Energy efficiency is on the minds of many commercial real estate owners as it provides a way to lower energy costs, increase property values, reduce operating expenses and enhance the comfort of their tenants. However, there are two main obstacles that can prevent owners from making energy improvements to their properties: a lack of capital and the inability to find financing sources.
To overcome these barriers, in certain states commercial property owners have been utilizing Property Assessed Clean Energy (PACE) financing, which provides funding for energy efficiency, water conservation and renewable energy projects.
What is PACE financing?
PACE is a voluntary energy conservation program that provides up to 100 percent financing for approved energy efficiency projects. While PACE is a national initiative, programs can be established locally and tailored to meet specific regional needs. State legislation must be passed in order to authorize municipalities to create local PACE programs. Commercial PACE programs are active in 18 states, with Illinois being the most recent state to pass PACE legislation.
PACE provides low-cost, long-term financing for energy efficiency projects such as, installing solar panels, HVAC improvements, roof repairs, updating insulation and installing LED lighting. This financing is available for a variety of commercial real estate properties including retail, multifamily, industrial, office, hospitality, affordable housing and senior housing.
How does PACE work?
Financing is arranged through a local program administrator who ensures applications meet specific guidelines and coordinates with the municipality to sell bonds to provide capital for such projects. The property owners repay the long term improvement financing through an assessment included on the real estate tax bill.
The PACE financing lien is affixed to the property -- not to an individual or business -- until the financing is repaid and since PACE is repaid through the property tax bill, it is non-recourse to the individual property owner. If the commercial real estate property is sold before the PACE assessment is fully paid, the lien stays with the property and remains the responsibility of the new owner as part of the real estate taxes as the savings from the energy efficiency project continue to benefit the new owner.
The value of PACE
From a property owner's perspective, there are many benefits of utilizing PACE financing. PACE offers up to 100 percent financing for projects, therefore the owner does not have to worry about upfront capital and can reallocate funds that were previously reserved for energy projects. The energy savings from PACE financed projects can also increase a property's value and cash flow. In addition, it provides access to energy efficient technology that may not have been otherwise available to the property owner.
Municipalities can also see benefits from PACE in terms of economic development, job creation, increased property values and the fact that there are zero net costs to the issuer or government body.
Commercial PACE is now available in Illinois. Legislation for PACE financing in Illinois started in 2009 with the passage of a basic PACE bill. In 2017, SB1700 -- HB2831 successfully passed committees, and in August, the governor signed it into law. Illinois' PACE law is only in effect for commercial properties.
The introduction of PACE in Illinois will help spur more energy efficient projects within the commercial real estate market, improve property values and create jobs in the clean and renewable energy industries.
• Mark Pikus is senior vice president of Inland Green Capital LLC, an environmental finance and investment company that provides capital for PACE project initiatives nationwide.