Property Assessed Clean Energy (PACE) financing is a novel method of encouraging energy efficiency without diverting internal capital from more productive investments in machinery or personnel. The PACE model is built from a municipal financing model that has been used for decades for spaces that serve the public good, such as street paving, parks, water and sewer systems – think Sewer Assessment.
There are over 30 Property Assessed Clean Energy (PACE) programs in the United States as of January 2016. Several states are in process of approving legislation this year.
The commercial real estate sector is hot on PACE because there is no upfront cost to the owner of the building and the payments are spread out over the expected life of the improvements (typically 15 to 20 years).
What’s so great about that you might say? You could go to your commercial bank and get a loan to do the upgrades. True. However, most commercial loans require upfront outlay (% down payment), and the term is limited to 5, 6 or at most 10 years, before it would need to be re-financed.
But the most significant difference is the PACE loan is tied to the property tax card, not to corporate or personal assets. Thus, if the business moves out of the building, or the owner decides to sell the property, the loan transfers to the new owner. Typically PACE programs have a non-acceleration clause as well.
Why would you want to do this?
Energy costs are usually the 2nd or 3rd largest operating cost for manufacturers. You can’t make what you make without lights, heat, cooling, motors spinning, etc… It’s also necessary to not just pay the utility bill, but also keep all the associated equipment that uses energy in good service. Sometimes these things need to be replaced. Where should the money come from? Most deferred maintenance and deferred capital expenditures are the lower priority items, such as the equipment that doesn’t directly make the goods that bring in the revenue. And that makes sense. And that is where PACE comes in.
Why spend internal capital to replace an air conditioning unit, or lights when you can buy a new 5-axis milling machine that will increase product output by 30%? Not buying the milling machine would be silly. But there are benefits to the ancillary equipment in any factory. For example, human factors engineers have long proven the need for certain light levels within the workspace. The Illumination Engineers Society has tables of proper lighting values. Yet, 80% of the factories I have visited are below these levels for the tasks being performed. PLUS as the workforce is now the oldest it has been since before World War II, eyesight just ain’t what it used to be. Eyestrain, leads to headaches, which leads to mistakes, lost production time, increased error rates, and off-spec parts. Improving the light levels of any workspace can increase productivity there by 15% or more.
So use the PACE to retrofit the lights, HVAC, boilers and other building components, and save the internal capital for the milling machines.
An example may prove useful
A machine shop of of 150 employees located in Hartford, CT wanted to retrofit lighting (80,000 sq. ft. of floor space), replace seven large air conditioning units that were over 20 years old, and install an energy management system that would help decrease their summer electricity demand charges.
If paid out of capital through annual budgeting process:
Total cost for the projects: $220,000
Expected energy savings: $25,000 / year in natural gas & electricity
Return on Investment: 11.3% (company’s IRR = 15%)
Savings to Investment over equipment lifetime: 1.7 to 1
Here the project is competing against other projects with a much higher return, and would likely be tabled year after year until the HVAC completely failed.
If financed through C-PACE:
Zero down, 15-year financing – no capital outlay.
Monthly payment * 12 months: $1,856*12= $22,272 /year
Expected annual energy savings: $25,000
Net Positive Cash Flow: $2,728 / year
Return on Investment: (infinite)
Savings to Investment over equipment lifetime: 1.12
Additionally, many energy utilities offer incentives for energy-saving projects. In this example the utility offered $32,000.
These funds paid the loan payments for 17 months!