A Primer for Commercial Real Estate Companies What Is PACE 2 PACE is a taxassessment based financing mechanism for energy efficiency renewable energy and water conservation projects ID: 808852
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Slide1
a
Property Assessed Clean Energy (PACE) Financing
A Primer for Commercial Real Estate Companies
Slide2What Is PACE?
2
PACE is
a tax-assessment
based financing
mechanism
for
energy efficiency, renewable energy, and water conservation projects
.
Slide3PACE: Old Concept – New Application
3
1736
– First Assessment District in PhiladelphiaToday – 37,000 Assessment Districts nationwide
Water & Sewer ServiceParksSidewalksLightingDowntown renewalEnergy Efficiency (PACE)
Slide4PACE Basics
Assessment-based financing
Enabled by Statewide legislationSponsored by a
“local” government – a taxing jurisdictionPACE assessment collected with and like any other property tax and assessment
PACE assessment survives sales, including foreclosuresPACE assessment in arrears is senior to mortgages - but only the past due assessmentFuture PACE assessments are paid by future building owners
4
Slide5How PACE Works
5
E
nergy project construction proceeds exactly as it typically would.
Rather than
using equity and/or debt for
project
financing,
property owner uses a PACE provider.
PACE provider directs
the local taxing authority to
add a line item to
the property’s
regular tax bill, in annual repayment amounts for duration of the financing.
PACE repayment is collected with
the property
tax
payment, with no
additional paperwork
for
the property owner.
Municipality remits
the PACE assessment payment
to
the PACE
provider.
Slide6Who can use PACE?
Most Buildings, E
ven Non-Profits
6
Slide7What can be Financed through PACE?
7
Projects that Save or Generate Energy
Slide8PACE Legislative Map
8
32 States + DC, 80+% of US Population
2009
2009
2009
2013
2009
2009
2009
2009
2009
2009
2015
2008
2013
2013
2013
2011
2010
2010
2010
2010
2010
2010
2012
2010
2009
2009
HI Existing Authority
2016 legislative initiatives
2013
8
2014
2015
2015
PACE enabled
2015
Slide99
C-PACE Programs Today
730+ Projects – $230+
million
9
PACE programs with funded projects
Early stage PACE program development
Launched PACE programs
PACE enabled
RI
DC
Slide10Why PACE Financing?
The secure nature of
PACE enables up to 20-yr funding: projects with simple paybacks as long as 12 years can be implemented on a positive cash flow basis
Increases NOI.Increases Property Value.
Allows comprehensive projects10No payoff on sale –
PACE automatically transfers to the new owner, like any other real estate tax
No residual encumbrance and easy exit.
Takes the risk away from investing in needed
CAPEX.
PACE funds 100% of hard and soft development
costs
R
ecovery
of overhead
expenses and development fees.
No money down
Slide11Why PACE Financing?
The benefits AND the cost of projects can be
shared with tenants
Aligns landlord and tenant interests (eliminates the split incentive issue)
11Provides one or more benefits under all lease typesIncreases NOI
Increases property value
Improves aging infrastructure with no residual encumbrancesIncreases cost recovery by aligning landlord and tenant interests
Increases sustainable development
Slide12Simon Property Group – Great Lakes Mall, OH
“We hope to serve as pioneers in this arena, encouraging others to explore the many ways to reduce energy use now, rather than delaying sound financial and environmental decisions.”
George
Caraghiaur
, former SVP for Sustainability at Simon Property Group
12
$3.4M PACE Energy Efficiency Project
Slide13Prologis, Inc. Headquarters – San Francisco, CA
“
Prologis
is participating in the PACE program in order to promote new, innovative solutions for financing sustainable building improvements. It provides the flexibility to drive more energy improvement programs and that’s something everyone should embrace.”
Jack Rizzo, Managing Director, Global Construction and Renewable Energy,
Prologis
13
$1.4M PACE Energy & Solar Upgrade
Slide14Mountain Village – Sonoma County, CA
14
Sonoma Mountain Village used PACE to finance a 1 MW solar electric system in Rohnert
Park (CA) that allowed
SMV to cover 100% of its electric needs from on-site renewable power.
