NEW ENERGY ON PACE

PACE Financing for Commercial Buildings; Property Assessed Clean Energy Financing for Energy Efficiency Retrofits and Renewable Energy: Market Opportunity, GHG Reduction, and Job Creation
Levin Nock and Clint Wheelock, 2Q 2010 (Pike Research)

"A Property Assessed Clean Energy (PACE) program creates voluntary tax liens on private property, to secure financing for retrofits on existing buildings for energy efficiency, renewable energy, and sometimes water conservation. The liens are paid off over 5 to 20 years, usually on the property tax bills.

"With a lien as security, financing can be secured in various ways…Each property owner in the district can voluntarily opt in to the program to receive energy upgrades on their own property…The effect of the lien on the property owner’s financial statement is to shift operational expense from energy bills to property tax bills. Some programs require this shift to be revenue-neutral or cash flow positive, while other programs allow PACE lien repayments which are larger than the expected energy cost savings…"

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"For a municipality, a PACE program is a “gift that keeps on giving” because a one-time public investment yields an ongoing benefit. In terms of the total amount of outstanding liens, the cost of running a program is roughly 1% to 2% for administration and education, plus 5% for credit enhancements such as a loan loss reserve fund or credit insurance…For a commercial program, if each large building project brings its own third party financing, then minimal public funding is needed…For third party financing, repayment can be managed in different ways…

"As the scope of a PACE program grows, bonds can be issued more frequently. For instance, a program might launch using $20 million borrowed from a municipal reserve…The program allocates $20 million in retrofit loans during the first year, and then issues a $20 million bond to replenish the funding. As the PACE program becomes more popular in year two, the cycle of “issue $20 million in retrofit loans, then aggregate these small liens and issue $20 million in bonds” might be repeated twice or even three times…"

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"A wide variety of efficiency upgrades are cost-effective within this structure. When existing rebates and tax credits are included, renewable energy projects are also cost-effective in some states…This financial tool was developed recently, and is rapidly evolving. Most programs have concentrated on residential retrofits thus far, with a few pilot commercial programs, some of which have developed out of residential programs…

"Opinions vary regarding the potential effectiveness of PACE in commercial energy retrofits, and the potential characteristics of successful commercial programs…The appetite of institutional retirement accounts for long-term bonds is huge…States with active PACE programs include Arizona, California, Colorado, Maryland, New York, and Oregon. The most activity in 2010 will be in California…Commercial property owners likely to take advantage of PACE in the next few years will be those with noticeably high energy bills, 10%+ equity, and expectations of keeping the property for a while. Because PACE programs are so new, some potential buyers and lending institutions may be wary…In regions where PACE programs are available, PACE will provide one of the best options to finance…"