Chicago PACE makes it possible for owners and developers of commercial properties to obtain low-cost, 100% financing for 20+ years for sustainability, renewable energy and energy efficiency infrastructure deployed in new or existing buildings. There are many financial and operational benefits that Chicago PACE provides to building owners, especially compared to traditional debt financing.
Chicago PACE is the latest and potentially largest in a growing number of state and municipal based C-PACE programs across the country which have combined to fund 2,000 energy efficiency, renewables and resiliency projects. PACE is private capital and stands for Property Assessed Clean Energy – the “C” denotes the commercial program.
Currently active in 22 states, C-PACE is a unique form of funding repaid through a beneficial assessment which becomes an attachment to the building and added to the owner’s property tax bill. The program is established at the state level by statute and is adopted by legislation sponsored by the local taxing authority.
A C-PACE lender’s approach to credit is quite different from that of a traditional debt provider. Since the assessment is an attachment to the building which survives changes in ownership, the C-PACE lender is most concerned with whether any owner would value the usefulness and location of the building. This is in stark contrast to the traditional approach of senior and mezzanine debt providers who rely on a number of protections which often tie the hands of building owners.
C-PACE offers low cost funding which places no financial or operational constraints on building owners.
Funding for 100% of Efficiency Retrofit Project Costs Over 20+ Years
C-PACE allows building owners to spread payments over 20+ years which is quite beneficial for new development and redevelopment projects. For a pure retrofit, it creates an immediate increase in net cash flow.
Increase Net Cash Flow from Efficiency Retrofits
Since funding is repaid over 20+ years, annual payments are very low, especially when compared to a traditional 7-year loan. As a result, energy and avoided maintenance/repair savings will exceed the annual C-PACE assessment for virtually any pure efficiency retrofit.
If C-PACE is used to fund pure equipment retrofits, net cash flow will increase!
This is illustrated below for a project with the following assumptions:
Typical 7-year debt financing: the chart below shows how the project has negative net cash flow each year with a cumulative deficit in Year-7 of ($123,578).
C-PACE – 20 year funding: the chart below shows how the project results in an immediate positive net cash flow due to the low annual C-PACE assessment.
The reduction in operating expenses makes the building more attractive to tenants and potential buyers. Furthermore, the assessment becomes an obligation of the buyer and does not require consent of the C-PACE lender.
C-PACE has become an important tool for some developers as part of a strategy to buy, enhance value and then sell properties.
No Guarantees Required from Ownership
This benefits owners of small businesses – no personal guarantees. It can also benefit large organizations if the parent wishes to minimize guarantees provided at the subsidiary level.
No Acceleration of the Assessment
The C-PACE lender does not have the right to accelerate the full unpaid balance, even if a scheduled payment is past due. Only the unpaid amount that has been billed but not paid, is recoverable. This provides great flexibility to owners in case they need to restructure their debt – there is one less lender involved.
Absence of Constraints Required in Traditional Debt
The C-PACE structure does not impose traditional lender protections such as cross default, restrictions on distributions, maintenance of debt covenants or quarterly reporting requirements.
Cheaper Capital for New Development and Redevelopment of Properties
C-PACE provides an excellent addition to the capital stack for development/redevelopment projects. The concept is simple – to the extent lower cost C-PACE funding can be used in lieu of mezzanine debt or common/preferred equity, it lowers the owner’s weighted average cost of capital.
As shown above, C-PACE can make a meaningful contribution to the Capital Stack. In fact, the Chicago PACE program allows funding up to 25% of the appraised value of the building.
When compared to Mezzanine, not only is C-PACE cheaper, it also allows owners to avoid the lengthy negotiation of a complex inter-creditor agreement. In addition, it allows owners to operate with much more financial flexibility as shown below.
C-PACE is “patient financing.” This building owner’s only concern is to pay the assessment included with their property tax bill.
The “green elements” of a building, can be used to support the raising of capital in existing buildings using C-PACE. Since the C-PACE attachment constitutes a lien, it will require consent of the existing lender. The application of C-PACE for refinancing will vary depending on how the business is financed and the use of proceeds. However, given the right circumstances, it can be quite attractive.
Freedom to Sell the Building – Assessment Assumed by Buyer
The C-PACE lender does not have the right to block a sale.
As mentioned previously, the assessment is an attachment to the building and becomes an obligation of the buyer. This is a great benefit for owners who actively manage their investment portfolio, particularly for CRE private equity firms and developers. The building owner will be asked to provide prepayment compensation to the lender for sales within the first three years, subject to negotiation.
Unique Benefits for Efficiency Projects for Owners Using Triple Net Leases
Under many triple net lease structures, building owners and tenants have been misaligned regarding the risks and rewards of efficiency retrofits. Building owners absorb the risk of financing, but tenants enjoy the benefits of reduced energy and maintenance/repair costs.
Since the C-PACE assessment is added to the property tax charge, it can often be passed to tenants in triple net leases. Although the pass-through is allowed contractually, for relationship reasons owners may want to justify to tenants how the project will lower their overall costs. Due to the low payments from C-PACE being amortized over 20+ years, energy and maintenance savings for virtually any pure retrofit will lower the overall costs for tenants.
This is a win-win. Tenants are happy because are saving money and are in a more comfortable environment. The owner has a more valuable building with lower operating costs and upgraded equipment.
- In Chicago, C- PACE is now available to building owners to fund energy efficiency, sustainability and renewable energy infrastructure deployed in new or existing buildings
- C-PACE programs, which provide 100% funding over 20+ years, are being embraced all over the US with over 2,000 projects closed to date.
- For virtually any pure retrofit, net cash flow increases by using C-PACE.
- For new construction and major renovation projects, C-PACE can be used in lieu of mezzanine debt or common/preferred equity to lower the weighted average cost of capital for building owners. With respect to mezzanine debt, owners can avoid the lengthy and complex negotiations associated with an inter-creditor agreement.
- Owners can realize a number of financial benefits because C-PACE does not require restrictions on distributions, rights to accelerate debt, guarantees from ownership, compliance with financial covenants, cross default provisions, or quarterly reporting requirements.
- Owners can realize operational benefits including the flexibility to sell the building and pass the C-PACE assessment to the buyer. In addition, C-PACE provides a valuable tool to solve the misalignment between building owners and tenants as to the risks and rewards of efficiency retrofits.
By Larry Derrett, founder and CEO of EnFlux Building Solutions
EnFlux Building Solutions has partnered with Counterpointe Sustainable Real Estate, LLC to introduce C-PACE financing to its business partners and potential clients around the US. EnFlux provides a range of capital solutions including C-PACE and separate programs for small retrofits anywhere in the US and for large projects in those areas where C-PACE is not active.
Counterpointe Sustainable Real Estate, LLC is a private capital provider that specializes in Property Assessed Clean Energy (PACE) financing. The firm’s management team has over 100 years of combined real estate and financial experience focused on making the economics of sustainable real estate work.
Counterpointe plays a unique role with Chicago Pace in that its sister company, Counterpointe Energy Solutions, LLC serves as the city’s program administrator in a joint venture with the Chicago-based investment banking firm, Loop Capital LLC.