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DRAFT

U.S. DOE

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4.3 Interest Rate Buy-Down

A third option is for grantees to use ARRA funds to buy down the interest rate that will be paid by property owners to such a point that PACE financing becomes an attractive option. That can be a way to gain more attention for the PACE program, reward early participants in a newly launched program, and build market demand.

On a dollar-for-dollar basis, an interest rate buy down will result in the same APR as the funding of a 10% DSRF. That result can be seen by comparing columns 2 and 3 in Table 2 (note that the resulting APR in both cases is 8%). However, it is better to use ARRA funds to fund the DSRF because defaults on property taxes are historically very low and any defaults will be satisfied at the time of property sale. This means the money in the DSRF will be preserved and available for continued use as a DSRF, or eventually repurposed. Contrast that with using ARRA funds to buy down the interest rate, in which case the funds are exhausted.

1. Applicant

2. ARRA

3. ARRA

Funds DSRF

Funds DSRF

Subsidizes Rate

Table 2 – Contrasting ARRA Funding Impact on Applicant APR

Term in Years*

15

Debt Service Reserve Fund (DSRF)

10.00%

ARRA Funds Applied

$0

Applicant Interest Rate

8.00%

Project Cost

$10,000

DSRF Amount Financed by Applicant

$1,000

Bond Amount

$11,000

Bond Price (Par 100)

100

Applicant APR

9.60%

15

10.00%

$1,000

8.00%

$10,000

$0

$10,000

100

8.00%

15

10.00%

$1,000

6.48%

$10,000

$1,000

$11,000

90.9

10

8.00%

*Assumes 15-year semi-annual assessment and 8% par (100) priced coupon

4.4 Subsidize Transaction Costs

As described in previous sections, applicants can face additional costs associated with participating in a commercial PACE program. ARRA funds can be used to partially or fully cover one or more of those costs. A good candidate that could be subsidized or paid in full is the energy audit conducted on the property. That is an early and key step in the application process, so offsetting part or all of the audit cost might encourage more applicants to get involved. Funding for the audit can be made contingent on the property owner ultimately completing an energy retrofit or improvement.

10 The bond price of 90.9 means that the bond is being sold at a discount to face (par 100) value in order to compensate investors for the fact that this bond has a lower interest rate (6.48% vs. 8.0%). So an $11,000 bond ($10,000 project cost + $1,000 DSRF financed by applicant) sold at bond price of 90.9 yields ~$10,000 ($11,000 x 0.909), and then $1,000 of ARRA funds are added so there is enough money to cover both the $10,000 project cost and $1,000 DSRF.

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Chapter 13

15

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