PACE Funding Gains Momentum with Commercial Owners

Large and small commercial property owners alike are discovering a new financing source that allows them to leverage future property taxes to pay for energy efficient improvements today.

Green buildings and new energy efficient improvements are an easy sell for today’s commercial owners. The payback on energy efficiency can range from immediate reductions on energy bills to less quantifiable benefits such as improved worker productivity, higher employee retention, and a more positive brand image. But finding ways to pay for those improvements can still present a stumbling block for many companies.

One financing solution that is gaining traction across the U.S. is Property Assessed Clean Energy (PACE) financing. The program enables commercial property owners to retrofit their buildings with more energy-aware solutions by borrowing money from a private lender and repaying the loan via a special assessment on their local property taxes. Qualifying projects can use PACE loans to pay for features such as heating and cooling systems, lighting improvements, solar panels, water pumps, and insulation.

Gaining Traction

California was one of the first states to pass PACE legislation in 2007. The financing program has since expanded to more than 30 states, according to PACE Nation. PACE loans can be used to fund 100 percent of project costs, including soft costs such as development fees. PACE financing also is available with flexible terms up to 20 years.

Madison Equities recently secured PACE financing to fully fund $5.2 million in energy improvements at two of its Class A office properties in St. Paul, Minn. The money will be used to pay for upgrades to the energy management and HVAC systems as well as LED lighting retrofits at the U.S. Bank Center and 375 Jackson Street. The improvements are expected to reduce energy consumption and related costs by 35 to 40% for each building.

"This is exactly what the PACE program was created to do, and this is the type of investment that every building owner in Minnesota should be pursuing for their own economic benefit," said Peter Klein, vice president of finance for the Saint Paul Port Authority, which serves as administrator for Minnesota's PACE program.

Significant Growth Ahead

Commercial property owners are gravitating to PACE financing due to a variety of advantages. PACE is entirely property-based financing, which means it requires no personal or corporate guarantees. PACE does not affect a building owner’s typical loan covenants, such as debt to equity ratios. In addition, because PACE is attached to a property tax bill, the obligation to repay the financing typically transfers to a new owner upon the sale of the property.

Many industry experts see significantly more growth ahead for the financing tool. The financing potential of the Commercial PACE program was estimated to reach more than $2.5 billion annually by 2015, according to a study by Navigant Research. Yet the road ahead may not be all smooth sailing. The PACE program is taking some heat on the residential side due to guidance that was recently issued by the Federal Housing Administration that sets standards that will allow qualifying homes with PACE assessments to be purchased or refinanced with mortgage products provided by FHA.

Residential Challenges

Although the new guidelines may have the best intentions to provide greater energy efficiency upgrades on the residential side, it also has drawn criticism from the likes of the Mortgage Bankers Association (MBA). The MBA issued a statement saying that the guidelines raises questions about lack of consumer protections and increased risks to FHA's insurance programs.

"While MBA believes that energy efficient home improvements can be beneficial for homeowners, we have had significant concerns for years about PACE programs in general," said Pete Mills, MBA senior vice president of residential policy and member engagement, in a letter to MBA members. "Unfortunately, FHA's new PACE guidance does little to ameliorate those concerns and raises important new questions about the lack of consumer protections, increased risks to the FHA's Mutual Mortgage Insurance Fund, and significant compliance and indemnification risks for lenders and servicers."

It remains to be seen whether the backlash on the residential side will slow momentum for commercial PACE financing. In addition, PACE funding may not be the best option for every situation. However, it is an alternative that more commercial property owners are considering as they work to line up capital to get energy efficient improvements off the drawing board and underway.

Billy Fink
Billy Fink
Billy Fink is a former member of the VTS team. Subscribe to the VTS blog: https://blog.vts.com/
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