Property owners implementing green energy initiatives are on the rise, and with good reason. The benefits extend to owners and tenants. The on-going issue has always been how to pay for energy efficiency upgrades. In the past, property owners recognizing the significant outlay of capital for upgrades had difficulty identifying a source of funds for this additional investment.
The tenant will see lower energy bills based on reduced consumption from green initiative improvements (paid for by the property owner). But what about the owner/investor? Intelligent investments produce a return for a said investor. Where's that coming from? Today the answer is PACE.
The property assessed clean energy (PACE) model is an innovative mechanism for financing energy efficiency and renewable energy improvements on private property. PACE programs allow local governments, state governments, or other inter-jurisdictional authorities, when authorized by state law, to fund the up-front cost of energy improvements on commercial and residential properties, which are paid back over time by the property owners (U.S. Dept. of Energy).
The win-win for the property owner, tenant, economy, and ecology all point to reasons to participate in this program, focusing on creating lower energy usage. The outcomes are measurable, trackable, and create real dollars on the front end for installation and upgrades and on the backend in terms of installing a lower, long-term operating cost structure.
The initial "win' for the property owner is that any debt created by using a PACE loan is exclusive to the property and not the property owner:
Said another way, it is a non-recourse loan, whereas the only obligor is the property. The C-PACE model of financing energy efficiency improvements provides property owners with a methodology to implement positive green upgrades without "finding" new capital.
Capital is within a streamlined process with multiple stakeholders willing to cushion installation costs for the benefit of the community, lender, property owner, and tenant. This initiative is working on behalf of owners and tenants in over thirty states today across the U.S.
The dollars generated by C-PACE for implementing energy efficiency improvements is a loan made by the property. The U.S. Office of Energy Efficiency has outlined the pros and cons of C-PACE.
PACE is a loan with favorable terms and a payback schedule that emulates the improvements' useful life. PACE loans become secured by the property receiving the upgrades. The repayment terms are up to 20-years as an added tax assessment (paid with annual property taxes) The win-win from C-PACE includes:
The biggest “win” is the opportunity to accomplish all of this without any out-of-pocket expense. Add to this an extended payback period, and the immediate benefits are difficult to deny!
In less than a year, you, the property owner, can generate all the above benefits with the potential of increasing the value of your asset- all because of taking the time to learn about and implement a financing option that local government is wanting you to do. The benefits are wide-ranging:
State and local government assistance are available to structure C-PACE capital best suited to implement needed energy improvements and infrastructure at the property level. The National PACE Association will help you find PACE programs by state and PACE lenders by state and locality, including the PACE program in California.
PACE programs (property assessed clean energy) allow local governments, state governments, or other inter-jurisdictional authorities, when authorized by state law, to fund the up-front cost of energy improvements on commercial and residential properties are paid back over time by the property owners. the recent extension of this financing model to energy efficiency (EE) and renewable energy (RE) allows a property owner to implement improvements without a large up-front cash payment. (U.S. Dept. of Energy)
C-PACE considers existing financing and the needs of senior lien holders. The acknowledgment that senior lien holders must be on-board to access PACE financing from the very beginning is written into state legislation. It is essential to know this potential hurdle is and include mortgage holders at the front end of the process.
Property owners have two primary ways to increase the value of an asset; grow revenue or control expenses. As a property owner, the number one method of improving value is to reduce on-going expenditures. Often, one of the most significant line items is utility expense!
Addressing this with small dollars will usually create small advances. Access to the most significant capital expenditure funding allows for immediate and significant savings that reduce operating costs and boost NOI (Net Operating Income).
Energy efficiency lowers operating costs. Lower operating costs directly impact asset value.
What is a controllable expense? A controllable expense is a cost the property owner can change. A controllable expense is one that provides proactive property management opportunities to generate meaningful financial impact. State-sponsored support allows property owners throughout the country to make needed improvements, trim the carbon footprint of buildings, and reduce operating costs.
One of the most significant expenditures is utilities. C-PACE presents property owners with an opportunity to lower the costs of operations at the property level and the tenant. Reducing utility expenses, in turn, makes the property more desirable for occupancy when comparing tenant operating expenses between buildings with and without upgrades.
A property owner must decide which items to focus on when controlling expenses. It begins with the most significant dollar outflows and looks at cutting these as a percentage of the total costs.
For example, if water bills can be reduced by 15% by adding faucet flow devices, the cost of product and installation will be significantly less than the cost savings. Larger ticket items require more substantial capital expenditures. Tackling these expense items head-on is why C-PACE makes good business sense.
When property prices are rising, any incremental decrease in operating expenses can convert a higher asking price. If inflation is zero and property prices are stagnant- when there’s just no upside pressure on prices to rise, increased energy efficiency directly assists in allowing a property to maintain value as compared to assets without improvements.
The win-win for the property owner and tenant is creating lower energy usage. This paradigm shift is cause for celebration because the change can potentially extend the life of the asset. The only thing missing is you. Decide to review and implement C-PACE for yourself, your investors, tenants, and community.
