Architects, contractors and managers who make a living improving the energy efficiency of buildings know the drill: They fight hard for cost-effective energy-efficient designs, and they fight even harder to ensure these designs and systems survive cost-cutting efforts that can arise.
Technically sound projects don’t always get off the ground for several economic reasons. Sometimes the split incentive embedded in leases means the owner makes the capital investment but the tenant reaps the economic benefit. Other times, architects, contractors and managers must face the fact that they simply cannot get internal capital allocated to energy-efficiency projects despite their undeniable cost effectiveness. For small business owners, it can come down to lack of funds. For larger companies, the capital allocation process often translates into investment hurdle rates that are hard to attain because energy-efficiency projects must meet two- or three-year simple paybacks.
If an energy retrofit project makes economic sense and internal capital won’t be allocated to it, textbooks suggest the use of external capital. In practice, it’s not that easy. For small business owners, getting third-party financing often requires personal guarantees, some equity investment or other conditions. For larger companies, the use of external capital involves lengthy discussions that may include the downside of borrowing when a building’s holding period is up in the air, the cost of project capital versus corporate debt, and the balance sheet impact of the borrowed funds.
Enter Property Assessed Clean Energy (PACE) Financing. PACE is a tax-lien financing program that allows interested property owners to finance qualifying energy-efficiency and clean-energy improvements on their properties through a voluntary benefit assessment placed on their property tax bill.
This exciting form of third-party financing provides unique benefits to building owners:
- The cost of PACE financing and the benefits generated can be shared with tenants, thus eliminating the split-incentive issue that derails so many energy-efficiency projects.
- One-hundred percent of project costs, including soft costs such as development fees, can be financed through PACE, which removes the requirement for out-of-pocket expenses for owners.
- PACE financing is available with flexible terms up to 20 years, making it possible to generate positive cash flow—and operating income—from projects with simple paybacks as long as 12 years. This increased operating income translates to higher property values for building owners.
- PACE is entirely property-based financing. As a result, it requires no personal or corporate guarantees.
- PACE is attached to a property tax bill, so the obligation to repay the financing automatically transfers to the new owner upon the sale of the property, along with the energy-saving benefits generated by the project. This eliminates any holding-period concern owners may have.
- It’s generally accepted that PACE does not affect a building owner’s typical loan covenants, such as debt to equity ratios.
PACE funding is provided or arranged by a local government for 100 percent of a project’s costs and is repaid with a voluntary assessment during a term of up to 20 years. The property owner pays its typical tax bill, which now includes the PACE finance charge, and the local government redirects that payment to the investor.
Capital provided under a PACE program is secured by a lien on the owner’s property. Like other tax assessments, PACE assessments assume a first lien priority and the repayment obligation automatically transfers to the next property owner if the property is sold.
Similarly, in the event of default, only the payments in arrears would come due and the PACE financing does not accelerate. Because assessments are repaid through the property tax bill—a secure payment stream—PACE projects are seen as less risky than other financing mechanisms and, therefore, benefit from lower interest rates from the private sector with no government financing required.PACE builds on a long history of benefit assessments that a government can levy on real-estate parcels to pay for the installation of projects that serve a public purpose, such as sewers and sidewalks. PACE serves a public purpose by reducing energy costs, stimulating the economy, improving property valuation, reducing greenhouse-gas emissions and creating jobs.
Pioneered by the city of Berkeley, Calif., in 2008, PACE is now a proven and effective tool to attract private capital to clean-energy projects. Commercial PACE programs are currently operating in 16 states and Washington, D.C., including more than 2,000 municipalities.
More than 700 energy-efficiency retrofits have been financed to date by commercial and industrial building owners using PACE. Indianapolis-based Simon Property Group, a global leader in retail real estate and an S&P 100 company, first used PACE in 2009 and has accelerated its use since then. Prologis, a leading developer of industrial real estate, used PACE to perform an energy-efficiency and renewable-energy retrofit at its headquarters in San Francisco in October 2012.
In Connecticut, hundreds of owners have elected to use PACE to retrofit their buildings, including the Norwalk Center, a family-owned shopping center, whose owner found PACE was ideal to finance energy-efficiency and renewable-energy improvements. In Bridgeport, Forstone Capital used PACE to retrofit the mechanicals and envelope of its 100,000-square-foot office building, which will save the owner nearly $250,000 in energy costs annually. Without PACE, it would have implemented only a fraction of its desired work scope.
Property owners across the U.S. are using PACE because it saves them money and makes their buildings more valuable. PACE pays for 100 percent of a project’s costs and is repaid for up to 20 years with an assessment added to the property’s tax bill. PACE financing stays with the building upon sale and is easy to share with tenants.
PACE is a simple and effective way to finance energy-efficiency, renewable-energy and water-conservation retrofits to buildings. Building owners who want to take advantage of PACE financing can find out where PACE is available via PACENation, a recognized source of impartial, independent and consensus-based information about PACE.