Commercial PACE Financing Brings New Equity to Projects

Commercial PACE (Property Assessed Clean Energy) is a cost competitive way to finance energy efficiency, renewable energy, water conservation, mechanical system replacement and other upgrades to new and existing buildings. PACE can pay for new heating and cooling systems, lighting improvements, solar panels, wind energy systems, structural repairs, insulation, and more for almost any property – commercial, industrial, non-profit, and agricultural.

In addition to providing a readily available source of financing for these specific aspects of redevelopment and new development, property owners use PACE to also lower utility bills and contribute equity following completion. PACE pays for 100 percent of a project’s hard costs and much of the engineering, permitting, project management and other soft costs. Additionally, terms on PACE loans regularly extend to 20 years with debt payment added to the property’s tax bill as a special assessment similar to new roads and infrastructure. Commercial PACE financing automatically stays with the property upon sale and is part of the taxes that can be assessed to tenants in traditional triple net lease situations. However, financing is off-set by savings in Common Area Maintenance (“CAM”) and may result in no net increase per square foot of rent paid.

How is PACE Provided to Property Owners?

PACE is a nation-wide initiative, but programs are established locally and tailored to meet regional market needs. State legislation is passed that authorizes municipalities to establish PACE programs, and local governments are involved in collection of the assessments and ultimately pay the debt service on PACE loans.

PACE can be used to fund projects with no outof-pocket costs. Since PACE financing terms extend to 20 years, it’s possible to undertake deep, comprehensive retrofits that have meaningful energy savings and a significant impact on the bottom line. In many cases, annual energy savings for a PACE project exceeds the annual assessment payment allowing some property owners to be cash flow positive immediately.

Minnesota PACE Programs

Minnesota passed PACE-enabling legislation in 2010, allowing multiple PACE programs to begin operating in the state. There are currently two active commercial PACE programs in Minnesota.

MinnPACE, a division of the Saint Paul Port Authority, is the State of Minnesota’s largest provider of PACE financing for commercial building owners for energy system upgrades and renewable energy projects. Additionally, MinnPACE is entering into strategic partnerships with local lenders to further increase the use of the program throughout the State. MinnPACE has many Joint Powers Agreements (“JPA”) in place with counties and local municipalities allowing PACE loans to be made in virtually any community within Minnesota. Furthermore, MinnPACE has been successful in entering into new agreements with governmental agencies on almost a weekly basis to further promote the program.

What Type of Projects have been Financed with PACE?

The range and scope of projects utilizing PACE financing is extensive and includes: energy efficiency upgrades, HVAC, lighting, motors, compressed air, new manufacturing equipment, outdoor lighting, and insulation and structural support improvements for all of the forgoing projects. The types of buildings utilizing PACE financing is also widespread and includes: industrial/manufacturing, multi-family housing (5+ units), agriculture, nonprofits, charter schools and places of worship. In addition, PACE financing is used for energy investments such as solar, wind and geothermal.

Prime Example of the Use of PACE

Earlier this year, Go Wild, LLC secured $6.74 million in PACE financing as part of its capital stack for the Treasure Island Center redevelopment project in Saint Paul, Minnesota. Treasure Island Center is a major, mixed-use redevelopment project scheduled for completion this fall located at the site of the former Dayton’s department store in downtown St. Paul. PACE funds are being used for energy efficiency upgrades that are projected to cut utility costs by 40 to 60 percent. The new building facility will be home to TRIA Rink, a fully enclosed rooftop ice arena that will be used by the Minnesota Wild as a practice facility. Once opened, the building will also be home to a fitness center, a brew pub, a restaurant, an event center, a multilevel Walgreen’s, Tim Hortons, an orthopedic clinic and office space.

Limitations on the Use of PACE

While extremely flexible, there are several limitations on the use of PACE. For example, the improvements financed using commercial.

PACE must be shown through a review by Xcel Energy or a private licensed professional engineer to meet national standards for energy efficiency, and the total amount of the PACE loan cannot exceed 20 percent of the completed tax assessed market value of the property. Further, most commercial mortgages have a Due on Encumbrance clause that gives the mortgage-holder the right to call the loan due if additional debt is placed on the property without the lender’s consent. A PACE loan is “unsecured” in the traditional sense because no mortgage is recorded against the property. However, as a property tax special assessment that runs with the land, the payment stream for a PACE loan actually has a “super priority” over even a first mortgage. Because of this, it is crucial to make use of an experienced PACE lending attorney to prepare documentation so as to appropriately manage risk and security interests when using PACE financing.

Summary

PACE financing is a fairly new and flexible mechanism for adding equity to old projects, providing necessary capital inputs into new projects and extending commercial financing over a longer period than is available with most traditional commercial real estate financing products at this time. Inevitably, commercial lenders and banks will need to become familiar and ultimately comfortable with the use of PACE financing both alone and in combination with other more traditional products. Commercial PACE is here to stay and will likely become much more common in commercial financing in the years to come.

For further information, please contact Daniel Schleck at (612) 672-3683 or dschleck@messerlikramer.com