Debt financing can be as simple as a loan from a bank or as complex as a bond issued and marketed to investors in the open market. Both approaches can be used to finance high-performance buildings.
Municipal bonds are long-term debt obligations of states, local governments, and their authorities and agencies. They are most commonly issued to finance public buildings and schools, streets and bridges, water and wastewater treatment facilities, and other major infrastructure projects. Municipal bonds are essentially promissory notes that require the issuer to make scheduled interest payments at specific periods at an agreed-upon rate, and to return the principal on the date the issue matures.
The simplest form of debt financing is direct loans. A borrower can usually negotiate terms for repayment of principal and interest so that savings from increased energy efficiency provide at least a break-even cash flow.
Debt financing for small energy-efficiency improvements is relatively uncommon among local governments and school districts. Issuing bonds to finance large initiatives or to provide reduced rate loans for schools and local governments is a more common practice among agencies of state government.
How It Works
Debt financing typically works in one of two ways:
- A school uses credit relationships with a financial institution that result in a loan agreement between a single lender and a borrower.
- Debt is issued in the form of bonds; like stocks, these bonds are tradable in a secondary market
How to Proceed
- Determine the optimal weighted average cost of capital for all nonsubsidized debt options. This is the baseline discount rate for NPV analysis. Subsidies or discounted loan programs that lower this number will increase the NPV.
- Look for state bonding agency options that could provide lower interest rates or forward energy credits.
- Determine the optimal bond/loan option for the school type. (Retain financial advisory services, if necessary.) Most public schools are best served by using municipal bonds because they have the backing of the local government and often have better credit ratings than privately issued bonds.
- Investigate state, local, and nongovernmental (NGO) revolving loan options that may offer discounted interest rates.