least) the pilot program.
- Doug Salloum, Senior Manager of Development with the Federation of Canadian Municipalities, states that FCM is keen to have municipalities approaching them to see if they could be supported under the Green Municipal Funds.
The problem is clear – we need to green our existing buildings, and quickly.
The solution pieces to this puzzle are before us.
What is needed, now, is the political will to take this forward.
Green Syndicated Columnist Sonja Persram is author of: Green Buildings: A Strategic Analysis of North American Markets for Frost & Sullivan (published Aug 06) addressing Energy, Water and Facilities Management; and the U.S. portion of International Sustainable Building Policy Initiatives, a study for Canada Mortgage & Housing Corporation whose project lead was Nils Larsson, iiSBE Executive Director. She was a member of the City of Toronto’s Green Development Standards Working Group. Contact: Sustainable Alternatives Consulting Inc: firstname.lastname@example.org
 Personal conversation with Sonja Persram, June 15, 2007