A whitepaper “Underwriting Energy Efficiency Financing in the Innovative Connecticut PACE Program” finds that PACE financing has lots of upside for commercial real estate owners.

Property Assessed Clean Energy (PACE) programs operate by allowing local governments to sell bonds and use the proceeds to help property owners make energy efficiency improvements. The improvements are paid back as part of the building owner’s property taxes, and the lien is attached to the property and transfers with ownership.

To date, 28 states and the District of Columbia have passed legislation enacting PACE programs. More than a dozen commercial PACE programs are currently in operation or are in an advanced development phase.

In June 2012, the Connecticut legislature established C-PACE specifically for the commercial and industrial property market. The program is administered by the Clean Energy Finance and Investment Authority (CEFIA), which can issue bonds for financing building energy improvements, provided the renovation, retrofit or installation is permanently affixed to the property and achieves an energy savings-to-investment ratio greater than one.

The whitepaper, discussing Connecticut’s PACE program, was sponsored by Sustainable Real Estate Solutions (SRS) – a provider of on-demand building energy assessment and proprietary benchmarking software. The paper cites several reasons why commercial real estate owners will benefit from PACE financing:

1. There is no net out-of-pocket capital expense.
2. 100 percent of the total project cost can be financed, including up-front costs (such as those up-front costs associated with the energy audit, CEFIA administration fees and finance closing costs) and post-construction costs (such as energy savings measurement and verification).
3. Well-developed projects have the potential to achieve immediate positive cash flow, while offering a number of additional benefits, such as reduced building operating costs, increased marketplace competitiveness and higher building value.
4. For multi-tenant investment property utilizing triple-net leases, costs and associated savings can typically be passed to tenants. Payments are typically treated as a pass-through operating expense, consistent with existing property tax expense treatment. For multi-tenant investment property utilizing gross leases (that are all-inclusive, except for agreed upon escalation clauses), the building owner benefits directly from lower operating (energy) costs.
5. The loan is secured by the tax lien on the property and ?the building’s financials rather than the borrower’s credit quality. The security of the tax lien reduces lender risk and enables more attractive financing terms.
6. The PACE structure enables long term financing (15-20 years depending on the useful life of the improvements) at commercially attractive financing rates. This can result in immediate positive cash flow since the energy savings typically will more than offset the cost associated with achieving these savings.

California has been out in front in terms of PACE. The corporate headquarters of Prologis at San Francisco’s Pier 1 will be the first commercial energy efficiency upgrade funded through the city’s GreenFinanceSF program that uses PACE bond financing.