PACE financing for commercial buildings picks up pace
Commercial property owners received hundreds of millions of dollars in PACE financing in 2017—more than twice the total amount of deals closed in 2016. It is now possible to arrange PACE financing in more than half the states in the United States.
Also, as more property owners learn how to use this complicated financing tool, PACE deals are becoming larger, reports UrbanLand.
“We are seeing more and more $5 (million) to $10 million PACE projects for complete building renovations. There is an increasing trend to use PACE for new construction,” said Jonathan Pickering of K2 Clean Energy Capital, the firm that arranged the C-PACE financing for Varseon.
Last December, Varseon, a pharmaceutical company in Silicon Valley received $8.65 million to pay for renovations to make its research and administrative facility in Fremont, Calif., more energy efficient. But the money was not a loan, and it wasn’t a grant.
Instead, Varseon, received the cash through commercial PACE financing. It will pay back the $8.65 million through an assessment on its property tax bills.
The amount of PACE financings that have been completed is growing quickly. For example, borrowers completed $222 million in PACE financings in 2017. That is more than double the $132 million in PACE financings created in 2016, according to data from PACE Nation.
The typical size of PACE financings is also getting larger—70 percent of the PACE transactions performed by CleanFund are now $70 million or larger, compared with just 20 percent a few years ago. Generally PACE has been used to renovate existing buildings, but some developers now also use PACE to help finance new construction.
“We have reached an inflection point in the popularity of PACE,” says Billy Grayson, executive director of the Urban Land Institute’s Center for Sustainability and Economic Performance.
PACE financing provides capital for building features that are specified by a local PACE program. Usually, these features cut the utility bill for the property by saving energy or water.
The financing is like a loan in that it must be paid back over a set term. But unlike a loan, the outstanding balance of a PACE financing does not appear on the balance sheets of the property. Instead, the payments are added to the property tax assessment for the property. Local property tax officials effectively become the servicers for the PACE financing.
The term of a PACE financing is typically 10 to 20 years, though some PACE financings have terms as long as 25 to 30 years. The term must be consistent with the useful life of the equipment it pays for. The longer the term, the lower the payments the property owners must make to repay the financing.
Because PACE financings are repaid through the property tax bills for the property, the companies like CleanFund that arrange PACE financing can be confident that the financing will be repaid, even if a property defaults on other financial obligations.
Interest rates for PACE may fall as some finance providers have experimented with securitizing the debt from PACE financings, selling the debts as bonds. For a property to use PACE financing, the other lenders that the property has borrowed money from need to approve the financing and the new property tax assessment.
PACE financing takes money out of the operating budget of a building to make improvements that are highly likely to cut the utility bills for the building. But those utility savings are not guaranteed.
Capital raised by PACE can also replace some of the equity that would otherwise need to be provided by the property owner. However, in most cases, the total amount of the PACE financing and the mortgage on the property cannot be more than 90 percent of the value of the property, officials said.
For PACE financing to work, local tax officials need to create their own local PACE programs that will allow them to collect the payments. So far, 33 states have passed legislation that allows local jurisdictions to create commercial PACE financing programs.
“More states are passing legislation to allow PACE,” Grayson said.
But different states have created different rules for their PACE programs. For example, in Texas, PACE renovations must meet one of the recognized industry standards for energy efficiency. In Florida, PACE financing can also be used to help pay for storm-proofing.