CHICAGO — Ann Arbor in on track to become the first city in Michigan to launch a bond-backed energy efficiency program authorized in state legislation adopted last year.

The City Council last week passed the first of two resolutions needed to launch the state’s first property assessed clean energy, or PACE, program. It allows the city to issue revenue bonds and use the proceeds for loans to commercial property owners who use them to pay for efficiency improvements. The loans are repaid over 20 years through a special assessment.

So far, 27 states have approved PACE-enabling legislation. Michigan passed the law last year. In Michigan, as in other states, the program was initially designed for both residential and commercial properties. But many states dropped the residential provision after the Federal Housing Finance Agency directed mortgage giants Fannie Mae and Freddie Mac not to buy mortgages with PACE-type liens attached, given the lien’s priority over mortgages when homeowners default.

Michigan statute requires the mortgage lender to approve the PACE loan, a provision that could whittle down the number of successful applicants, said Matthew Horning, Ann Arbor treasurer. “If someone has a mortgage with Bank of America, the chances might be slim, but if it’s Bank of Ann Arbor, then it’s more likely,” Horning said. He added that the city will require a borrower to have significant equity in the property to help ensure timely payments.

From a market perspective, some investors have been concerned about the security of debt backed only by a mortgage lien. Different issuers have offered various credit enhancements. Boulder County, Colo., one of the first PACE issuers, attached an appropriation pledge.

Double-A rated Ann Arbor did not consider attaching a pledge to the debt, Horning said. The city has set up a debt reserve fund using $400,000 of federal stimulus to use in the case of missed payments.

Horning said he expects the city will hold a competitive sale, as it does for all its debt, but is considering a private placement as well. “The PACE bonds are a new flavor and we don’t know if the market has an appetite,” Horning said. “From things I’m hearing, there are folks that do like these things that are starting to spring up around the country and express interest.”

The city is working with financial advisor Paul Stauder from Stauder Barch & Associates. Bond counsel is Dykema Gossett PLLC. A public hearing and council consideration of the second and final resolution is set for Oct. 3.

If approved, the city plans to pool the projects and issue a maximum of $4 million. The city will be allowed to issue $10 million annually in the future.

Several cities across the state have shown interest in the program, said Wendy Barrott, community energy coordinator for Ann Arbor. The city considered partnering with other issuers, but decided to act alone in order to ensure the bonds were issued before the clock ran out on the use of the federal stimulus proceeds, Barrott said.

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