United States:
PACE Financing Can Create Essentially Found Money For Your Buildings
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Have you heard of PACE Financing? If not, you should be aware
that this can be an effectively easy way to create economic upside
from your corporate – and non-corporate – real estate.
It cannot be overstated that PACE financing provides a multitude of
benefits to property owners, financial and otherwise. There are
certainly dollars here.Â
Here is the quick background:
First – what is PACE financing?
Property Assessed Clean Energy financing (i.e., PACE financing)
enables property owners to obtain private, long-term, fixed-rate,
fully amortizing financing for up to 100% of qualifying
energy-efficient building improvements. This financing is repaid by
an assessment on the property’s tax bill. PACE financing needs
to be legislatively enabled and is currently available in 37 states
in the U.S. as well as Washington D.C.
PACE financing can be an extremely attractive option to property
owners looking to build new or renovate their buildings as PACE
provides an ability to finance up to 100% of the hard and soft
costs of qualifying improvements at a fixed interest rate fully
amortized over the useful life of the improvement (typically 20-30
years). Because repayment of the PACE loan is made alongside
property taxes, an owner need only make payments a few times a year
rather than a monthly basis like a traditional loan. Additionally,
in certain jurisdictions, PACE is even available for improvements
that have been recently completed (i.e., can be financed
retroactively). Thus, PACE is one of the best possible ways to free
up otherwise trapped capital in certain real property.
In a nutshell, PACE financing allows a property owner/developer
to obtain very advantageous financing for energy-efficient building
improvements, sometimes even retroactively.
It is important to note that what qualifies as an
“energy-efficient building improvement” varies from
jurisdiction to jurisdiction but is generally broadly defined to
include items beyond the obvious “green improvements”
(like solar panels or cogeneration facilities), including items
such as windows, doors, heating systems, cooling systems, and
insulation – so long as such item makes the building more
energy-efficient. PACE is designed to be a self-sustaining program
so the theory is that the PACE loan will pay for itself with the
energy savings the owner will enjoy from the energy-efficient
improvements financed with PACE.
What are the financial terms of a PACE financing?
Although the specifics vary and will be tailored to each
project’s circumstances as it is like for any loan transaction,
most PACE financings are roughly as follows:
- Up to 10%-20% of the value of the relevant property
- Interest rate between 5% and 6%
- Term approximately 20-30 years
- Self-liquidating payments over the term
Where can PACE financing be effectuated?
37 states have enacted PACE financing so far – here is a
link to the list. If you have property in those
states, depending on your circumstances, you may be able to put
PACE financing on those properties. If your state does not
currently have PACE – fear not! There are active efforts to
bring PACE to all fifty states and those efforts can be expedited
if your proposed project warrants it.
Is there an ESG component to PACE financing?
Yes there is – and a big one too! PACE financing fits in
perfectly with the major trend towards being environmentally
friendly that is sweeping the U.S. and other countries. Indeed, the
heart of the reason PACE exists in the first place is to make it
easier – and cost effective – for companies to finance
green improvements to limit and reduce their carbon footprint. PACE
borrowers are essentially doing well by doing good.
Is this of any use if you are not a Real Estate Company?
Absolutely!!!! If you own real estate, you may derive a
significant benefit from PACE financing.
And this could be even more true if you are publicly traded, as
the low cost long-term nature of the financing will likely increase
your ROIC and other financial measures, which are treasured –
and rewarded – by stock investors and the markets.
Not to mention that in addition to benefitting the environment,
energy-efficient improvements also benefit an owner’s bottom
line by decreasing operating expenses through improved energy
efficiency.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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