DATE: December 3, 2024
DEPARTMENT: FINANCE, CITY ATTORNEY, PUBLIC WORKS
FROM: Selina Andrews, Finance Director
CHRISTOPHER A. CALLIHAN, CITY ATTORNEY
DAVID JACOBS, PUBLIC WORKS DIRECTOR
TITLE: 2024 Energy Equipment Lease
RECOMMENDED MOTION:
A motion to approve a resolution approving an Equipment Lease/Purchase Agreement and an Escrow and Account Control Agreement and authorizing certain actions in connection therewith relating to the financing of certain equipment for the City.
EXECUTIVE SUMMARY:
The City worked with ENGIE to assess certain City facilities for installation and maintenance of solar photovoltaic (“PV”) systems at the El Gabilan Library and the Police Department, as well as a backup generator to support City Hall. The cost of the solar PV systems and backup generator is $4,774,025, and the City plans to finance these improvements with a tax-exempt equipment lease. The City requested interest rate from banks for a 20-year tax-exempt equipment lease (“2024 Lease), and the proposal from Banc of America Public Capital Corp (“BAPCC”) was the most advantageous to the City. City staff proposes to enter into an Equipment Lease/Purchase Agreement with BAPCC and an Escrow and Account Control Agreement with Wilmington Trust (collectively, the “Financing Agreements”). City Council approval of the resolution and the Financing Agreements will authorize City staff to sign the documents and take other necessary actions. Staff expect to execute the Financing Agreements and close the 2024 Lease before the end of December.
BACKGROUND:
The City worked with ENGIE to assess certain City facilities for installation and maintenance of solar photovoltaic (“PV”) systems within El Gabilan Library and the Police Department. In addition to the solar PV systems, staff also recommends a backup generator to support City Hall be included as part of the scope. It is anticipated that the City would also benefit from the NEM 2.0 savings and Investment Tax Credit (“ITC”) from the Inflation Reduction Act (“IRA”).
The total cost of these projects is $4,774,025 and the projects are expected to result in over $5 million savings over the life of the project approximately 25 years) after application of an Inflation Reduction Act Investment Tax Credit (“IRA ITC”, discussed further below). City Council reviewed ENGIE’s Energy Services Contract earlier this meeting and consideration of this agenda item related to the Financing Agreements is contingent upon approval of the contract with ENGIE.
To finance the $4.8 million cost of these improvements, the City engaged NHA Advisors LLC (“NHA”) as municipal financial advisor and Stifel as the placement agent. Due to the relatively small size of the tax-exempt municipal equipment lease and the equipment lease structure, NHA, Stifel, and City staff decided to utilize a private placement process (direct loan with a bank), rather than a public offering (bond issued to investors). Stifel contacted 22 active banks for this type of financing vehicle, requesting interest rates for a 20-year tax-exempt equipment lease. Five banks responded with interest rates ranging from 4.255% to 5.570%. The proposal from BAPCC was the most advantageous to the City due to the following reasons:
Lowest interest rate.
BAPCC will provide all the lease documents – the City will not need to engage special counsel to prepare the documents.
A tax opinion is not required.
No bank fees are associated with the loan.
City will not need to pay for escrow agent services through Wilmington Trust as escrow agent.
City can use its IRA ITC to prepay a portion of the loan during the first 3 years, at a 100.5% premium.
The 2024 Lease will have a 20-year term, maturing June 1, 2044. BAPCC has provided a fixed 4.255% interest rate for the 2024 Lease. This interest rate is also locked through closing of the 2024 Lease, removing the risk that interest rates rise in the next few weeks before the 2024 Lease closes and funds. The 2024 Lease is expected be sized to $4,735,000, which will cover the project cost and the costs of issuing the 2024 Lease. The resolution requests authorization for staff to enter into the agreement subject to the final lease amount being less than a not-to-exceed amount of $4,900,000 and the interest rate being less than a not-to-exceed amount of 4.30%. These amounts are intentionally set slightly higher than the actual expected amounts to provide a little contingency in case of any unforeseen delays.
The 2024 Lease has annual debt service escalating at approximately 4.5% per year over the next 20 years. This escalation follows the annual escalation of ENGIE’s projected energy savings during that same period and achieves approximately $7,500 in net energy savings each year over the next 20 years (before applying the IRA ITC credit). Once the loan is paid off, the savings are projected to increase in years 21-25 to an average of about $665,000 per year. The graph below shows the projected net energy savings from the ENGIE project over the next 25 years (orange bars) and the debt service on the 2024 Lease through final maturity in 2044 (dark blue line). The amount by which the orange bars are higher than the blue line equals the net energy savings the City is projected to achieve through the ENGIE project.
