property assessed clean energy (pace) program
TRANSCRIPT
© 2017 Lerch, Early & Brewer
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Enabling property owners to pay for energy improvements or upgrades through
essentially a property tax assessment.
Property Assessed Clean Energy (PACE) Program
Lerch, Early & Brewer’s Real Estate group presents
Wednesday, November 8, 2017 | Offices of Lerch, Early & Brewer
@lerchearly @greenworkslend
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Greenworks Lending is the leading national
provider of Commercial PACE financing,
investing with building owners to upgrade their
commercial properties, drop operating
expenses, and become more energy efficient.
Our mission is to make clean energy smart
business
GREENWORKS LENDING
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Jessica Bailey CEO & Co-Founder Greenworks Lending
C-PACE 101
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• Property Assessed Clean Energy (PACE) is a government financing policy that classifies energy-saving upgrades as a public benefit – like a sewer, road extension, etc.
• This enables 100% of hard and soft project costs to be funded by private capital and repaid via a surcharge on the property tax bill.
• Payback periods match equipment life (often 20+ years)…
…this makes most projects cash flow positive from day one.
C-PACE TRANSFORMING ENERGY IMPROVEMENT FINANCE
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MOST ENERGY AND WATER PROJECTS QUALIFY
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High efficiency lighting Automated building and HVAC controls Variable speed drives (VSDs) on
motors fans and pumps High efficiency chillers, boilers, and
furnaces High efficiency hot water heating
systems Combustion and burner upgrades
Fuel switching (ex. oil to gas conversions) Water conservation Heat recovery and steam traps Building enclosure/envelope improvements Building management systems Renewable energy systems Associated permitting and other soft costs etc…
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Financial Requirements Financed amount cannot exceed $3.5M
or 35% of property value Total property debt (mortgage +
PACE) cannot exceed 95% of property value
Not in bankruptcy
Meets State’s statutory requirements
MOST COMMERCIAL BUILDINGS QUALIFY
Building Requirements Commercial, Industrial, Non-Profit,
Multi-Family >5 Units
Does NOT work for residential, government
Located within operational PACE municipality
Current on property taxes
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STATE-BASED LEGISLATION
• California • Colorado • Connecticut • District of Columbia • Florida • Kentucky • Maryland • Michigan • Missouri
• New York • Ohio • Oregon • Rhode Island • Texas • Utah • Wisconsin
•Virginia coming soon
ACTIVE PROGRAMS :
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LEGISLATION IN MARYLAND
Maryland Senate Bill 186 (signed, May 2014)
• Enables PACE for: Commercial Industrial Multi-family
• Enables Counties to Opt-In by Passing an Ordinance that Describes: Eligible Measures Eligible Properties and Property Owners Loan Terms and Conditions
• Requires Consent of Existing Mortgage Lenders
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C-PACE IN DC/MARYLAND
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ECONOMIC DEVELOPMENT
NATIONAL DATA, ALL LENDERS (9/31/17)
CRE MOTIVATION
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C-PACE FINANCING OVERCOMES IMPLEMENTATION BARRIERS
IMMEDIATE CASH FLOW
100% financing Long payback period, fixed
rate Covers all hard and soft
costs
FLEXIBLE AND SECURE FOR OWNERS
No personal or corporate guarantee Transfers on sale Can be passed through to tenants Preserves borrowing capacity
MOST PROJECTS & BUILDINGS QUALIFY
Qualify based on property value Funds most energy and water
projects All standard commercial property
types
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Cash Bank Loan PACE Assessment Down payment amount ($2,000,000) 15% - ($300,000) $0 Loan amount $0 $1,700,000 $2,000,000 Loan term NA 5 yrs 20 yrs Interest rate NA 4.00% 6.25% Annual Cash Flow Annual payment NA ($382,295) ($180,978) Annual energy savings $320,000 $320,000 $320,000 Net annual cash flow $320,000 ($62,295) $139,022
5-Year Financial Performance 5-Year Net Cash Flow ($720,000) ($611,475) $695,110 5-Year NPV @ 6% ($840,766) ($530,574) $585,611 5-Year IRR -16% NA Infinite 1Assumes no utility cost escalation and no performance degradation
to simplify case study
Sample $2M, Multi-Measure Project w/ ~6.25 Year Simple Payback
THE DAY 1 PAYBACK
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SECURE, AFFORDABLE SOURCE OF PROJECT CAPITAL
PACE funding decreases overall cost of capital, boost return on equity, and enhances existing mortgage and equity holder security
Payments made via property tax surcharge
PACE assessment transfers upon sale of property
PACE funding cannot be accelerated past current amount due - stays with property even in event of default
Up-front disbursement of up to 20-35% of “as is” property value for qualifying expenses – providing source of “first in, last out” capital*
Total funding can be up to 20% of “as complete” property value
Funding must be earmarked for qualifying energy and water-saving upgrades (as defined by local PACE ordinance)
Existing mortgage lender consent required due to tax assessment structure (illustrated at right)
Traditional Capital Stack Capital Stack with $2M PACE
Capital Stack For Sample $20M Property
$1.8M Remaining PACE
Principal
Mortgage ($14M)
Mortgage ($14M)
Owner/Investor Equity ($6M)
Owner/Investor Equity ($4M)
$180K Enforceable PACE Assessment
(Current Payment)
*Mandatory 10% hold-back until construction completion.
