A lending process also requires a repayment structure (a way to repay the loan). Examples of repayment structures include on-bill repayment structure, property tax-based structures, and lender billing.
Repayment structures determine how borrowers will pay back the loan principal and interest. The repayment structure is important because financial institutions want the most secure and robust structure possible—in other words, one that is most likely to yield regular payments in full of the principal and interest. Any new and unfamiliar repayment structure is likely to require state and local governments to put up a credit enhancement.
Property Tax-Based Structures
Property tax-based payment mechanisms place the payment obligation on the property tax bill, so borrowers satisfy their repayment obligation as they pay their property taxes. In some communities, an unpaid waste pickup or water bill can be added to the property tax bill, so adding the clean energy loan payment to the tax bill is a variant on that type of repayment mechanism.
Property tax-based repayment mechanisms are important because they trigger the first lien position in the event of foreclosure. The security the first lien position creates also makes capital providers more comfortable with loan terms that may be much longer than would be available through a traditional unsecured loan. These property tax-based structures are commonly known as property-assessed clean energy (PACE). Federal regulatory hurdles stand in the way of residential PACE financing, but commercial PACE financing is still a viable option. See Property-Assessed Clean Energy Financing for more information.
Lender Billing
Traditional (nonutility/nontax bill) repayment structures are the simplest in that a financial institution sends out bills, collects payments, and tracks payments and defaults. The financial institution also manages compliance with any lending regulations like the Truth in Lending Act. The lender typically defines the collection terms as well—for instance, the number of days after which an unpaid bill is declared to be in default.