Month: December 2018

C-PACE Flips The Script On Energy Efficiency For Multi-Tenant Commercial Properties

By Counterpointe Energy Solutions
You can view the original article here.

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Historically, making energy efficiency improvements to buildings has been uneconomic for owners of commercial real estate. There are structural reasons why leased commercial properties have traditionally lagged all other properties types in terms of energy efficiency. The results? Billions of dollars of inefficiencies, hurting the environment as well as most companies bottom lines. “Energy use in buildings is a $400bn to $500bn a year problem,” according to Stephen Selkowitz of the Lawrence Berkeley National Laboratory. Worse, tenants are inhabiting buildings with outdated infrastructure for seemingly no reason. These problems are well-understood, and the solutions are readily available, so what is holding commercial properties back?

THE SPLIT INCENTIVE

Common types of commercial leases, such as triple net or modified gross leases, make tenants responsible for energy bills. As a result, the benefits of any reductions in operating costs from energy efficiency upgrades accrue to tenants. As great as that is for the tenant, it leaves the property owner holding the bag and bearing the total cost of those capital improvements. So not surprisingly, property owners have virtually no reason to invest in improvements. They utilize equity for no return. This conundrum is known as “the split incentive”. Given this raw deal, it is no wonder that property owners have been reluctant to engage in energy efficiency projects.

PACE IS THE SOLUTION

Enter Commercial Property Assessed Clean Energy (C-PACE), an innovative financing option that can be used to finance 100% of renewable energy, energy efficiency and resiliency improvements to commercial properties. PACE financing also covers all development and soft costs, so there are no out-of-pocket expenses for the property owner. C-PACE solves the split incentive problem and uses the commercial lease structure to the owner’s advantage. Since it is an assessment, not a loan, C-PACE payments are paid with property taxes. And in most triple net and modified gross leases, tenants pay their share of property taxes. So now, the tenant who benefits from the upgrade is also responsible for repayment – thereby solving the split incentive problem.
For property owners, C-PACE is a definite win. They get to upgrade their assets, with no out-of-pocket expenses. The improved properties have lower energy bills, resulting in lower operating expenditures and higher valuations. The properties can also be marketed as “green”, allowing owners to take advantage of any rent premiums for environmentally friendly buildings, as well as better cap rates upon sale

Recently upgraded buildings are also an added selling point when attracting new tenants and buyers. For example, the World Green Building Council reported in 2016 that greener retail buildings correlate with happier customers and higher revenues for stores. When it comes time to find new tenants or renegotiate terms of a lease, property owners will benefit handily from having made a C-PACE assessment.

Tenants also benefit from C-PACE. Most C-PACE programs require energy efficiency improvements to have a savings-to-investment ratio greater than one. This means that tenants should be able to make each C-PACE repayment with only the funds they have saved from lower energy bills – and still have cash left over that they can pocket. Tenants additionally get to inhabit improved buildings with brand new HVAC, windows, chillers, and other features.

The community likewise benefits from the environmental impact of C-PACE. Energy efficiency reduces the emissions of greenhouse gases, minimizing smog and asthma-inducing particles and diminishes the need for environmentally disruptive fossil fuel extraction methods.
Energy efficiency has long been a difficult investment for owners of commercial real estate. C-PACE flips this script – energy efficiency projects are now not only a good idea but are a slam dunk for commercial property owners.

PACE for Nonprofit-owned Buildings: Cutting Energy Costs to Serve Communities

By Bracken Hendricks
You can view the original article here.

Every day nonprofit community-based institutions work hard to raise money and deliver mission-driven programs and services. Whether providing affordable housing for the homeless, assisting at-risk youth in gaining job skills in public charter schools, or ministering to the conscience of a community in houses of worship, these institutions regularly push their internal capacity and strain their budgets just to advance a public mission of service.

When choosing to install new energy saving technology like more efficient lighting or boilers, or upgrading to renewable energy with solar panels, the choice too often comes down to a trade-off between using scarce capital resources to either upgrade their physical plant or carry out their mission.