Case Study: Sample $20M gut rehabilitation project uses $2M PACE funding (6.25% cost of capital); reducing need for owner or investor equity (12%-15% cost of capital). Use of PACE results in $146K annual savings vs. investor equity due to reduction in cost of capital. Owner return on equity (ROE) increases dramatically due to increased leverage and reduced equity dilution.
MECHANICS OF A PACE DEAL
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• Technical Review: Ensures investments are economically sound for property owners
• Underwriting standards: Debt and property value ratios • Program Compliance: References C-PACE guidelines (verified by program
administrator) • Contractor Underwriting: complete background checks • Mortgage protection: Consent form verifies that C-PACE assessment
does not conflict with mortgage covenant
BORROWER PROTECTIONS
LENDER AND TITLE PREREQUISITES
Request for Lender Consent and Notice of Proposed C-PACE Loan 1. Explanation of C-PACE program 2. Explanation of lien priority and remedies upon a default 3. Debt and lien runs with land 4. Disclosure of C-PACE loan terms: a) Loan amount b) Interest rate c) Repayment period d) Annual installment payments
GREENWORKS LENDING
• PACE project makes the building – the lender’s collateral – more valuable
• Only PACE assessment in arrears is senior – future assessments do not accelerate
• Underwriting, mortgage consent, and technical review ensure projects are appropriate
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120+ MORTGAGE LENDERS HAVE CONSENTED NATIONWIDE
Only the red line (arrears) is senior to mortgage
Energy Savings
PACE Payments
0 5 10 15 20 25
C-PACE IMPROVES MORTGAGE SECURITY
LENDER AND TITLE PREREQUISITES
Notice of Clean Energy Loan
Two-page document recorded in land records
1. Discloses loan amount and that the lien and assessment
runs with the land
2. Subject to recordation tax
RECOVERY OF COSTS OF C-PACE LOAN FROM TENANT
Common Area Operating Expenses (CAM) • Capital expenditures that reduce operating costs • Repairs and replacements amortized over useful life • Taxes and assessments
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Building owner and contractor scope and price project Contractor and lender assemble energy measures into package
for state PACE approval Lender underwrites building and executes financing agreement
with owner for project cost Lender funds building owner through construction milestone
schedule Building owner receives property tax bill with PACE assessment
line item Building owner pays PACE assessment to municipality at same
time other property taxes are due Municipality remits PACE assessment, through the state
administrator, to Lender
PROCESS & CAPITAL FLOW
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MARYLAND FLOW OF FUNDS
CASE STUDIES
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CASE STUDY: COMFORT INN AND MEDICAL OFFICES
Highlight: Hotel received Choice Hotel’s (ComfortINN) highest level certification for sustainability following the improvements.
Project Need & Solution Commercial office building and hotel on a single parcel in Gaithersburg MD. implementing cost-saving energy efficiency upgrades. Project Type: building envelope, HVAC replacement, LED Lighting Total Project Cost: $ 1,400,000 Money Down: $ 0.00 C-PACE Financing: $ 1,400,000 Term: 20 years Annual Assessment: $ 124,567 Year One Savings $ 34,444 Lifetime Cost Savings: $ 3,174,510 PACE to Value <10%
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CASE STUDY: MULTI-FAMILY RESIDENTIAL & RETAIL
Take-Away: Historic bank building renovated into LEED platinum mixed-use facility. Developer used C-PACE to lower average cost of capital in stack.
Project Need & Solution Transform a former bank headquarters into a mixed use commercial condo and apartment building consisting of 285 residential units and retail space on the lower levels. Energy: Solar, high-efficiency lighting, and a microgrid. Total Project Cost: $1,000,000 Money Down: $0.00 C-PACE Financing: $1,000,000 Term: 20 years Annual Assessment: $42,685 Year One Savings: $236,899 Lifetime Cost Savings: $1,907,591 PACE to Value 17%
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CASE STUDY: OFFICE BUILDING
Owner Quote: “We expect the enhanced energy performance will transform the building for decades to come, making it a more comfortable, healthier, and productive place to do business.”
Project Need & Solution Commercial office building in CT requiring gut rehabilitation of two floors to reposition the asset for a higher grade tenant. Energy: High efficiency lighting, HVAC, and 80 kW solar Total Project Cost: $1,000,000 Money Down: $0.00 C-PACE Financing: $1,000,000 Term: 20 years Annual Assessment: $21,794 Year One Savings: $961,631 Lifetime Cost Savings: $2,483,527.00 PACE to Value 10%
Larry Lerman is a commercial transactions attorney who closes deals for real estate owners and investors, banks, and other businesses throughout the Washington metropolitan area. He structures and documents complex commercial lending arrangements and represents parties who are buying, selling, leasing, and financing commercial real estate.
About the Presenters
Jessica Bailey co-founded Greenworks Lending, with the goal of accelerating Property Assessed Clean Energy-financed clean energy projects throughout the United States. Previously, she led the design and management of the C-PACE program at the CT Green Bank. In its first two years, the program financed $75 million in clean energy projects– more than doubling the volume of PACE transactions between 2013 and 2014.
Jessica Bailey CEO & Co-Founder Greenworks Lending T 203-883-6152 [email protected]
Larry Lerman Commercial Lending Attorney Lerch, Early & Brewer T 301-657-0163 [email protected]
Property Assessed Clean Energy (PACE)