By Andrew Hanzl

Global warming is now a widely accepted concern. As real estate professionals, what role can we play to ensure environmental sustainability? One solution is to upgrade our residential and commercial buildings to become more energy efficient, incorporate renewable energy, and include water conservation mechanisms that reduce the carbon dioxide emissions. All these changes will significantly help the fight against global warming.

Currently, the United States produces a staggering amount of excess carbon dioxide emissions. Let me put this into perspective: the buildings in the United States alone, create more carbon dioxide emissions than any other country in world, except China. Furthermore, 40% of carbon dioxide emissions in the United States are attributed to buildings, surpassing both the industrial and transportation sectors. This is a pressing issue but upgrading older buildings is easier said than done. The initial process may seem complicated and costly but the resulting reduction in operating costs and positive impact on the environment is worth the trouble.  The U.S. Green Building Council has estimated that green buildings will lead to $1.2 billion in energy savings, $150 million in water savings, $715 million in maintenance savings, and $55 million in waste savings, between 2015 and 2018.

pace-financing

To make this eco-friendly transformation easier to implement, a means of financing known as PACE (Property Assessed Clean Energy) lending is currently available throughout the United States. PACE financing pays for 100% of the costs (no initial cash outlay) associated with retrofitting older buildings with environmentally friendly improvements, as well as outfitting new buildings with eco-friendly improvements. Some of the upgrades that can be financed through PACE include roofs, heating/ventilation, lighting, water pumps, insulation, and solar panels. The improvements are repaid over 20 years with an assessment added to the property’s tax bill. The local tax authorities simply add a line item to the properties tax bill, which automatically transfers to new owner upon the building being sold.

PACE Financing is available on almost all property types: office, multifamily, residential, agriculture, hotels, retail, industrial, non-profit, and even residential properties. On retail properties with triple net leases the tenants might be burdened by increased real estate taxes. But their utility bills will be considerably lower, resulting in more net savings. The building owner will benefit from all the energy efficiency savings in the common areas throughout the building. For gross leases (multi-family, hotels, etc.) all the energy efficiency savings flow directly to the bottom line for the building owner.

Since its inception in 2005, 750 commercial buildings, representing $250 million in total improvements, have benefited from PACE Financing. 32 states currently have legislation supporting PACE. 16 states currently have active projects.  PACE Financing is available in major markets including Los Angeles, Washington D.C., San Francisco, Austin, St. Louis, and Cincinnati. The availability of PACE in markets is increasing by the day.

The funding for PACE projects are raised from private investors, banks, and investment funds, collaborating in partnership with local governments. The companies raising the capital for PACE financing will lead building owners through the programs guidelines. Furthermore, they will offer engineering reports showing potential energy savings and assist in project management.

PACE assessments are ranked above mortgages, causing building owners to seek lender consent before engaging in PACE financing. For a number of reasons, over hundred mortgage lenders have allowed PACE assessments to take a senior line position. For one, the assessment will mostly likely increase the properties net operating income because the reduction of the operating costs far outweighs the increase in property taxes. Two, the increased cash flow will increase the building’s value to the lender. Finally, PACE financing does not accelerate upon default, which means only the portion past the due date is senior to the lenders claim. Currently, the vast majority of PACE financing projects are being approved by lenders.

PACE financing is an innovative and growing method to fund environmentally friendly improvements. Environmentally friendly practices are something that all owners should consider. If you are interested in obtaining PACE financing, or any other type of debt/equity financing please feel free to contact Andrew Hanzl, the author, at ahanzl@metcapital.com. Andrew is a Financial Analyst in the Dallas office of Metropolitan Capital Advisors.

If you would like to learn more about PACE financing, please go to www.PACEnation.us.