Financing building improvements using Property Assessed Clean Energy (PACE) can enable nonprofits to overcome these upfront cost barriers and easily access capital that is paid for over time through savings on utility bills. PACE offers low interest rates, long terms to minimize payments, and a solid value proposition for mission driven organizations.  That’s a good deal not only for the community, but for local clean energy businesses, the regional economy, and our shared environment.

Today, PACE programs in Washington DC and New York State can provide important lessons to help other communities around the nation access these benefits from what we call “Civic PACE”.  Both Energize NY and Urban Ingenuity are finding that the nonprofit sector is a huge opportunity for clean energy sector growth. Considered part of the commercial building stock, most nonprofits have underinvested in energy related improvements.

These community-based organizations often have constrained budgets, substantial deferred maintenance challenges, and very large unmet capital investment needs.  Nonprofits are typically underserved in debt markets because they have unusual forms of credit or cash flows, making PACE an ideal mechanism to finance building upgrades because it attaches to the land record of the property not the credit of the borrower. For this reason, nonprofit properties frequently have low debt levels, further simplifying PACE underwriting by reducing the need for lender consent to establish a special PACE tax assessment.

Although PACE is a powerful tool for nonprofit institutions, it has not been widely available or accessible to these critical community-based institutions… until now. The cost of capital can be a major factor for institutions that low priced debt. In order to serve this important market, it is essential to structure creative financing solutions that bring down pricing for nonprofits.

With support from the U.S. Department of Energy’s Sunshot Initiative, The Solar Foundation, Urban Ingenuity, and Clean Energy Solutions Inc. (CESI) are working with program administrators across the country to open up the nonprofit market beyond Washington DC. Through outreach and collaboration, the team is working to demonstrate the viability of using PACE with HUD-assisted multifamily housing, the value of PACE-secured PPAs for non-profit solar projects, tax-exempt bond financing considerations, and other creative credit enhancements.  The team is finding opportunities to build this market to use PACE financing to expand deployment of solar energy and energy efficiency projects for nonprofit organizations, working closely with houses of worship and local Public Housing Authorities in Washington DC, New York, and many other communities around the country to make low-cost, long-dated debt and appropriate equity available for PACE projects.

For example, in the District of Columbia, Urban Ingenuity is currently structuring credit enhancements and tax-exempt PACE capital to bring down interest rates. They are currently closing a tax-exempt PACE note at less than 4% for 20 year debt, representing perhaps the first tax-exempt PACE financing, and demonstrating a new potential opportunity for PACE investment.

In New York, Energize NY has used Qualified Energy Conservation Bonds (QECBs) to bring down the cost of clean energy upgrades to under 3% for 20 year funds, as well as offering direct property owner support to help overcome the capacity gap that is a common barrier to upgrades in this sector.  In addition, New Market Tax Credits (NMTC) and other forms of innovative, low-cost capital are available to credit-enhance PACE notes.

Nonprofit owned buildings are not currently well served by solar tax equity markets; these markets are not always transparent for consumers, and the pricing and structure is traditionally designed to benefit the investor and developer, instead of maximizing the flow of resources to advance a non-profit’s mission. The PACE-secured PPA, on the other hand, reduces credit risk, drives transparency in solar markets, and presents improved pricing and terms for customers. DC PACE has proven a “pre-paid PPA” approach, and Energize NY is close to closing three PPA’s with non-profits and others unable to take advantage of federal tax credits.

More broadly, NY State is addressing the challenges facing non-profits and Low and Moderate Income (LMI) housing by supporting Energize NY PACE financing as well as through the State’s energy agency (NYSERDA) and a range of utility initiatives. These efforts combine to form a compelling package that can include direct project support, financing with long-terms and low interest rates, and energy upgrade standards that encourage improvements which provide significant financial gain to LMI housing and other non-profit customers.

