including the Washington-based U.S. Envi- ronmental Protection Agency, consistently show that energy consumption by existing commercial and industrial buildings can be reduced by 25 to 40 percent through a variety of retrofi ts. Moreover, many types of retrofi ts can provide attractive returns on investment with relatively modest payback periods. Reliable sources estimate the volume of com- mercial building retrofi ts may grow to $15 to $18 billion per year by 2014, up from $3 billion in 2009. Thus, there is a huge potential mar- ket for energy-effi ciency retrofi ts fi nanced through the PACE program. In the industrial sector alone, there
are numerous opportunities for achiev- ing greater energy effi ciency. For example, the industrial sector in Texas accounts for 19 percent of total industrial electricity consumption in the U.S. Industries, such as refi ning, petrochemical, cement, steel and manufacturing, consume signifi cant amounts of energy and could enjoy sub- stantial economic benefi ts from energy- effi ciency retrofi ts. Energy effi ciency is important not only from the standpoint of savings in consumption costs, but also with regard to its impact on the demand side of energy availability. Maintaining reliable energy sources
is critical to continued industrial growth. Because of a variety of market and regula- tory constraints, there is little likelihood of signifi cantly increasing electrical production capacity in Texas in the near term. Therefore, reducing demand for energy supplies is a critical component of meeting ever-increas- ing energy needs. By facilitating energy- effi ciency retrofi ts, PACE fi nancing helps drive down the demand side of resource avail- ability. As Tripp Doggett, CEO of the Electric Reliability Council of Texas (ERCOT), Austin, recently noted: “To ensure future electric reliability in the ERCOT region, we need to take immediate steps to address this issue— on the supply side and demand side of the resource adequacy equation. For now, energy use—or “load”—will play a signifi cant role in the near-term reliability equation.” PACE also has the potential to dramati-
cally accelerate the energy-effi ciency retrofi t market for commercial buildings. Examples of eligible commercial properties include but are not limited to offi ce buildings, shopping malls, hotels, restaurants, condo-
18 RETROFIT // January-February 2013
miniums and apartment complexes. Unlike conventional fi nancing arrangements, the repayment period under the PACE program is frequently tied to the expected useful life of the improvements. In many cases, the repayment period for PACE fi nancing may extend for up to 20 years. The extended term of PACE fi nancing, coupled with the program’s requirement for annual energy cost savings to exceed the total amount of the annual assessment payments, means that retrofi ts fi nanced under PACE will gen- erate positive cash fl ows from the outset. In addition, PACE fi nancing removes the
“split-incentive” barrier in buildings with net lease agreements because property taxes generally qualify as a pass-through expense to tenants. The “split incentive” is an issue hindering investment in capital
There is no additional mortgage debt on the property.
The PACE loan is secured by the assess- ment lien on the property and does not affect the borrower’s credit.
The PACE structure results in positive cash fl ow immediately because the an- nual energy cost savings will more than offset the annual assessment costs.
For multi-tenant investment properties, assessment costs (and associated sav- ings) can be passed through to tenants under existing leases in most cases.
Ownership turnover is irrelevant be- cause PACE fi nancing follows title to the property. Future owners of the property assume the remaining PACE assessment payments while benefi ting from the cost
current driving forces for the nationwide growth of PACE.
improvements to multi-tenant buildings. For equipment upgrades that provide a return on investment through energy sav- ings, there is a “split incentive” between the landlord and tenants. The landlord often has little to no ability to recover the capital investment in energy-effi ciency retrofi ts. Although individual tenants would enjoy the benefi t of the investment through lower occupancy costs, they are unlikely to contrib- ute to the cost of capital investments that benefi t other tenants and whose payback may extend beyond the remaining terms of their leases. However, with PACE, tenants will reap the benefi ts of lower utility costs while also paying their allocable share of the assessment costs tied to the upgrades.
THE PACE PROGRAM is a smart way for owners of commercial and industrial properties to fi nance retrofi ts for energy ef- fi ciency and water conservation for a number of reasons, including the following: One hundred percent of the retrofi t cost can be fi nanced without utilizing the owner’s credit sources or investment capital for ongoing business operations.
PACE programs for commercial and industrial properties are the
savings realized from the energy-effi ciency upgrades.
By avoiding building obsolescence, ret- rofi ts fi nanced under the PACE program help preserve the value of the property.
In addition to the contractor’s guarantee of the energy savings that will result from the retrofi t work, the property owner can obtain energy savings insur- ance to cover any shortfall in energy cost savings below projected levels.
Yes, PACE may sound too good to be true,
yet the approach is real and the word is spreading. In addition to the numerous ben- efi ts of PACE fi nancing for commercial and industrial property owners, retrofi ts fi nanced through the PACE program will produce sig- nifi cant energy savings in the future.
This article fi rst appeared in The Metropoli- tan Corporate Counsel, a publication that covers legal, regulatory, legislative and busi- ness developments.
Interested in PACE Financing? Learn whether there is a PACE pro- gram near you at
pacenow.org.
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