As part of the unofficial PACE Nation club - the professional individuals and corporations that have successfully created, fund and completed a PACE project - I often come across market data that most others do not see. Market data has so much to do with working smarter and not harder that I consider one of my best skills as a hustler the ability to research and discover true facts versus nonsense not worth my time. A very smart guy I know once defined "intelligence" as the ability to distinguish legitimate information from nonsense.
To this point, I'd like to share with the forum a detail report on the benefits of PACE for commercial real estate owners.
Before I do, I'd like to tell you why. After all, MJ has a thread on this forum dedicated to explaining why most successful members guard their industry, their hustle, their business - basically, the real meat on the bone - behind a veil of secrecy. Understandably so.
However, I play a different game. I am succeeding wildly in a $7,000,000,000,000 - yes, seven Trillion... with a "T" - global industry.
The other day, a young hustler in Australia directed this comment to me in this thread:
Receiving messages like this, even for the most solipsistic of narcissists, makes you thinking about your life and legacy, perhaps reframing it to include a genuine joy of actually helping people.
There is so much pain and frustration in this world, and I believe much of it comes from unsatisfied needs and unrealized desires. My fellow millennials - people 18 - 35 - squander so much wasted potential, because they simply don't have the right platform. They just don't have a place to drive all of this energy home
If talking about what I do, introducing people to the industry, and then even potentially working with the truly ambitious like myself, can make people's lives better, then I see a higher meaning to this hustle I've been putting together - and predicting the eventual exponential growth of - for years.
I mean, when I really think about it, after I have everything I want in life - the cars, the boats, the planes, the homes, the clothes, the girls - I can think of no greater joy than helping people that remind me of myself get to the top, too.
Anyway, enough of the sappy stuff. Let's get to the facts. Here's what makes PACE so freakin' awesome for commercial real estate owners (residential, too, but this thread will focus only on the commercial market).
Property managers often struggle to get technically sound energy efficiency and renewable energy projects approved for financial reasons. Sometimes the split incentive embedded in leases makes projects uneconomic for the building owner. Other times, property managers simply cannot get internal capital allocated to clean energy efficiency projects or cannot gain approval for the use of external financing. For commercial real estate property owners, Property Assessed Clean Energy (PACE) financing can remove the typical barriers to the implementation of energy efficiency improvements:
• The cost of PACE financing, and the benefits generated, can be shared with tenants.
• 100% of project costs, including soft costs such as development fees, can be financed through PACE.
• PACE financing allows terms up to 20 years, which makes it possible to generate increased net operating income from projects with simple paybacks reaching almost 12 years.
• PACE is strictly property-based financing and requires no personal or corporate guarantees.
• The obligation to repay the PACE financing automatically transfers to the new owner upon the sale of the property.
Challenges to Investing in Energy Efficiency and Renewable Energy Property managers who strive to make their buildings more energy efficient often struggle to get capital expenditures approved for technically sound projects. Sometimes the split incentives embedded in certain leases make projects uneconomic for the building owner. Other times, property managers must face the fact that they simply cannot get internal capital allocated to clean energy projects, despite their projected cost effectiveness. In the real estate world, many desirable capital expenditures compete for the allocation of limited funds. Investments to build revenue and market share typically trump those intended to cut costs. Almost always, core-business investments are seen as less risky. They are also viewed as making a critical long term contribution to the income growth expected by shareholders, and therefore face a lower hurdle rate for return on capital expenditures.
On the other hand, capital expenditures for energy efficiency and renewable energy projects face high risk-adjusted return requirements because savings estimates in such non-core activities are thought to be less certain2 and are heavily discounted or are simply not seen as being material or scalable. For small business owners, this situation is compounded by a lack of funds. If an energy retrofit project makes economic sense, and internal capital won’t be allocated to it, textbooks suggest the use of external capital (borrowing) instead. In practice, it’s not that easy. For small business owners, getting third-party financing often requires personal guarantees, some equity investment, or other onerous conditions. For larger companies, the downside of borrowing when a building’s holding period is up in the air, the cost of project capital versus corporate debt, and the balance sheet impact of the borrowed funds present barriers to the use of external capital. For commercial real estate property owners, PACE financing removes these barriers to the funding of energy efficiency and renewable energy projects.
