62 Energy Project Financing: Resources and Strategies for Success
energy savings into the decision making process, which is truly another
“cost of delay.”CHOOSING THE RIGHT FINANCING“Financing” should be thought of as a two-step process: financial
instruments (or vehicles) and sources of funds. Once you decide which
financing vehicle is best for your organization, the next step is to choose
the best source of funds. Bear in mind that no one financing alternative
is right for everyone. In the world of energy efficiency finance, one size
definitely does not fit all! For the purposes of this discussion, our focus is
limited to the public and private sectors, not consumer finance options.
Before you can choose the right financial vehicle, however, two oth-
er issues must be considered—tax exempt status and interest rates. In
general, public sector organizations and some non-profits qualify for tax-
exempt financing, while private sector organizations do not. Private sec-
tor organizations are usually driven by tax considerations and financial
strategies, but public sector organizations do not pay taxes.
What’s the interest rate?” is frequently the first question asked when
evaluating financing options. Organizations able to issue tax-exempt obli-
gations will benefit more from lower interest rates than would be the case
for regular “for profit” organizations. This is because, according to the
Internal Revenue Code of 1986, the lender does not have to pay federal in-
come tax on the interest earned from tax-exempt transactions. Due to com-
petitive market forces, much of this saving is passed back to the borrower in
the form of lower interest rates. Any U.S. state, district, or any subdivision
thereof that (a) has the ability to tax its citizens; (b) has police powers; or
(c) has the right of eminent domain and qualifies for tax-exempt financing.
This includes public schools, state universities and community colleges, li-
braries, public hospitals, town halls, municipal governments, county gov-
ernments—in summary, almost any organization that receives its funding
from tax revenues. While not-for-profit organizations created under Section
501(c)(3) of the Internal Revenue Code and private organizations do not di-
rectly qualify as issuers of tax-exempt obligations, they may be able to have
a “conduit agency”—a city, state, health, or education authority—apply for
the financing on their behalf.
For private sector organizations, interest rate alone is rarely the best
indicator of the “best deal.” To show the importance of proper deal struc-