The project is expected to be eligible for the IRA ITC in an amount of approximately $1,017,000. The IRA ITC is available in the form of a refundable tax credit at the conclusion of the project (once permission to operate has been granted by PG&E). All eligible projects nationwide can receive this IRA ITC, without regard to volume cap limitations. The current financing plan is for the City to prepay a portion of the 2024 Lease with the IRA ITC once the City receives the credit. BAPCC’s term sheet allows for an extraordinary optional prepayment provision for partial prepayment of the 2024 Lease using the IRA ITC during the first 3 years, at a 100.5% premium. The dark red line in the chart below represents the debt service on the 2024 Lease assuming the IRA ITC is used to partially prepay the 2024 Lease. While the City is not required to use the $1.017M IRA ITC to prepay a portion of the lease, doing so will increase total savings over the 25-year project life by approximately $1.77M to bring the total savings over the 25-year period over the $5 million estimate previously mentioned.
For the City to enter into the 2024 Lease, City Council will need to adopt the attached resolution approving the Financing Agreements and authorizing City staff to execute the Financing Agreements and take other necessary actions.
Discussion of Lease Documents:
Equipment Lease/Purchase Agreement: The Equipment Lease/Purchase Agreement (“ELPA”) outlines the terms governing the 2024 Lease. The ELPA will identify the location of the energy improvements (solar and generator) and that the security for the 2024 Lease is a lien on the equipment. This lien will be in place until the 2024 Lease matures in June 2044, or is otherwise prepaid in accordance with the lease terms. The ELPA also contains the payment details, prepayment provisions, and other covenants of the City. A detailed payment schedule for the 2024 Lease can be found in Exhibit B of the ELPA.
Escrow and Account Control Agreement: The Escrow and Account Control Agreement (“Escrow Agreement”) is among BAPCC, the City of Salinas, and Wilmington Trust, National Association (“Wilmington Trust”). The Escrow Agreement identifies the various covenants between the City and Wilmington Trust as the Escrow Agent. Wilmington Trust will hold the proceeds of the 2024 Lease starting on the closing/funding day and will distribute them to pay for ENGIE project costs as requested from time to time by the City.
CEQA CONSIDERATION:
Not a Project. The City of Salinas has determined that the proposed action is categotically exempt from environmental review under the California Environmental Quality Act (CEQA) pursuant to CEQA Guidelines section 15301 (Existing Facilities) and 15303 (New Construction or Conversion of Small Structures) and statutorily exempt pursuant to Public Resources Code section 21080.35.
CALIFORNIA GOVERNMENT CODE §84308 APPLIES:
Yes.
STRATEGIC PLAN INITIATIVE:
This project meets the strategic goal of Infrastructure and Environmental Sustainability and Effective and Culturally Responsive Government.
DEPARTMENTAL COORDINATION:
This staff report was coordinated with the City Attorney’s Office, City Manager’s Office, Public Works Department, and the Finance Department.
FISCAL AND SUSTAINABILITY IMPACT:
The 2024 Lease will have no financial impact on the FY 2024-25 budget cycle. The 2024 Lease has ascending annual debt service payments, with just over $253,000 due in fiscal year 2025-26, ascending just under $563,000 due in fiscal year 2043-44 (final maturity of the 2024 Lease). As mentioned earlier, this structure achieves uniform net energy cost savings of approximately $7,500 per year over the next 20 years before the application of the IRA ITC to prepay a portion of the lease.
The costs associated with issuing the 2024 Lease will be paid out of the proceeds of the 2024 Lease (no direct budgetary impact).
The first debt service payment will be due in December 2025. This will be included in the FY 25-26 operating budget.
Fund
Appropriation
Appropriation
Name
Total Appropriation
Amount for recommendation
FY 24-25 Operating Budget Page
Last Budget Action (Date, Resolution)*
1100
TBD
Debt Service
N/A
N/A
N/A
N/A
ATTACHMENTS:
Resolution
Exhibit A – Government Code Section 5852.1 Disclosure
Exhibit B – Savings Analysis
Exhibit C – BAPCC Term Sheet
Exhibit D – Equipment Lease/Purchase Agreement
Exhibit E – Escrow and Account Control Agreement
Exhibit F – Estimated Debt Service Schedule
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