Many commercial and industrial energy efficiency renovation projects go unfunded for a wide variety of financial reasons. Even though they could improve operational efficiency and reduce energy expenses, they are often delayed until they reach a point where waiting is no longer an option (operational failure).
An energy saving renovation project is often relegated to some unknown point in the future UNLESS there is a compelling advantage to undertake them NOW.
The latest EAGM client, a commercial real estate investment firm with an extensive portfolio of industrial, commercial and multi-family properties, was explaining the financial benefits they expect to achieve by utilizing Property Assessed Clean Energy (PACE). They are interested in launching energy renovations on a number of their properties IMMEDIATELY.
Every one of the properties in their portfolio has a long list of upgrades that are necessary to be more energy efficient but have been delayed for a variety of reasons. Upon learning about PACE, the investors realized the program could be used to update their properties in a more timely fashion. The financial advantages that go along with PACE helped encourage immediate action.
Here’s a brief list of the financial advantages that are compelling for this client:
- Access to Capital – 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.
- Long Term Funding – 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.
- No Up-Front Costs – 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.
- Reduction of Tenant Expenses – 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!
- Property Not Encumbered by Renovation Loan – 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.
- Increased Tenant Comfort – 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.
- Improves Marketability of the Property – 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.
- Marketing Strategy – 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.
- Off Balance Sheet – 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.
- Reduced Rate of Vacancy – 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.
What is interesting about this client is that even though energy efficiency is important to them, saving energy is not how they measure project success! The client has financial concerns that are much higher on their list of priorities. Those concerns are threefold: preservation of capital, reduced vacancies and an improved rate of return on investments. The financial leaders associated with this client understand PACE at a far deeper financial level than most CFO’s. Because of their newfound understanding of the PACE program, they have expressed interest in using Property Assessed Clean Energy to upgrade the efficiency of many of their buildings.
When the full financial benefits of PACE are understood throughout the commercial real estate industry, CFOs will be leading the way on energy renovation projects. Could it be that marketing energy efficiency will be viewed as one approach, but not the highest priority? Maybe it’s time to market the financial advantages of PACE and let energy efficiency be the beneficial side effect!
Want to learn more about energy efficiency financing? Considering a renovation project? Download the free report Ten Questions to Ask Before an Energy Efficiency Upgrade by clicking HERE.