Slide15The Financial Impact of PACE - An Example
Property where the Landlord provides common area cooling and lighting
Project involves a $200,000 energy
efficiency retrofitAnnual energy and maintenance savings of $33,000 (6.1 years simple payback)
PACE funding available for up to 20 years 15
Slide16Scenario 1 – Owner-occupied building
16
Key Attribute
s of owner-occupied buildings
The owner is responsible for the payment of real estate taxes, building insurance, and common area repair and maintenance expenses Recovery of these expenses is through base
rent
Similar to
owner-occupied
buildings: Gross leases; Hotels; multi-family.
Any energy efficiency savings
flow
directly to the
owner's
bottom
line
Energy
efficiency projects
– versus required infrastructure improvement projects - are evaluated on the basis of cash-on-cash
return on investment
Slide17Financial Impact of PACE – Owner-occupied Building
17
Simplifying Assumptions
Annual Energy
Cost Increase: 0%Annual Maintenance Cost Increase: 0%
PACE financing interest rate
: 6%
10-yr
horizon for NPV and IRR calculations
Slide18Financial Impact of PACE – Owner-occupied Building
18
PACE increases property value with
no capital investment by the owner
Self FundedPACE 20 yearsPACE 8 years
Investment by owner
($200,000)
$0
$0
Decrease in energy
cost
$33,000
$33,000
$33,000
Increase in real estate tax
$0
($17,440)
($32,200)
EBITDA impact
$33,000
$15,560
$800
Cash flow year 1
($167,000)
$15,560
$800
Cash flow year 2 thru PACE term
$33,000
$15,560
$800
Cash-on-cash
IRR
13.4%
N/AN/ANPV of cash flow (8% discount rate)$36,000$104,000$5,300Property value increase at 6% cap rate (during financing term)$550,000$225,000$11,000
Slide19Scenario 2 – Triple Net Leases
19
Key Attribute
s of Triple Net Leases
Real estate taxes, building insurance, and common area repair and maintenance expenses are "passed through" to tenants on a pro-rata basis based on the relative size (square footage) of the area occupied by each tenant The tenants are typically directly metered and responsible for utilities in their own space
All
energy efficiency savings in the common area generated from investments by the landlord go directly to the tenants' bottom
line
Any increase in real estate taxes can be passed through to the tenants
Slide20Financial Impact of PACE – Triple Net Leases
20
Simplifying Assumptions
Annual Energy
Cost Increase: 0%Annual Maintenance Cost Increase: 0%
CAM Expense
Recovery Rate: 100%
Real Estate
Tax Recovery Rate: 100%
Green Lease
Clause for CAPEX Recovery: Not applicable
PACE financing interest rate: 6%
10-yr horizon for
NPV and IRR calculations
Slide21Impact of PACE – Triple Net Leases
21
Financing energy
efficiency through PACE improves the asset and can lower costs for tenants with no capital investment by the landlord
Self FundedPACE 20 yearsPACE 8 years
Investment by landlord
($200,000)
$0
$0
Decrease in energy
cost for LL
$33,000
$33,000
$33,000
Increase in real estate tax
for LL
$0
($17,440)
($32,200)
EBITDA impact
$0
$0
$0
Cash flow year 1
($200,000)
$0
$0
Cash flow year 2 thru PACE term
$0
$0
$0
NPV of cash flow
(8% discount rate)
($200,000)$0$0RET recovery from tenants$0($17,440)($32,200)Energy savings shared w/tenants($33,000)($33,000)($33,000)Tenant annual net savings$33,000$15,560$800
Slide22PACE Financing – In Summary
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Proven:
Assessment districts have been use in the US since 1736, and
PACE assessment districts are underpinned by the principle that energy efficiency and renewable energy projects on private property have a public purpose
Voluntary:
interested owners opt-in a PACE District to receive private market financing for improvements
Senior:
PACE has the same senior standing as non
ad valorem taxes
. As with taxes, there is no acceleration upon
default. Well accepted by mortgagors.
Tax Assessed:
property owners who use PACE to finance retrofits pay for the improvements through annual assessment payments on their property taxes
Availability:
32 States with PACE law. 15 States/DC with PACE programs in place.
Transferability:
Assessments
are linked to the property and transfer to a new owner upon
sale.
No residual encumbrances and easy exit
Beneficial:
Covers 100% of costs, increases NOI and property value, improves aging infrastructure, and aligns landlord and tenant interests
Slide23PACENation
23
Supporting the PACE Marketplace
PACENation
is a non-profit with a mission to promote PACE financing by providing leadership, support, resources, advice, networking and problem solving for a growing universe of PACE market participants.We’re here to help! Please reach out to us at www
.PACENation.us or info@pacenow.org