PACE is a recent adaptation of property tax based assessment financing that state and local governments have used for decades to pay for improvements that benefit property owners and meet a specific public purpose. Throughout the United States (and even abroad), buildings are often assessed to pay for water and sewer facilities, parks, street lighting, business district improvements and many other projects. With PACE, the improvements are for clean energy upgrades that make buildings more energy efficient or enable them to generate renewable energy3 . PACE starts with state enabling legislation, and to date, 30 states and the District of Columbia have authorized PACE financing for commercial properties (which includes just about every building type other than single family homes or multi-family units of four or less). Because PACE financing is repaid as a line item on the property tax bill, a unit of local government must choose to operate or host a PACE program. Today, PACE financing is offered in over 2,000 municipalities in 16 states, ranging from small towns to major urban centers, including Atlanta, Cincinnati, Los Angeles, and St. Louis.
While there are many ways in which PACE can be implemented, most programs outsource (third-party) administration, and financing is typically arranged with a growing number of specialty finance firms that use private sector capital to invest in PACE funded projects. The specific process varies from state to state, but the elements of every PACE project are simple: 1) a property owner, working with a contractor, determines which clean energy upgrades make sense and opts to receive financing through the local PACE program, 2) 100% financing for both hard and soft costs is provided by an investor, and 3) a unit of local government “services the loan” by placing an annual assessment on the property, invoicing it alongside the real estate tax and other assessments on the property tax bill, collecting it, and forwarding it to the project funder.
The local government will enforce or assign its enforcement rights to the investor in the event of non-payment. Like other property taxes and assessments, the PACE lien is senior to other non-tax liens, including mortgages. In almost all PACE jurisdictions, an existing mortgage lender is given the right to consent to a project before it can be undertaken. To date, well over 100 mortgage lenders have consented because PACE projects make good business sense: they increase interest coverage ratios and building value, and PACE assessments do not accelerate upon a default. A mortgage lender’s only exposure to the senior PACE lien is for a payment in arrears. We know, from the hundreds of projects completed to date, that PACE financing works for all types of commercial real estate, including nonprofit owned buildings: office, retail, industrial, agricultural, multi-family, and more. Its appeal spans the broad spectrum of building ownership, from companies like Simon Property Group, Prologis, and Forest City, to small single building enterprises.
This exciting form of third-party financing provides unique benefits to building owners:
• The cost of PACE financing, and the benefits generated, can be shared with tenants under most lease forms, thus eliminating the split incentive issue that derails so many energy efficiency projects.
• 100% of project costs, including soft costs such as development fees, can be financed through PACE, which removes the requirement for out-of-pocket expenses for owners.
• PACE financing is available with flexible terms up to 20 years, making it possible to increase net operating income by implementing projects with simple paybacks reaching almost 12 years. This increased net operating income translates to higher property values for building owners.
• PACE is strictly property-based financing secured by a lien on the property4 . As a result, the owner of the property is not personally obligated to repay the tax assessment.
• PACE is attached to a property tax bill, and the obligation to repay the financing automatically transfers to the new owner upon the sale of the property, along with the energy-saving benefits generated by the project. This eliminates any holding period concern owners may have, i.e., it encourages energy production and efficiency and water conservation improvements even if a property owner does not expect to retain the property for the duration of repayment.
• It’s generally accepted that PACE does not affect a building owner’s typical loan covenants, such as debt to equity ratios. PACE Aligns Landlord and Tenant Interests One unique benefit of PACE financing is that the resulting real estate tax assessment, along with the cost savings generated by a sustainability project, can be shared with tenants under most lease forms. This alignment of landlord and tenant interests is a key benefit of PACE financing. Under triple net leases, for example, real estate taxes, building insurance, and common area repair and maintenance expenses are passed through to tenants on a pro-rata basis, based on the relative size (square footage) of the area occupied by each tenant. Conversely, any energy efficiency savings generated from investments by the landlord in the common area go directly to the tenants' bottom line. For the landlord, the resulting cash-on-cash return is negative. This split incentive – the investment is made by the landlord, but its financial benefits accrue to the tenants – is a reason why so few sustainability projects are undertaken by landlords at properties with triple net leases.
With PACE financing, however, the resulting special tax assessment is recovered from the tenants. PACE makes it possible for the landlord to improve a property’s energy efficiency with no negative effect on EBITDA or cash flow. At the same time, tenants’ EBITDA and cash flow can be increased by selecting the proper tenure for PACE financing, hence ensuring that the annual energy savings enjoyed by the tenants exceed the annual PACE assessment. PACE provides a win-win solution for landlords and tenants. PACE increases Property Values Whereas common area repair and maintenance expenses are passed through to tenants under triple net leases, there are many situations in which the landlord/property owner – not the tenants – is responsible for all costs in the common area. This is the case for owner-occupied buildings. It is also true for hotel owners, who rent rooms at a fixed price, and for owners of multi-family properties who recover common area energyand water costs through base rent. Other examples include properties with gross leases, and to a certain extent, properties with modified gross leases. In these cases, PACE financing can increase net operating income and property values for owners.