The energy burden is disproportionately high for almost all nonprofits and especially for affordable housing owners who struggle with balancing operating needs and serving their mission.  Reducing energy costs and consumption make good financial sense for these property owners, and accessing upfront capital to pay for needed project level investments, paid for over time with utility savings, is one key piece of the solution. Now, with PACE, which can be enhanced through QECBs or other tools and paired with direct incentives, nonprofits can access the capital they desperately need to improve their property while saving money to advance their mission, foster public welfare and a higher quality of life while giving back to communities in ways that extend well beyond greening the environment and protecting global climate.

 

Five Financial Benefits of Using C-PACE (In Language Your CFO Will Understand…)

By Larry Derrett, Founder, EnFlux Building Solutions
You can view the original publishing of this article here.

CPACE
The C-PACE funding program has grown extensively and has the potential to become a game changer for the funding of energy efficiency projects. The market potential is immense, and the benefits of the program are compelling. But it is relatively underutilized. For the program to accelerate its growth, constant messaging is required for building owners, contractors and legislators to learn about the benefits of the program. Out of all these stakeholders, perhaps the building owner’s CFO is the most important target as they are the key decision maker when considering this type of funding.

My goal here is to provide a snapshot of the financial benefits of using C-PACE. This article is purposefully narrow in scope and is written in the CFO’s language.

C-PACE Testimonial

As of June 30, 2018, building owners have chosen the C-PACE program to fund 1,790 projects. That’s a 75% increase above the 1,020 projects closed through the end of 2016. However, it’s just the tip of the iceberg for C-PACE’s market potential. Financial decision makers all over the US have validated the benefits of C-PACE 1,790 times. That says something about the program.

“As a former CFO, I would not hesitate to recommend C-PACE to the CEO, board or investors. The benefits are compelling.”

Why? Let’s look at five reasons.                                                                     

#1. Increase Net Cash Flow from Efficiency Retrofits

C-PACE funding is repaid through a 20+ year assessment to a building which is collected similarly to traditional property taxes. This causes annual payments to be very low, especially when compared to 5- or 7-year traditional financing. As a result, energy and maintenance savings will exceed the annual C-PACE assessment for virtually any pure efficiency retrofit. In other words, if companies use C-PACE to fund pure equipment retrofits, their cash flow will increase.

The positive net cash flow can also ease the ability of commercial office building owners to pass along the costs and benefits of a retrofit to tenants. That’s because it’s easier to demonstrate savings will cover financing costs spread over 20 years versus a more traditional repayment period of ~ 7 years.

This is a win-win. Building owners receive an upgrade to the building that could last 15 to 20 years. Tenants enjoy lower overall net expenses and a more comfortable work environment.

What is outlined above is reason enough for many to use this type of funding. But that’s just scratching the surface…

#2. No Acceleration of the Assessment

The C-PACE lender is not allowed to accelerate the full amount owing even if a scheduled payment is past due. Only the unpaid amount that has been billed but not paid is recoverable. This is a very small amount when compared to the capital involved in a total debt restructuring. Therefore, it should not carry enough voting power to complicate the restructuring process.

#3. Freedom to Sell the Building

The C-PACE lender does not have approval rights regarding a sale. That’s because the assessment is an attachment to the building and becomes an obligation of the buyer. This eases how owners can optimize holdings, particularly for larger commercial real estate developers.

#4. Absence of Constraints Typically Imposed by a Lender

The C-PACE lender does not impose traditional lender protections such as quarterly reporting, maintenance of debt covenants or similar requirements. There is no need for an inter-creditor agreement and the building owner has one less creditor to deal with in case of a debt restructuring.

#5. Reduced Weighted Average Cost of Capital

This applies primarily to new construction and major renovations where the project is part of a new or restructured capital deck. The concept is simple – to the extent lower cost C-PACE funding can be used in lieu of higher cost equity (common or preferred) or traditional mezzanine debt, it lowers the overall cost of capital to building owners.

As mentioned earlier, an important element in C-PACE’s continued growth is for CFOs to understand the financial benefits of the program. You can help get the word out by sharing this article with financial decision makers in your network. If they are not familiar with C-PACE, they will appreciate the heads up. And please comment below if you have encountered additional financial drivers for embracing C-PACE.