“The idea of PACE is to broker long term financing so business property owners can undertake energy improvements profitably. That makes their business more efficient and they gain positive cash flow to plow back into their operation.” Andy Levin, Lean and Green Michigan
You are the CFO of a company that has a growing appetite for all kinds of energy. Your energy costs keep rising and it’s your job to assure the business is profitable. Even though you know your existing energy hungry equipment is due for upgrades the big question is how do you pay for the upgrades without posting a huge expense to your balance sheets?
“The CEO was discussing all the ways they were losing money on energy, which they can’t afford to fix because they don’t have the upfront capital.” Andy Levin
Andy Levin of Lean and Green Michigan recently discussed the energy challenges facing business leaders and owners of commercial real estate. EAG Vice President Curt Monhart was able to spend some time with Andy as he highlighted the ability of the Property Assessed Clean Energy program (PACE) to make businesses more energy efficient and more profitable.
To begin with Levin detailed three significant impediments to energy efficiency in regard to commercial and industrial property, and then showed how the Property Assessed Clean Energy (PACE) program solved each of them.
Problem # 1 – Profit & Loss Statement – when paying for energy efficiency upgrades, it shows up as a large expense on a company’s P&L statement. If that expense does not show a short term return on investment it’s very hard to justify to shareholders and stakeholders. It’s easier to do nothing and continue to waste energy.
Problem #2 – Only Short Term Loans Are Available – the P&L issue can be overcome if longer term loans are available. Most banks at present will only agree to make shorter term loans, usually less than 10 years. Additionally if a property owner is considering selling in the near future, any loan would become due and payable upon sale. Energy investments typically don’t make economic sense in those situations and once again – it’s easier to do nothing.
Problem #3 – High Investor Risk – banks and investors are always looking to lower their risk. A long term loan on equipment may not be considered a good risk. Because of the high perceived risk there is little money available for energy efficiency upgrade loans and, one more time – it’s easier to do nothing!
Considering the above listed problems, it’s no wonder why many corporate officers hang on to their outdated, inefficient, energy hungry equipment! According to Lean and Green Michigan, outdated technology is wasting BILLIONS of dollars per year in unnecessary energy expenses. Up until now there has not been an effective system in place to assist with energy upgrades while at the same time maintaining a company’s bottom line profitability!
PACE changes all that!
Solution #1 – Positive Cash Flow – the PACE program mandates strict requirements for the program to be used. The most appealing requirement is that the projects funded under the program must be CASH FLOW POSITIVE! The projects have to be paid for out of the reduced energy costs. This means that the CFO can highlight increased profitability due to reduced energy expenses! And the property is actually worth more because of the energy efficiency upgrade. That keeps the shareholders happy and makes moving forward on projects very EASY!
Solution #2 – Long Term Loans – One unique aspect of the PACE program is the mechanism for repayment of a loan. The property owner agrees to a special assessment that is secured by and repaid through the property tax system. The loan is attached to the property and if the property is sold, the repayment mechanism goes seamlessly with the property. PACE will finance qualifying projects up to 20 years. A property owner does not have to take into consideration having to cash out a loan if they decide to sell. They can increase the value of the property and make necessary upgrades using a long term loan without any downside. Once more it makes taking action easy!
Solution #3 – Lowers Investor Risk – Andy explained the unique dynamic that has created a large pool of investors that find PACE projects especially appealing. Attaching the loan to the property and using the tax system as a repayment tool has dramatically lowered the risk for investors. He noted that private equity, retirement and insurance funds, prefer PACE investments due to the safety associated with them. A large availability of funds lowers the cost of borrowing money and makes taking action easier! And because of the low risk of a PACE loan, the interest rate is usually one to one and a half points less than the typical commercial loan.
There is a huge pent up demand for energy efficient upgrades in the business and commercial real estate environment. Up until now there hasn’t been a system in place that made those upgrades easy or affordable. That has all changed with the PACE program. If you want to learn more check out PACENow which is a national clearing house for all the information on this unique green energy financing.