PACE Financing A new approach to funding energy efficiency

7-29-2013 PACE Financing A new approach to funding energy efficiency

By Douglas Elbinger, Energy Policy Analyst, GreenLancer.com

 PACE = Property Assessed Clean Energy.

That’s exactly what it is. A financial tool whereby you can finance any energy improvements by accepting a ‘special property tax assessment’ to your commercial property and spread the cost out over 10, 20, year or more. The mission of the PACE program is to facilitate adoption of renewable energy and energy efficiency improvements by overcoming two major barriers to entry; the up-front capital and the payback period.  PACE programs allow property owners to voluntarily borrow money from local governments to pay for such upgrades without negatively impacting the credit of either the borrower, or that of the participating jurisdiction.  The payback period needed to make renewable energy and energy efficiency upgrades are economically attractive and have often been outside the reach of traditional bank financing.  The program is designed to work like a ‘performance contract’, so the energy savings from your improvements will be greater than the ‘special assessment’ cost, thus having a net gain on the bottom line.

Owners of commercial and industrial property in the U.S. spend over $202 billion each year on energy for their operations – yet industry studies indicate that 30% of that cost is outright wasted every year due to inefficiency and out dated energy equipment. If your energy audit shows opportunity for a 15 – 30+% improvement …you can finance the upgrades out of the saving.

Virtually any business owner can participate in PACE . If you own commercial, industrial or multi-family property (five units and up) and you want to reduce your energy or water costs or install renewable energy equipment, the PACE  program can work for you. Unfortunately, under Michigan’s PACE law single-family residential properties are not currently eligible.

Property owners who undertake a PACE project enjoy the following benefits;

 –You typically pay nothing down.

–On all energy efficiency projects, you must save more than you pay from start to finish. I.e., your semi-annual special tax assessment payments must be less than the money you save in reduced energy costs. Of course once you have paid off the special assessment, you accrue all the savings with no payments at all.

–The contractor guarantees and verifies the energy savings on all projects of $250,000 and up.

Property owners start by performing an energy audit on their facilities to determine the most cost effective energy interventions. A Certified Energy Manager (CEM) should perform the energy audit, or other certified professional.  The cost for this audit can be rolled into the PACE funding.

Once you have completed the audit and have a list of recommended improvements with a cost/benefit analysis and energy saving projections, you should contact Lean & Green Michigan™. Lean & Green Michigan™, is a public-private partnership that enables local governments, property owners, banks, third party lenders, and contractors to collaborate to create a market for energy efficiency and renewable energy finance.

They administer the application process to have your project evaluated. Lean & Green Michigan™ expedites the process for municipalities and other jurisdictions to create a PACE district at no cost, with no need for new government staff or lengthy RFP processes.

 Attention Contractors

Once you are in the application process, Lean & Green Michigan™ collaborates with contractors and their clients to work with lenders and investors. Plus, it affords your clients a source of money with no ‘opportunity cost’, i.e. they cannot use it for anything else. Experienced contractors with strong track records may become a partner on the Lean & Green Michigan™ team, which means property owners may turn to you to help design and implement energy projects

 A summary list of typical improvements include; Insulation, roofing, Caulking, weather-stripping, air sealing, windows, doors, energy control systems, HVAC and Energy recovery systems, LED Lighting retrofits, and day lighting systems.  Also covered is installation of electric car charging stations to charge PEVs and HPEVs. Any water use reduction or efficiency methods are covered as well as energy-efficient or water-efficient manufacturing processes or equipment.  Renewable energy installations such as Solar Electric, Solar Thermal, Wind, Geothermal …and the list goes on.

How PACE Financing Works

 PACE financing allows a longer payback period with lower annual amortization and better terms, making many energy projects financially feasible …that otherwise would not be.

Under Michigan’s Property Assessed Clean Energy (PACE) financing law counties, cities and townships may work together to form a joint PACE district, which is open to all Michigan counties, cities and townships free of charge. A PACE district allows a property owner to use the property tax mechanism to finance energy improvements. The property owner voluntarily takes on a Special Tax Assessment, which it pays off as part of its property tax bill.

That’s a fundamentally different arrangement than a traditional bank loan, in ways that can transform an energy efficiency or renewable project from an engineer’s great idea that the company CFO will not approve into a clear bottom line winner for the company.

Here’s how:

—Since the PACE loan is a special assessment obligation, it is senior to any mortgage – and hence very secure for the lender. (Because of this, if the property owner has a preexisting mortgage, he or she must get the mortgage bank’s consent.)

—Up to 100% of the project’s cost can be covered under a PACE special assessment.

—The PACE special assessment “runs with the land” – the owner can sell the property and the new owner simply picks up the payments (and energy savings), just as it begins to pay property tax.

—Because of these features, PACE special assessments can be amortized for 10 or 20 years or longer (up to the useful life of the improvements or equipment involved) – many times longer than a traditional bank loan. Projects may also garner slightly more favorable interest rates.

—Under Michigan’s PACE statute, the general contractor must guarantee the energy savings on all projects of $250,000 and up.

—Bottom line: property owners doing PACE approved projects will generally pay nothing down and will generate more money in energy savings than their payments to service the special assessment. The project will be cash flow positive from beginning to end. In fact, under Michigan’s PACE law, this savings to investment ratio must be positive on day one as a condition of project approval. OK. This is not as difficult as it sounds and really works.

Andy Levin is managing partner of Lean & Green Michigan™

Andy Levin is managing partner of Lean & Green Michigan™, and champion of the PACE program in Michigan. Andy is a former Deputy Director and Acting Director of the Michigan Department of Energy, Labor & Economic Growth. Other partners include Citigroup, Lockheed Martin, Johnson Controls Inc., AKT Peerless, Sustainable Real Estate Solutions, Celtic Energy Inc. and the Michigan Economic Development Corp.

Pace is a relatively new financing model, started only in 2008. A report in June 2011, (the last complete data set) the number of projects in the US, completed with PACE financing has more than doubled, to at least 168 worth $33 million, from 75 worth $10 million”, according to David Gabrielson, the executive director of PACENow, a nonprofit advocacy group that tracks the programs. The group says that 30 states including Michigan and the District of Columbia have passed laws allowing the program, and estimates that the number of projects could easily double by the end of next year. “It’s an idea that resonates and is catching on,” concluded David Gabrielson.

To learn more about the Pace program and start creating new jobs contact;

Lean & Green Michigan™, administrates the PACE program in Michigan.

To get started, visit www.leanandgreenmi.com

Newman Consulting Group, LLC

Performs energy audits, Level I – III.  Financial grade audits with cost/benefit analysis should be performed by a CEM (Certified Energy Manager). You can get more information from Newman Consulting Group, LLC www.newmanconsultinggroup.us

 

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