U.S. Department of Energy Energy Efficiency and Renewable Energy

Sample Lending Program in Alabama

The table below presents basic information about the AlabamaSAVES lending program. For information on other programs, see sample state and local lending programs.

BASIC PROGRAM INFORMATION 
Program Name, Location, and Geographic Scope:  AlabamaSAVES™, Alabama
Statewide energy program
Launch Date:December 2010
Web Site URL:AlabamaSAVES
Target Market:Commercial and industrial properties in Alabama
Particular Income or Credit Target:AlabamaSAVES is structured to accommodate a variety of property and borrower profiles. Each applicant will be reviewed individually for ability and willingness to repay. Recourse and nonrecourse options are available with the DSCR (Debt Service Coverage Ratio) and FICO limitations set accordingly. Without significant compensating factors, the minimum DSCR is 1.30x and the minimum FICO is 680.
Brief Description of Program:Alabama Department of Economic and Community Affairs (ADECA) is capitalizing the Program with $25 million of State Energy Progra (SEP) funds and intends to attract private capital through various credit enhancement mechanisms so that a targeted total of $60 million to $75 million is available to lend. The funds will be bifurcated into two pools, one for proprietary lending and the other to enhance third-party lending participation. 
Financing Capital Source:American Recovery and Reinvestment Act of 2009 (ARRA), SEP grant, and private capital: $60 million loan fund.
CREDIT ENHANCEMENTS
Credit Enhancements (if applicable):The Program will attract private capital providers through a participation agreement whereby the providers will receive an allocation of the Program’s funds for loan loss/debt service reserves and interest rate buydowns in return for lending based on the Program’s underwriting criteria.
Source of Capital for Credit Enhancement:Private capital providers
Custodian of Credit Enhancement:ADECA (held in escrow at a national bank)
Interest Rate Buydown:See above
Structure of Interest Rate Buydown
(if Applicable):
See above
PARTNERS
Method of Selecting Participating Lenders:Lenders are invited to respond to a Request for Information (RFI) to assist the ADECA Energy Division in creating financial products suitable for financing energy efficiency and renewable energy retrofits on commercial and industrial real estate throughout the State of Alabama.
SECURITY
Security:Security for each loan will include, on a case-by-case basis:     (i) any payment obligations of the borrower; (ii) the collateral value of the improvements; (iii) any additional security interest and/or pledge provided by the borrower, including without limitation cash collateral and/or parent guarantees; and (iv) the Loan Loss Reserve (defined below). Cross-collateralization will be considered for single loans.
Disconnection Threat for Nonpayment:NA
REPAYMENT STRUCTURE
Repayment:Program Administrator: Abundant Power
MAJOR LOAN FEATURES
 
  • Interest Rate – 2%, fixed, per annum. The rate will be reevaluated on the first anniversary of the Program’s launch date and quarterly thereafter.
  • Loan Term – The blended useful life of the improvements up to 10 years.
  • Loan Size – $250,000–$4,000,000.
  • Credit Score – 680               
  • Debt-To-Income – 1.30x
  • Costs – An application fee of $1,000 will be required.

Closing costs: 2% loan origination fee and reasonable and customary costs among the program administrator and the program lenders.
Income Threshold – N/A

Origination/Servicing:Abundant Power
LOANS SALE BUILT IN TO PROGRAM
Are Loans Held to Maturity?Potentially
If Loans are Sold prior to Maturity, Please Describe:They will be sold at market rates, i.e., most likely a discount to par.
CONTRACTOR PROGRAM 
Are Energy Evaluations Required:Yes – must be included with the loan application
Contractor Program:Contractors, energy service providers, consultants, engineers, and auditors serve as the “engine” of AlabamaSAVES™. This expertise must be unleashed in a trustworthy and transparent manner. To participate in projects funded by the Program, service providers must:

 

  • document proof of proper qualifications and licenses,
  • participate in a Program orientation, and
  • submit to ongoing reporting and quality assurance standards.

The Program may charge a fee to cover the costs of review of the qualifications and performance of each service provider.
Service providers that meet the eligible requirements and have been approved by the program administrator will be available to perform services and will be highlighted on the AlabamaSAVES™ website.
Results of each project funded in whole or in part by the Program will be measured to encourage successful outcomes and provide full circle feedback. The project performance for each vendor also will be available on the AlabamaSAVES™ website.

Notable:
  • Notably, AlabamaSAVES™ will be targeting industrial businesses whose current cash flow situation will be improved significantly by a deep retrofit. It aims to find customers that can improve their net operating income sufficiently to grow their business.
  • AlabamaSAVES will allow deep whole-building retrofits by providing loans up to $4 million. 
Challenges:
  • Educating the lending community on the benefit and security achieved by completing the property improvements. 
  • Minimizing the costs associated with the origination process while securing credit and valuation qualifications. Options to overcome this may include (1) partnering with a lending institution that will offer the Program as a “piggy-back” loan, (2) using the existing underwriting and valuation information from a recent refinance or purchase of the property, and (3) targeting borrowers that are willing and able to use personal guarantees as loan security.   
  • The ideal structure for the borrower is an extended term to maximize cash flow positive outcomes over the life of improvement. This structure, however, is at odds with the desired financial instrument of the lending community who typically prefer a shorter term and adjustable rate. ADECA’s intention is to balance the difference by offering a slightly longer term and fixed rate.