if you build it, will they come? · if you build it, will they come? presentation at aceee’s...
TRANSCRIPT
IfyouBuildIt,WillTheyCome?PresentationatACEEE’sEnergyEfficiencyFinanceForumMay23,2017
OurmissionistopromotePropertyAssessedCleanEnergyfinancingby providingleadership, support,problem
solving,dataandnetworkingopportunitiesforagrowinguniverseofPACE marketparticipants.
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PACEFinancingfortheCREMarket
ü TheCREMarketanditscharacteristics
ü WhyisEEatoughsellintheCREmarket?
ü WhatMakesPACEsoCompelling?
ü ExampleoftheFinancialImpactofPACE
• Buyitorbuilditright– CREcompaniesbuildandpurchasethecorrectpropertyinthecorrectlocation• Leaseitright– CREcompaniesleasespacetotherightmixoftenantstomaximizethevalueoftheproperty• Financeitright– CREcompaniesutilizetheappropriateamountofdebtandequitytoreducetheiroverallcostofcapitalandmaximizetheirreturnoninvestmentgivenaconservativelevelofrisk.
HowdoCREcompaniesmakemoney?
TheBasicObjectiveofCRECompanies
“…thetwomostimportantthingsinthefuturearetop-linegrowthandminimizingcapexoutflows.”
- RealEstateForum July/August2015
PrioritiesofCRECompanies
DespiteBenFranklin’smaximthat“Apennysavedisapennyearned”,assetmanagementandexpenseminimizationadistant4th onthelistofCREpriorities
Capitalexpendituresarededucteddirectlyfromcashflowü Lesscashavailablefordistributionü Lesscashfornewacquisitions/coreprojects
WhydoCRECompaniesMinimizeCAPEX?
NOI $1,000,000
LessCAPEX ($100,000)
CashAvailableforDistribution $900,000
Capital expenditures aredeemed to come from “theequity pocket”, andinvestments not related tothe core business arefurther subjected toallocation of capital, andare burdened with riskallocation premiums
WhyareHurdleRatesforCAPEXsoHigh?
CapitalExpenditures
PropertyAcquisition
Equity(12-15%)
Debt(4-5%)
OtherReasonsCREavoidEnergyProjectCAPEX
ü TimePressure:Peopleareoverworkedandhavelittletimeorinclinationtofocusonanythingnew
ü PoorCredit:CREpropertiesareoftenownedbyspecialpurposeentitieswithnoassetsbeyondthepropertyandparentcompaniesarereluctanttoprovideparentalguarantees.
ü HoldingPeriodBias:CREcompaniesarenotinclinedtoinvestinapropertyiftheydon’tknowhowmuchlongertheywillownit
ü PerceivedRisk:CREexecutivesdon’ttrustsavingsforecastsandaddsubstantialriskpremiumstohurdlerates.
ü SplitIncentive:Manyleaseformsprovidedis-incentivesforlandlordtoinvestinenergyprojects
TheCaseforPACEforCRE
TheCaseforPACE
CapitalExpenditures
PropertyAcquisition
Equity(12-15%)
Debt(4-5%)
PACE(5-6%)
üCashFlowvsCAPEX• PACEfunds100%ofhardandsoftcostsandeliminatesdeductionsfromcashflowforCAPEX.• PACEisacheaperformoffinancingforCAPEX
WhatMakesPACE soCompelling?
üPoorCredit• PACEisstrictlyproperty-basedfinancing• Goodrealestatetaxpaymenthistory,notcreditstrength,iskeytofinancing.• Reasonableloantovaluerequirements• Nonrecoursetobuildingowner
WhatMakesPACEsoCompelling?
üHoldingPeriodBias• Automatictransfertothenewowneruponthesaleoftheproperty• Non-accelerating
WhatMakesPACEsoCompelling?
üPerceivedRisks• 20-yrfundingavailablebasedontheaverageusefullifeofECMsreducesriskbymakingitpossibletogeneratemorepositivecashflow• Wellacceptedbymortgagees• Favorablebalancesheettreatment
WhatMakesPACEsoCompelling?
üSplitIncentive• Dependingontheleasestructure,theannualPACEtaxassessmentburdenmaybesharedwithtenants,alongwiththebenefitsofanenergyefficiencyorrenewableenergyproject.• Thetenants’cashflowsavingsfromreducedenergycostsfromtheimprovementsarepartiallyoff-setbytheincreaseinpropertytaxpassthrough,resultinginanetsavingsfortenants• Thiseliminatesthesplitincentiveimbeddedinmanyleaseforms.
WhatMakesPACEsoCompelling?
