Going Solar With PACE
By: Sam H. Black, attorney and past chairman of the Washington, D.C., Smart Growth Alliance
PACE enabled Prologis to incorporate a rooftop solar installation at its world headquarters at Pier One in San Francisco. Photo courtesy Sunquest Energy System
Property Assessed Clean Energy (PACE) is a new approach to financing clean energy generation and energy-efficiency improvements. With PACE, a local property tax jurisdiction can help finance these types of projects. The jurisdiction issues bonds to the private sector to raise the necessary capital and makes loans to property owners, tenants and/or investors, who are also taxpayers in that jurisdiction. The jurisdiction also arranges for the taxpayer to make regular payments of the principal and interest as part of their regular property tax payments. Finally, the jurisdiction places a lien on the property to secure the financing.
Thirty-one states and the District of Columbia have adopted legislation that enables local governments to offer PACE benefits to building owners (see map below). PACE is a form of secured nonrecourse financing. The loan obligation is not personal, but runs with the property. Sale of the property does not require payoff of the loan. The arrangement may well qualify for off-balance sheet treatment.
This form of financing is completely voluntary. A property owner chooses to use PACE only when it seems to be the most attractive option. The owner does not need to have an investment-grade rating or any particular credit rating; it may be unrated. PACE payments don’t affect the general public; only the participating business or tenant pays a commercial PACE assessment. (Homeowner PACE programs do exist, but they have run into objections from the mortgage industry.) This article covers only commercial PACE programs.
Local tax assessment jurisdictions administer the PACE programs, often with the assistance of private partners. Different localities within each state can have different rules; in some PACE states, local programs are not yet in effect (or not yet fully in effect).
Elite Development Group used PACE financing to install a solar array and LED lighting at a Norwalk, Connecticut, shopping center.
A typical PACE-financed solar project may be located atop a factory, mall, shopping center, office building, warehouse or parking garage. Parking lots and open spaces offer additional sites for solar installations. A typical rooftop installation is at least 100 to 300 Kw in size and needs 10,000 to 30,000 square feet of space. Whether the owner uses a rooftop array or a parking lot installation, the larger the space, the better the financing and operating numbers will be.
The electricity cost savings over as few as three or four years can pay for 100 percent of the cost of installing solar panels on a building rooftop. Over a longer period, they can also pay for almost 100 percent of the cost of installing multicar carport structures on a surface parking deck or lot. Additional incentives, such as federal and state tax credits or exemptions, state grants or accelerated depreciation, may be available to close any gap.
A well-designed project will result in energy cost savings and tax benefits larger than the loan repayment costs from the first month, so these projects can be cash-positive from the start. PACE loans typically mature in 20 years, while solar installations last 25 to 30 years, usually longer. If a building or property owner purchases a solar system outright, the full return of the investment can come in as little as three or four years, but will take longer for a financed project. Cost recovery periods for some projects will be as long as eight to 10 years.
Power Purchase Agreements and Lease Financing
PACE can be available to a business even if that business does not own the real property on which the solar panels will be installed. If the landlord is agreeable, the business can structure the transaction as a power purchase agreement (PPA) or as an operating lease of just the solar installation. These types of arrangements can work as follows:
- A tenant may be able to negotiate a lease amendment with a building owner under which the landlord pays for the installation of the solar array, then recovers the cost of that installation through a higher lease payment. The landlord could finance the improvement with PACE. In this example, the tenant owns all of the electricity generated by the installation, and can pass on any excess power to the grid in exchange for a credit on the tenant’s electric bill. The landlord may allow the prime tenant to finance, build and own the array as a tenant improvement.
- In a PPA, the applicant also does not need to have equity in the property. Assuming the lease allows this, the tenant-applicant arranges for a third-party investor to install and own the solar array. The tenant buys the power from the investor, uses as much of the available power as needed and can pass on any excess power to the grid.
- Under a special-purpose operating lease of just the solar array, the third party investor — again, assuming the landlord allows this — builds and owns the installation. The tenant leases the array and owns the power, and can similarly sell any excess back to the grid.
Under all three of these approaches, the tenant will, over time, repay the landlord or the investor for all financing costs as well as any other added costs. A tenant may have to agree, in effect, to share some of the energy cost savings with the landlord in order to successfully negotiate a PACE transaction. Jackie Pitera, strategy and markets manager with Borrego Solar, which designs, finances, builds and maintains solar installations throughout the U.S., emphasizes that “if the potential user is a tenant, you need a willing landlord or a lease with reasonable flexibility on lessee improvements.”
Two Notable Projects
At Prologis’ world headquarters in a waterfront pier owned by the Port of San Francisco, the company is the prime tenant under a 50-year lease, occupies 30 percent of the office space and sublets the remaining space to unrelated users. Prologis was interested in a comprehensive HVAC and electrical upgrade, and the company, the port and the subtenants all were supportive of a highly visible sustainable energy system as part of the project, provided the costs were acceptable.
San Francisco-based Clean Fund, a broker that specializes in using PACE to finance clean energy installations, helped Prologis design the capital stack for the buildout, which generates 245 MWh of solar electricity yearly and cuts energy purchases by 32 percent. The package consists of $1.4 million in PACE funding coupled with a $200,000 Prologis equity investment. This approach made the project, which closed in November 2013, cash-positive from the start for every subtenant. According to John Kinney, CEO of Clean Fund, “While the normal design-build analysis would have recommended less expensive equipment for the buildout, PACE enabled Prologis to build a system with more expensive equipment but much lower lifetime maintenance and energy costs. This yielded a present value of the combined capital and lifetime costs that was less than the equivalent costs in the usual design-build approach. PACE also allowed Prologis to keep its other planned capital improvements in the budget.”
A project in Norwalk, Connecticut, offers an example of a PACE solar retrofit at a shopping plaza. The landlord, the Sarno family-owned Elite Development Group, and the building manager, Hartt Realty Advisors, created a plan to enhance the plaza’s competitive position and to jump-start the leasing of some vacant space. The plan involved landscaping, other improvements and, notably, conversion of the exterior lighting to LED, powered by a solar installation.
Robert Hartt explains that “the landlord … was willing to go beyond a low-upfront-cost solution. The family members wanted a progressive approach, taking into account lifetime energy costs. They also wanted to use green energy as part of the branding of the center.” The 100-kW solar array covers part of a grade-level parking deck, so the project is highly visible and, as Hartt points out, has received a lot of publicity. The LED upgrade and the solar array have reduced electricity costs by approximately 95 percent. The project has been cash-positive from day one, all tenants’ electricity bills have decreased and the utility bill savings will pay for the solar array in 10 years. Hartt is looking at ways of expanding the solar installation. Connecticut PACE (C-PACE) and its money source, Connecticut Energy Finance and Investment Authority (CEFIA), financed the $485,000 LED and solar panel capital costs at a very attractive rate.
Where Is PACE Available?
States with the most PACE activity include California, Connecticut and Florida. Some contractors regard Massachusetts, New York and Texas as additional prime markets for PACE financing. (Although Massachusetts is hardly a Sun Belt state, it’s one of the biggest U.S. markets for solar installations.) Commercial property owners located in the states highlighted on the map above may be able to use PACE to finance a highly visible solar installation that pays for itself and provides electricity cost savings for decades to come.