PACE Financing: Mass * Velocity = Momentum

We wrote a few weeks ago about PACE (property assessed clean energy) financing for commercial building energy efficiency projects. While it may not be a panacea nor tipping point for the development of energy efficiency measures, it's certainly a tremendous boost, particularly for small-to-mid-sized commercial and industrial building owners. At Octus, we're becoming increasingly involved and engaged -- by the day -- in PACE and its implementation.

Earlier this week, GoingGreen featured an interview with Dennis Tsu, who manages Business Development for Commercial PACE with Renewable Funding. Based in Oakland, Renewable Funding is the leader in the turnkey administration of PACE programs. They get it and they're catalyzing the momentum of PACE. In the interview, Tsu engaged how PACE financing differs from traditional bank loans, therein nailing the virtue and viability of the financial vehicle:

If a property owner were to go to a large commercial bank today and say, “I want to borrow 500,000 dollars to swap out all the lighting systems in my big office building, and I can get a three-year payback on the investment,” the bank will then reply, “Okay, we will give you a three year loan.”

Then for the first three years of the life of those lights – which is typically about ten years – you haven’t made any money and you haven’t saved any money. You’ve saved energy, but all the energy savings you had is going to repay the bank loan. So, it’s not until year four that you start to see cash using a traditional bank loan.

One of the fundamental elements of PACE is that you can amortize the cost of the project over its anticipated useful life. You can take that half-million-dollar lighting project and amortize it over ten years, and your energy savings are going to be greater than your property tax assessment from the very start. So, you actually start generating cash in year one, instead of having to wait until year four.

In most of the projects we’ve examined, property owners can save money and immediately generate cash by taking advantage of PACE. In today’s economic environment, this makes PACE compelling.

+ + + + + +
Post-script (21 June 2010): Pike Research released a report today forecasting PACE financing for commercial buildings will reach $2.5 billion by 2015. “PACE programs are gaining momentum around the country, and they represent a very promising mechanism for overcoming many of the barriers to energy efficiency retrofits for commercial buildings,” says managing director Clint Wheelock. “The majority of buildings would benefit from energy retrofits, with neutral to positive cash flow in addition to the other environmental and social benefits.”

+ + + + + +
Post-script (1 July 2010): Great piece in CoStar's newsletter today, amplifying the opportunity. Summary:

[PACE] helps commercial property owners overcome the hurdle of the high upfront cost of energy upgrades. While the industry has come to agree that retrofits can sharply reduce energy costs and consumption and offset greenhouse gas emissions, private owners have struggled to finance such improvements due to capital constraints, especially in today’s economy.

Aggressive NOI goals and the need to split the benefits of tax credits and other incentives with tenants present other barriers for owners. PACE financing has emerged as a promising, albeit untested, tool for commercial owners.

“The opportunities are really tremendous from an energy retrofit perspective,” Hasner tells CoStar. “A lot of the hesitation from building owners comes from the upstream expenses and not wanting to make those expenditures. This type of financing can help alleviate some of those concerns and convince owners to make these types of investments, which are going to be cost effective as well as energy efficient in the long run.”