By: Robert E. Mattler, Market Leader in Michigan for PACE-Equity
One of the most difficult parts of any worthy real estate development or retrofit involves finding sufficient capital to fund the project. For a variety of reasons, the task is even more difficult when the project involves a nonprofit as the owner, the project location is in a challenged neighborhood or it is a multi-family housing with some form of government subsidy. Property Assessed Clean Energy (PACE) financing is a new option to consider when identifying potential funding sources for these types of projects.
Property Assessed Clean Energy (Act 270 of 2010) is a Michigan law that offers an innovative, affordable method to address the challenges faced by economic development organizations. PACE is law in 31 states, including 18 counties and 5 cities in Michigan. Despite the legal component, counties and/or cities must take the initiative and “opt in” to implement use of the law.
How does Property Assessed Clean Energy financing work?
PACE uses the financial power of long-term energy savings to make improvements possible immediately, while spreading the cost over an extended period of time. The money that building owners and developers now spend on energy and water can be redirected into improvements that add value to the building, project or portfolio. PACE has many potential benefits when compared to traditional financing, including:
- Boosts property values without negatively impacting the owners’ balance sheet;
- There are NO out of pocket costs to the owner for using PACE financing;
- A PACE transaction is by definition a self-imposed property tax assessment, it is not considered a loan to the owner, therefore it easily transfers to any future owner;
- Since PACE is considered a self-assessed property tax, tenants would pay the special property tax on any lease in which they are responsible for their share of property taxes;
- A PACE transaction can be considered off-balance sheet financing, thus keeping an owners’ balance sheet free of additional liabilities, allowing it to preserve borrowing capacity for core mission or more essential business needs;
- PACE is non-recourse lending at its finest. The financing is tied more to the property than the property owner, so no guarantees are ever required;
- By law, any PACE project over $250,000 must come with a contract guarantee ensuring that savings over the life of the finance period will exceed the cost of improvements;
- PACE is an attractive financial instrument to private finance, private equity, pensions, life insurance and other finance companies to fund, since it’s a government secured lien which receives priority in repayment in the event of owner default; and
- PACE project financing comes from private investors, therefore eliminating the complex bonding scenarios that are both burdensome and expensive for government to run. PACE does not use taxpayer money to setup or run in Michigan!
PACE is an innovation that combines the flexibility of private financing with the assurance of payment through government participation. It covers 100% of improvement costs through a long-term property tax assessment, instead of burdening the property owner with a short-term commercial loan. This allows the owner to cash flow the improvement costs during the financing term, as savings are greater than the cost of the improvements.
Suitable Projects for Financing
A PACE Project can include any energy conservation measure that reduces either energy or water. If it can be calculated is can be a PACE financed building item. Some of the most popular PACE financed building systems include: Commercial Boilers, Lighting Retrofits, Windows, Roofs, Building Systems and Controls, HVAC Systems, Cooling Towers and Chillers, Elevators, Escalators, Fume Hoods, Refrigeration, Solar, Geothermal and Irrigation. Bio-digesters and incinerators are the only EXCLUDED items from the statute. PACE transactions can also include almost any property type.
The following types of facilities can benefit from PACE, including: Large and Small Commercial Properties, Non-Profit Buildings, Multi-Family, Industrial Buildings, Warehouses, Hospitality, Private Schools and Colleges, Retail Centers and Shopping Malls, Hospitals, Restaurants, Houses of Worship, Low Income Housing, Mixed Use Projects and Recreational Facilities or Resorts. Literally any project or property that IS NOT a Government owned building or considered a residence qualifies as a PACE Project.
Other states are having great success rolling out Property Assessed Clean Energy (PACE) financing to their communities. Most economic development professionals see PACE as another viable tool in the toolkit for economic growth and development where the local government has no financial commitment other than to support their local businesses and nonprofits with a great resource funded by private capital.
A Win-Win For All
Investing in development creates a win-win situations for the economy, citizens and all stakeholders alike. Building improvements reduce operational costs and enhances appeal, thus driving further investment, growth and job creation while creating an attractive climate for both business and individuals. With that in mind, why wait? Take the steps to access PACE financing for your project today!