To this point, I'd like to share with the forum a detail report on the benefits of PACE for commercial real estate owners.
Before I do, I'd like to tell you why. After all, MJ has a thread on this forum dedicated to explaining why most successful members guard their industry, their hustle, their business - basically, the real meat on the bone - behind a veil of secrecy. Understandably so.
However, I play a different game. I am succeeding wildly in a $7,000,000,000,000 - yes, seven Trillion... with a "T" - global industry.
The other day, a young hustler in Australia directed this comment to me in this thread:
Receiving messages like this, even for the most solipsistic of narcissists, makes you thinking about your life and legacy, perhaps reframing it to include a genuine joy of actually helping people.
There is so much pain and frustration in this world, and I believe much of it comes from unsatisfied needs and unrealized desires. My fellow millennials - people 18 - 35 - squander so much wasted potential, because they simply don't have the right platform. They just don't have a place to drive all of this energy home
If talking about what I do, introducing people to the industry, and then even potentially working with the truly ambitious like myself, can make people's lives better, then I see a higher meaning to this hustle I've been putting together - and predicting the eventual exponential growth of - for years.
I mean, when I really think about it, after I have everything I want in life - the cars, the boats, the planes, the homes, the clothes, the girls - I can think of no greater joy than helping people that remind me of myself get to the top, too.
Anyway, enough of the sappy stuff. Let's get to the facts. Here's what makes PACE so freakin' awesome for commercial real estate owners (residential, too, but this thread will focus only on the commercial market).
Property managers often struggle to get technically sound energy efficiency and renewable energy projects approved for financial reasons. Sometimes the split incentive embedded in leases makes projects uneconomic for the building owner. Other times, property managers simply cannot get internal capital allocated to clean energy efficiency projects or cannot gain approval for the use of external financing. For commercial real estate property owners, Property Assessed Clean Energy (PACE) financing can remove the typical barriers to the implementation of energy efficiency improvements:
• The cost of PACE financing, and the benefits generated, can be shared with tenants.
• 100% of project costs, including soft costs such as development fees, can be financed through PACE.
• PACE financing allows terms up to 20 years, which makes it possible to generate increased net operating income from projects with simple paybacks reaching almost 12 years.
• PACE is strictly property-based financing and requires no personal or corporate guarantees.
• The obligation to repay the PACE financing automatically transfers to the new owner upon the sale of the property.
Challenges to Investing in Energy Efficiency and Renewable Energy Property managers who strive to make their buildings more energy efficient often struggle to get capital expenditures approved for technically sound projects. Sometimes the split incentives embedded in certain leases make projects uneconomic for the building owner. Other times, property managers must face the fact that they simply cannot get internal capital allocated to clean energy projects, despite their projected cost effectiveness. In the real estate world, many desirable capital expenditures compete for the allocation of limited funds. Investments to build revenue and market share typically trump those intended to cut costs. Almost always, core-business investments are seen as less risky. They are also viewed as making a critical long term contribution to the income growth expected by shareholders, and therefore face a lower hurdle rate for return on capital expenditures.
On the other hand, capital expenditures for energy efficiency and renewable energy projects face high risk-adjusted return requirements because savings estimates in such non-core activities are thought to be less certain2 and are heavily discounted or are simply not seen as being material or scalable. For small business owners, this situation is compounded by a lack of funds. If an energy retrofit project makes economic sense, and internal capital won’t be allocated to it, textbooks suggest the use of external capital (borrowing) instead. In practice, it’s not that easy. For small business owners, getting third-party financing often requires personal guarantees, some equity investment, or other onerous conditions. For larger companies, the downside of borrowing when a building’s holding period is up in the air, the cost of project capital versus corporate debt, and the balance sheet impact of the borrowed funds present barriers to the use of external capital. For commercial real estate property owners, PACE financing removes these barriers to the funding of energy efficiency and renewable energy projects.
PACE is a recent adaptation of property tax based assessment financing that state and local governments have used for decades to pay for improvements that benefit property owners and meet a specific public purpose. Throughout the United States (and even abroad), buildings are often assessed to pay for water and sewer facilities, parks, street lighting, business district improvements and many other projects. With PACE, the improvements are for clean energy upgrades that make buildings more energy efficient or enable them to generate renewable energy3 . PACE starts with state enabling legislation, and to date, 30 states and the District of Columbia have authorized PACE financing for commercial properties (which includes just about every building type other than single family homes or multi-family units of four or less). Because PACE financing is repaid as a line item on the property tax bill, a unit of local government must choose to operate or host a PACE program. Today, PACE financing is offered in over 2,000 municipalities in 16 states, ranging from small towns to major urban centers, including Atlanta, Cincinnati, Los Angeles, and St. Louis.
