• PACE - Property Assessed Clean Energy

Does energy efficiency really pay for itself?

We have been hearing for years that it can, and now there is a financing tool to make it happen.

Property Assessed Clean Energy (PACE) is a new way for property owners to pay for energy efficiency upgrades, on-site renewable energy, and water conservation measures without incurring any upfront cost. PACE loans typically have longer terms — typically ranging from 15 to 20 years at a fixed rate. Longer terms mean the borrower’s loan payments are lower than what the property owner is saving from the energy project – generating immediate and lasting positive cash flow. Businesses with average combined monthly electric, gas, and water costs of at least $5,000 are excellent candidates; $500,000 – the higher the bill the better the project!

Before any of this can happen, Kent County needs to let it happen. This new financing tool is possible because local governments that establish a PACE program allow the PACE loan to be  treated as a special assessment property tax. In other words, the debt is attached to the property rather than the owner, offering benefits that other types of financing cannot provide. For example, upon the sale of a PACE project property, subsequent owners pick up the remaining PACE payments while also reaping the benefit of low energy costs. This makes PACE an excellent choice for businesses who want to install energy upgrades, but aren’t sure if they will be in the same property for the long term.

The bottom line is that PACE allows businesses to capture energy savings from measures such as  insulation, refrigeration, HVAC, lighting, windows, doors, roofs, boilers, pumps, solar, geothermal, and other new or retrofit energy upgrade projects in a way that makes financial sense. PACE is truly a win-win-win for all parties involved: business owners experience positive cash flow through long-term financing and capitalizing on energy saving opportunities; local governments create a business-friendly environment; contractors have the opportunity to complete more and bigger projects; and lenders have an avenue for safe, long-term investments.

To date, 25 local governments across both peninsulas have established a local PACE program by joining Lean & Green Michigan, Michigan’s statewide PACE program.  For a complete list, visit www.leanandgreenmi.com.

Benefits of PACE

There are large pools of cash looking to invest in low risk PACE projects. The low risk is derived from the unique pay-back mechanism that utilizes a voluntary property tax assessment. These are very secure loans since tax liabilities take precedence over all other creditors.

Commercial loans for energy renovations are typically short term, usually around five years. PACE funding can carry terms up to 20 years and the interest rate is fixed. The longer term financing makes incorporating a wide array of energy saving technology possible even if they have a longer payback period such as geo thermal heating and cooling and solar.

PACE projects cover 100% of all costs associated with energy efficiency projects. This includes equipment, installation labor and materials, financing and legal costs. For most commercial loans, the loan to value (LTV) ranges from 60% to 80%. Those costs are then repaid through a property tax assessment which, in the case of leased property, is typically paid by the tenant as part of their lease agreement.

For most energy efficiency projects, the PACE statute requires that its total cost be less than the resultant energy savings. Net costs are reduced resulting in a positive cash flow. Reduced costs create happy tenants!

Since the cost of the renovation shows up as a property tax assessment, and not a loan on the property, the property can be sold without the need to pay off a renovation lien. The assessment seamlessly passes with the property just as any property tax assessment would. A potential sale is thus less complex.

The benefits of converting to the latest energy technology are often improved lighting, less noise, increased comfort and a safer environment. Comfortable tenants are more likely to continue renting.

If a property up for rent has not been energy efficiency upgraded within the last 10-15 years, it’s relatively energy inefficient. Conversely, a property that has been updated is less costly to maintain and therefore far easier to lease, or sell if a sale makes sense. According to the client, energy updated properties increase the overall value of their portfolio. They are also a key advantage in tenant acquisition and retention, and often result in higher lease rates.

The client noted an advantage in renting out properties that are energy efficient and contain leading edge energy technology (see article). It greatly increases the size of the market of potential clients and allows them to charge an efficiency premium in their rent profile.

A PACE assessment does not have to show up on a balance sheet according to generally accepted accounting standards (it’s considered an assessment and not a loan payment). This has numerous benefits to the client including a stronger balance sheet to present to their investors.

A vacant building creates a significant expense to the company with no offsetting income. Keeping their properties occupied has a dramatic financial benefit and that is fostered by PACE in conjunction with many of the points listed above.

Contact WMEAC for more information on PACE:

Frequently Asked Questions:

What does “PACE” stand for?

“Property Assessed Clean Energy.”

What are PACE loans?

They are private loans to energy-intensive businesses, manufacturers, multi-unit housing, or nonprofits for big projects that significantly reduce large energy bills.

But here’s the twist: PACE loans are treated as special assessment property taxes, providing excellent security for private lenders who, in turn, provide fixed-rate financing for long terms.

Why use PACE loans for energy efficiency and clean energy projects?

Many of the most comprehensive energy upgrades have long payback periods – often greater than 10 years. In a competitive capitalist environment, businesses prefer to recoup their investments in much shorter timeframes. And, with terms of 3-5 years, traditional financing for energy projects hardly offers a solution. So businesses continue to pick at the low-hanging fruit while deferring the deep energy retrofits. In other words, they keep wasting money.

PACE changes all of this by eliminating the need for upfront capital and stretching the repayment terms long enough that the annual savings as a result of the energy project far exceed the debt service.  Through long terms (15, 20, or even 25 years) at fixed rates, businesses can experience positive cash flow from day one.

Why such long terms?

Because PACE loans are treated like property tax assessments, they enjoy first-lien status (just as any property tax obligation does). Then, because PACE projects are designed to produce an immediate positive cash flow, the new lender and any building mortgage holder see the loans as safe, and cooperate. That leads to long terms and fixed rates.

What happens if a PACE property is sold?

PACE loans stay with the property. The new owner assumes the payments, but also enjoys the benefits of owning a building with very low energy costs.  

What about tenant-occupied buildings, such as apartments or malls?

PACE can help to solve the “split-incentive” problem. Since the loan is treated as a tax assessment, it can be passed along to tenants as a rent increase. Tenants then benefit from a reduction in energy costs that is greater than their rent increase. PACE projects are smart investments for tenant-occupied buildings: Tenants help pay for the project; tenants and owners save costs and have improved comfort and health conditions; buildings are more attractive rental properties.

  • BOOST your cash flow immediately, and SLASH your big energy bills, all WITHOUT touching your cash on hand.
  • PACE enables private, long-term loans to businesses and nonprofits

for many kinds of energy-saving, revenue-enhancing projects. Lenders offer very favorable terms because the loans are secure county special assessments.

  • If your business’s average, combined monthly electric, gas, and water budget exceeds $5,000, there’s now an attractive way to finance and launch major, money-saving efficiency and clean-energy projects for both your building and your commercial, manufacturing, or industrial operations.

ELIGIBLE PROJECTS INCLUDE:Insulation ● Caulking/Sealing ● Windows, Doors, Roofs ● Energy Control Systems ● Indoor & Outdoor Lighting ● HVAC ● Boilers ● Refrigeration ● Ovens ● Displays ● Solar Panel Systems ● Solar Water Systems ● Geothermal Systems ● Pumps ● Electric Vehicle Chargers ● Water Use Reduction ● Fans ● Industrial Processes Even Refinancing!

► It requires no down payment.

► It immediately boost your business’s cash flow.

► It permanently increases your bottom line even as you pay off the loan.

► It works for owners and tenants, including offices, malls and multi-family housing, and mixed use space.