State and Municipal Revolving Loan Funds

State and Municipal Revolving Loan Funds (RLFs) are funds of capital used to provide loans for energy efficiency and renewable energy improvements; loan repayments recapitalize the funding pool to enable additional lending.

Two builders on a ladder working on a building

There are a number of entities that can administer revolving funds but here we focus on government-sponsored and managed RLFs. Government-sponsored RLFs typically offer lower interest rates and/or more flexible terms than are available in commercial capital markets. These programs typically focus on financing the cost of efficiency upgrades such as appliances, lighting, insulation, and heating and cooling system upgrades.

Depending upon each government's situation and need, RLFs can be capitalized through state bond proceeds, treasury investments, ratepayer funds, and other special funds. To date, more than thirty states have established loan programs for energy efficiency and renewable energy improvements. However, the ability of the states to attract borrowers has varied widely based upon numerous factors including interest rates, loan term, credit requirements, and marketing effectiveness.

Program administrators typically set the interest rate for RLFs either by pegging the rate to their own borrowing rate, or by using program funds to buy down the interest rate to more attractive levels. The majority of loan terms are under 10 years. Some programs require loans to be secured by additional collateral, while others create loan loss reserve funds to serve as a cushion for potential defaults. The opportunity for recipients of SEP or EECBG funding is to either provide the seed investment to establish a RLF or increase the capacity of an existing RLF. However, it is important to note that simple RLFs funded directly with public funds do not leverage private capital; they also tend to "revolve" quite slowly (depending on the loan term length). This means that public dollars can have a relatively limited impact in the near term compared to the opportunity to leverage private funds by using the public funds as a credit enhancement.

Transaction Points

A Revolving Loan Fund is an effective tool for residential energy efficiency improvements in the $2,000 to $10,000 range that are too expensive for a cash/credit purchase but do not warrant taking out a second mortgage or equity line.

This could range from urgent equipment replacements (such as furnace that goes out in the middle of winter) if the program is able to process loans quickly enough, to whole home efficiency retrofits.

RLFs are also effective for the MUSH (municipal, university, school, hospital) market and the small business market to provide cheaper access to credit for building improvements with shorter paybacks (so that the funds can be quickly recharged and reused). Special guidance on working with the non-residential markets is available here.

Advantages Disadvantages

+ Simple to set up compared to other options
+ Many cities and states already have RLFs, so expertise may exist in-house
+ Funds revolve indefinitely creating a source of funds that will be available in the long term
+ Can shape eligibility requirements to fit many markets and program goals

— Government often acts as the administrator; requires staff time and expertise to set up if there is not an existing RLF
— Does not leverage private capital, limiting the amount of funds available (especially in the near term)
— Must conduct rigorous credit analysis on borrower's ability to pay (or risk a high default rate)
— Costly collateral or security may be required from borrower

 

Resources

Past Webcast Presentations

Below are presentations from previous Webcasts. The presentations are available as Adobe Acrobat PDFs. The audio files are available as MP3 files. Download Windows Media Player.

Webcast Date Audio Transcript
Revolving Loan Funds Webcast 12/10/09 (MP3 62.3 MB) (Text)