While many commercial real estate owners may want to “go green,” some may view the costs as prohibitive. For those building owners, a new financing program, Property Assessed Clean Energy (PACE) finance, has been created to help make energy-efficiency upgrades less of a financial barrier.
“What we’ve seen repeatedly in a survey we’ve done for the last six years is that office building executives cite a lack of funding as their top barrier to retrofits,” said Katrina Managan, program manager with the Institute for Building Efficiency at Johnson Controls and author of a white paper on PACE.
The Institute for Building Efficiency maintains that building owners have had limited options for financing energy-efficiency projects. Debt financing terms rarely exceed 10 years, and terms between one and three years are more common for construction projects, according to the Institute.
PACE originated in 2008 in California and originally focused on the residential market. However, in 2011 commercial PACE programs were launched nationally. Under the PACE program, building retrofits or upgrades are paid back through property tax assessments. Managan said some cities have approved the use of the property tax assessment to prepay for the energy-efficiency improvements, which enables the use of PACE financing.
Additional benefits of the PACE finance structure for building owners include no upfront cash payments, long-term financing for up to 20 years, the ability to pass payments through to tenants and low interest rates, according to Managan.
“The reaction has been positive so far from the building owners that have used PACE financing. They’ve all used it for different purposes. They saw the option to use PACE finance so they wouldn't have to hold the loan themselves,” Managan said.
Industrial REIT Prologis (NYSE: PLD) in 2012 initiated a series of energy-efficiency upgrades to its headquarters in San Francisco using the PACE program. The company has almost completed its energy-efficiency overhaul, which represents the biggest PACE commercial retrofit in the country.
“Prologis saw the PACE program as an opportunity to promote an energy-efficient solution for commercial buildings in San Francisco and beyond,” said Aaron Binkley, director sustainability programs with Prologis. “PACE enabled us to allocate upgrade costs to customers in the building in proportion to their energy savings. The long-term financing allowed energy savings to exceed debt-service requirements.”