While there are many ways in which PACE can be implemented, most programs outsource (third-party) administration, and financing is typically arranged with a growing number of specialty finance firms that use private sector capital to invest in PACE funded projects. The specific process varies from state to state, but the elements of every PACE project are simple: 1) a property owner, working with a contractor, determines which clean energy upgrades make sense and opts to receive financing through the local PACE program, 2) 100% financing for both hard and soft costs is provided by an investor, and 3) a unit of local government “services the loan” by placing an annual assessment on the property, invoicing it alongside the real estate tax and other assessments on the property tax bill, collecting it, and forwarding it to the project funder.
The local government will enforce or assign its enforcement rights to the investor in the event of non-payment. Like other property taxes and assessments, the PACE lien is senior to other non-tax liens, including mortgages. In almost all PACE jurisdictions, an existing mortgage lender is given the right to consent to a project before it can be undertaken. To date, well over 100 mortgage lenders have consented because PACE projects make good business sense: they increase interest coverage ratios and building value, and PACE assessments do not accelerate upon a default. A mortgage lender’s only exposure to the senior PACE lien is for a payment in arrears. We know, from the hundreds of projects completed to date, that PACE financing works for all types of commercial real estate, including nonprofit owned buildings: office, retail, industrial, agricultural, multi-family, and more. Its appeal spans the broad spectrum of building ownership, from companies like Simon Property Group, Prologis, and Forest City, to small single building enterprises.
This exciting form of third-party financing provides unique benefits to building owners:
• The cost of PACE financing, and the benefits generated, can be shared with tenants under most lease forms, thus eliminating the split incentive issue that derails so many energy efficiency projects.
• 100% of project costs, including soft costs such as development fees, can be financed through PACE, which removes the requirement for out-of-pocket expenses for owners.
• PACE financing is available with flexible terms up to 20 years, making it possible to increase net operating income by implementing projects with simple paybacks reaching almost 12 years. This increased net operating income translates to higher property values for building owners.
• PACE is strictly property-based financing secured by a lien on the property4 . As a result, the owner of the property is not personally obligated to repay the tax assessment.
• PACE is attached to a property tax bill, and the obligation to repay the financing automatically transfers to the new owner upon the sale of the property, along with the energy-saving benefits generated by the project. This eliminates any holding period concern owners may have, i.e., it encourages energy production and efficiency and water conservation improvements even if a property owner does not expect to retain the property for the duration of repayment.
• It’s generally accepted that PACE does not affect a building owner’s typical loan covenants, such as debt to equity ratios. PACE Aligns Landlord and Tenant Interests One unique benefit of PACE financing is that the resulting real estate tax assessment, along with the cost savings generated by a sustainability project, can be shared with tenants under most lease forms. This alignment of landlord and tenant interests is a key benefit of PACE financing. Under triple net leases, for example, real estate taxes, building insurance, and common area repair and maintenance expenses are passed through to tenants on a pro-rata basis, based on the relative size (square footage) of the area occupied by each tenant. Conversely, any energy efficiency savings generated from investments by the landlord in the common area go directly to the tenants' bottom line. For the landlord, the resulting cash-on-cash return is negative. This split incentive – the investment is made by the landlord, but its financial benefits accrue to the tenants – is a reason why so few sustainability projects are undertaken by landlords at properties with triple net leases.
With PACE financing, however, the resulting special tax assessment is recovered from the tenants. PACE makes it possible for the landlord to improve a property’s energy efficiency with no negative effect on EBITDA or cash flow. At the same time, tenants’ EBITDA and cash flow can be increased by selecting the proper tenure for PACE financing, hence ensuring that the annual energy savings enjoyed by the tenants exceed the annual PACE assessment. PACE provides a win-win solution for landlords and tenants. PACE increases Property Values Whereas common area repair and maintenance expenses are passed through to tenants under triple net leases, there are many situations in which the landlord/property owner – not the tenants – is responsible for all costs in the common area. This is the case for owner-occupied buildings. It is also true for hotel owners, who rent rooms at a fixed price, and for owners of multi-family properties who recover common area energyand water costs through base rent. Other examples include properties with gross leases, and to a certain extent, properties with modified gross leases. In these cases, PACE financing can increase net operating income and property values for owners.
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