1. What is PACE?
PACE stands for Property Assessed Clean Energy, an innovative and relatively new financing tool for promoting and funding energy efficiency, water conservation and renewable energy upgrades. These include maintenance and end of life of the equipment. PACE loans are repaid by a special voluntary assessment on the owner’s property taxes, similar to those levied for sidewalks, streets, sewers and similar improvements.
2. How does PACE differ from traditional financing?
Commercial loans are typically for a term of three to seven years and require an upfront downpayment of 20 to 40%. PACE loans are long-term – typically 20 years or more – at a fixed interest rate. The property secures the loan, not the owner and therefore are non-recourse. PACE loans also provide 100% funding preserving the owner’s capital. The loans also “run with the land” and are not paid off if the property is sold – the new owners assumes responsibility for the special assessment. PACE loans can be considered “off-balance sheet” preserving the owner’s borrowing capacity.
3. How does PACE benefit a business?
While energy can account for a relatively significant portion of operating costs, many efficiency upgrades, which can be costly, are delayed or never undertaken for various reasons. The financial returns may not meet the company’s hurdle rate, the upgrades require upfront capital that can be used for higher priority requirements, or the resultant energy savings are insufficient to pay off the loan. In essence PACE solves these issues and make the upgrades financially doable. And in Michigan, a major benefit is any energy efficiency, water conservation or renewable energy project over $250,000.00 has to be cash flow positive. That is the resultant energy savings must exceed all project costs. This is guaranteed by the project developer resulting in the property owner’s business to more profitable after undertaking the upgrades than by maintaining the status quo.
4. What if a company has a project that must be done immediately or it recently completed and energy or water efficiency upgrade”
Because of the ability to use PACE to refinance completed projects, urgent projects can be funded from company capital or short-term financing. Once the project is completed, the costs can be recovered with PACE financing. It’s important to consult a PACE advisor prior to undertaking the project to insure the business and upgrades qualify for a PACE loan as well as the resultant loan value. PACE can also be used to refinance recently completed energy efficiency, water conservation or renewable energy upgrades. This option results in a source of new capital that can be used for other projects.
5. Will PACE financing show up on the company balance sheet?
While PACE loans can be considered “off-balance-sheet”, the decision to do so depends on many factors and is best determined by an accountant’s review of the specific situation. Factors such as depreciation, write offs, etc. must be considered before making that determination.
6. How do I know if my business would benefit from PACE?
The following factors are only a “rules of thumb” for evaluating potential PACE projects and there are many exceptions. They have to be evaluated individually since they can vary by PACE lender.
- The owner’s equity in the building is 20% or greater
- There’s high energy and/or water use with annual utility bills running around $60,000 or more
- Building is older than 15 years, or hasn’t had an efficiency upgrade in that time period
- Desire to improve occupant comfort and productivity
- Need to reduce risk of system failures due to outdated technology breakdowns.
- Desire to incorporate leading edge energy technology (geothermal, fuel cells, LED lighting, wind, solar, etc.).
- Concerns about making the business / building more sustainable.
- Deferred equipment maintenance due to high cost of repair / replacement.
- Corporate social responsibility and “green” public relations agenda.
7. Can PACE financing be written off as an expense?
The payment of the special assessment is considered a property tax and can therefore be listed as an expense.
8. Can equipment financed by PACE be depreciated?
The determination of whether to depreciate equipment financed through PACE depends on many factors and is best determined by an accountant’s review of the specific situation. Factors such as depreciation, write offs, etc. must be considered before making that determination. Depreciating equipment purchased with a PACE loan precludes considering the loan “off-balance-sheet.”
9. How does PACE affect the Loan to Value (LTV) calculation of a business or building?
For those buildings that have a mortgage, the LTV is improved. Since all PACEqualified upgrades are considered real property vs. personal property, they increase the value of the property. By increasing the property value, the LTV of an existing mortgage improves.
10. How is the amount of funding for individual PACE projects determined?
The amount of eligible PACE financing is based on a percentage of the value of the property. Each PACE district’s assessment language will specify the percentage limit. However this can possibly be overridden by the PACE Program Administrator depending on the circumstances and is handled on a case by case basis. A general rule of thumb is a PACE loan will be roughly 20 to 30% of the fair market value (FMV) of the property. Mortgaged properties qualify for a lower level of funding than non-mortgaged ones. There are many factors that can affect this amount and will vary by the particular PACE lender.
Since each project must be handled on an individual basis, it is critical to define these variables upfront with the building owner so when a Proposal Contract is signed, everyone knows the amount that’s available for financing the project. The amount of funding is also affected by the scope of work and its cost. Some PACE lenders will allow 90% of the project’s costs to be used in establishing the fair market value of the property.
11. How is the value of the property determined?
There are a several acceptable methods used to determine the value of the property. The easiest and most available is 2X’s the State Equalized Value (SEV) on the tax bill of record at the taxing authority (county, city, township, etc).
In the case of refinancing a past project, it must be confirmed that the tax bill reflects the improvements that were made to the property. If this has not been accounted for, a new assessment should be requested or have the property appraised..
The second, and preferred method by PACE lenders, is to either refer to the most recent appraisal (within the last 12 months) or have a new appraisal completed. Each PACE lender will specify if a current appraisal is acceptable based on age, type, and who provided it. If a new appraisal is required, the PACE lender must be contacted to determine what type of appraisal is required and who is qualified to perform it.
The third method is the Fair Market value. If the SEV is not up to date, and improvements have been made, typically you can take 2X’s the most recent SEV value and add 90% of the cost of the improvements. Again, this varies by each PACE lender and therefore they must be consulted in advance.
The fourth method is to secure a broker’s “opinion of value.” This is a less comprehensive evaluation of the property and therefore less expensive than a full-blown appraisal. While accepted by many PACE lenders, this should be confirmed before having one done.
12. For multi-phase projects, how is the value established?
Multi-phase projects can provide an advantage in securing PACE loans. The advantage is that one phase can be completed based on the initial SEV if an appraisal is outdated or does not exist. This postpones incurring the cost of the appraisal, and has the added benefit of including the value of the improvements made in the first phase to the overall value of the property.
This higher value will then be reflected in the appraisal required for subsequent phases. Additionally, for larger projects, the first phase value is automatically eligible to be considered in the fair market value calculation resulting in an increased property value that may be sufficient to fund subsequent phases without having a new appraisal.
13. For new construction or re-purposed projects, how is the value established?
For new construction or a re-purposing of the building, i.e., converting warehouse space to offices, the baseline from which the energy efficiency upgrades will be calculated are the building codes in effect at the time the upgrades are made.
14. Does PACE vary by state?
Since PACE is not Federally governed, there can be significant variability within each state and even within each county, city or township as to the program’s administration. This includes qualifying applications – residential, commercial, industrial, non-profit or multi-family, the source of the financing – public bonds or independent lenders such as private equity firms, the maximum value of a PACE loan and how it’s calculated. Any project considering PACE financing should have a qualified consultant look at the project first to determine what qualifies and how much funding the project will ultimately be available.