Although the state of Florida’s energy-efficiency program, known as PACE, has existed since 2010, recent developments could rapidly make it a more viable option to help fund certain commercial capital improvement projects. As a result, contractors who can help their clients access potential PACE funding options should gain a competitive advantage over their competitors.
What’s PACE?
The Property Assessed Clean Energy (PACE) program—adopted, so far, by 31 states and Washington, D.C.—provides funding for up to 100% of costs related to energy efficiency, renewable energy and water conservation upgrades to commercial and residential buildings. Florida’s PACE program also provides funding for wind mitigation (i.e., hurricane hardening) upgrades, including installation of impact-resistant windows and reinforced roofs. In its largest transaction to date, the state program provided $2 million in funding for energy retrofit upgrades at a West Palm Beach BrandsMart retail store, a sign that major owners are seeing the program’s benefits.
Additionally, private investors are indicating heightened interest in the program, as evidenced by two recent developments. First, a significant Florida PACE administrator, EcoCity Partners, was acquired earlier this year by California-based Renew Financial, a company headed by the originator of the PACE program model. Also, another Florida program administrator, Ygrene, completed a $150-million securitization of PACE loans in August.
How the Program Works
PACE operates simply. Local government authorities pay for the approved costs of qualifying upgrades, thus minimizing the property owner’s out-of-pocket costs. The local government then recovers those costs through a special property tax assessment against the related real estate over the useful life of the upgrades that it includes in the owner’s annual tax bill as a non-ad valorem assessment, payable until the costs are fully repaid. If the property is sold before the assessment is paid in full, the responsibility for future payments is transferred to the new owner.
Significant Benefits
The major benefit derived by property owners participating in the Florida program is that the annual energy cost savings achieved from energy efficiency upgrades, water bill savings, and/or property insurance premium savings from wind mitigation upgrades often will exceed the cost of the tax assessment, resulting in a net increase in operating income for the property, without incurring any traditional debt on the owner’s balance sheet. In addition, when tenants are responsible for their pro rata share of property operating expenses and real estate taxes, property owners can share with their tenants both the costs and the savings associated with their participation in the PACE program. Finally, the upgrades should also result in increased property values.
For contractors, bringing customers a new, innovative way to fund property improvements can solidify and enhance those client relationships, potentially resulting in increased sales and revenues. Participation in PACE also improves payment certainty for projects, since the local governmental authority pays for the work upon project completion.
Other potential economic benefits to property owners and contractors include the positive economic and environmental impacts these upgrades can have upon local communities by encouraging private-sector job creation, reduced energy costs and the use of local resources.
Overcoming Challenges
Despite these benefits, PACE’s growth has been slow to date, primarily due to a couple of challenges. The greatest challenge, and the easiest to overcome, has been the lack of information about the program, including both its existence and how it works. On a positive note, this challenge is quickly eroding as PACE’s funding of energy retrofits accelerates.
Another challenge, potentially more difficult to overcome, is the need to obtain the consent of existing mortgage lenders before funding property upgrades. This consent is required because the special property tax assessment used to repay the costs of the upgrades will take priority over the mortgage lender’s interest in the property. The facts and circumstances of each property are unique and require that deal-specific information be provided to the mortgage lender for consent to the PACE funding. Usually, however, once the mortgage lender understands the legal ramifications of their borrower participating in the PACE program, assuming that the economics of the transaction prove acceptable to the lender, such consent should be readily provided.
The potential opportunity to change the landscape of Florida’s commercial building stock is significant. Conservative estimates calculate that if all commercial buildings in Florida older than 20 years underwent qualifying upgrades, the cost would total about $47 billion. The PACE program can be an effective way to realize some of that potential.
The article authors are both attorneys with Holland & Knight in Fort Lauderdale. Bryan Jung is a finance attorney, specializing in creative, non-traditional financing transactions; Tony Alfonso is a LEED-accredited real estate attorney.
