PACE: A New Source Seeking to Reach Its Stride
Any shortlist of common obstacles to energy financing would include the following:
- Initial cost
- Difficulty of obtaining low, fixed interest rates
- Difficulty of obtaining long terms up to 15 or 20 years
- Recovery of the energy investment if a property is sold
PACE (Property-Assessed Clean Energy) programs are designed to jump those hurdles with ease.
The key feature that energizes the PACE concept is funding through an assessment made to the building owner’s tax bill, much like any other municipal tax assessment. The assessment provides collateral for the debt and skips around the large upfront payment of conventional financing. It can be transferred seamlessly to a new owner via the property tax. While paying the assessment nestled in the property bill, the current building owner and any future owner profit from lower utility bills made possible by the energy equipment upgrade. The assessment itself is secured by a senior lien on the property.
To enact PACE programs, states must pass enabling legislation that authorizes municipalities to place an assessment on properties as a means of repaying funds for energy efficiency or renewable energy. To date, 31 states have enabled such legislation. However, the legislation itself does not create programs, it only permits them. As a result, some states that have passed legislation do not yet have working PACE programs. Some PACE programs are too new to have yet funded a project (see map below).
||PACE PROGRAM DEVELOPMENT
This 35,000-square-foot, multitenant shopping plaza in Norwalk, CT, used PACE funding to retrofit exterior lighting with LEDs.
- $170,000 PACE assessment
- 13-year term
- Fixed 4.5% rate
- Estimated annual savings: $17,500
- Projected electricity savings: 152,000 kWh
To date, 31 states have enabled PACE legislation. The legislation itself does not create programs, it only permits them. As a result, not all enabled states have PACE programs and not all programs have funded projects.
Overcoming Lender Inexperience
While PACE offers an elegantly simple solution to many obstacles of energy financing, it is in its infancy and few lenders have first-hand experience with it. Existing commercial mortgage lenders, who hold the right to approve any encumbrance added to a mortgaged property, are slow to see any value in consenting to a property assessment that is senior to their loan. And if a commercial mortgage has been already been pooled into a commercial mortgage-backed security (CMBS), a PACE lien would no longer meet the original underwriting criteria.
But David Gabrielson, executive director of PACENow, believes that lender reluctance can be overcome. “We tell lenders that they should look at PACE like any other assessment on the property. For years mortgage lenders have dealt with property tax assessments that may be senior to a mortgage claim,” Gabrielson says. “The PACE assessment is no different, and it may improve the economics of the building.”
For a shopping plaza in Norfolk, CT, PACE financing provided through the state of Connecticut’s Clean Energy Finance and Investment Authority (CEFIA)was the best vehicle to fund an exterior LED lighting retrofit.
“The beauty of this program is that the cost of energy-saving projects can be passed on to the tenants through the tax assessment, but the energy savings that the tenants receive are greater than the increased cost of the assessment,” says building manager Robert Hartt of Hartt Realty Advisors. To ensure that tenants understood the funding, the building owner and manager met with the tenants to explain the capital pass-through via the assessment and the net-positive impact for tenants.
Hartt would not hesitate to use PACE again. “Everyone should look into it and see if you have it in your state,” he says. “If you don’t have it, you need to work on the legislators to get it going.”