A Zondits Interview: The CleanFund Advantage for Commercial PACE Financing

Valerie Eacret, ERS, for Zondits. April 21, 2016. Image credit: kpgolfpro


Property Assessed Clean Energy (PACE) financing is a novel type of assessment financing meant for projects that benefit a single property. Zondits spoke with Ben Dodge of CleanFund Commercial PACE Capital to learn more about what PACE financing offers today for energy efficiency improvement projects.

Can you give us an overview of what PACE financing is?

Property Assessed Clean Energy (PACE) financing is assessment financing for energy efficiency, renewable energy, water efficiency, and, in some cases, seismic strengthening improvements (referred to collectively as “improvements” throughout the interview) on residential or commercial properties. Historically, assessment financing has been used to finance community improvements, like roads and sewers. Property owners who benefit from these improvements pay an annual assessment on their property tax bill towards these (assessment) bonds. Assessment financing has been around for over 100 years in California.

In the case of personal property, a PACE lender provides the property owner with financing for such improvements, and the owner repays the lender via an assessment on their property tax bill. As improvements are affixed to the building, the assessment is tied to the property, not the owner. Thirty-two states and the District of Columbia have passed PACE legislation, and many of those states have active PACE programs. Generally, PACE legislation either creates a statewide or regional PACE program that municipalities and/or counties can opt in to (e.g., Connecticut), or allows for municipalities, counties, or Joint Powers Authorities (JPAs) to create their own PACE programs within a state (e.g., Texas). CleanFund has a map of PACE geographies at the state level.

Is this funding available to both commercial and residential properties?

Yes. Some programs focus exclusively on either residential or commercial projects, and others include both. CleanFund is focused only on commercial properties.

For whom is PACE financing most useful?

PACE financing is useful for a wide range of commercial property owners. CleanFund focuses exclusively on Commercial PACE (C-PACE) financing. A key difference between PACE and traditional debt financing is that PACE financing underwrites a property, whereas debt financing underwrites the property owner in addition to the property itself. For owners wanting to improve their property, but are capital (debt or equity) constrained, CleanFund’s PACE financing is a new option. PACE financing is also useful with recent property acquisitions and subsequent base building capital improvements. C-PACE financing is especially useful for any type of income-producing property owner, especially if a triple net lease (NNN) is in place (under which tenants pay a pro rata share of property taxes). The tenants share the cost of the improvements (through the payment of the assessment) and reap the direct rewards through the benefits of the improvements, removing what is commonly called “the split incentive”.

What do you see as the biggest benefit to PACE loans?

CleanFund’s financing products have significant advantages in the right situations, particularly for diversifying a property owner’s capital stack. PACE financing can often replace debt, high-cost equity or serve as mezzanine finance, depending on the property owner’s situation.

What types of projects are eligible?

Each program has its own set of eligible criteria. Generally, energy and water efficiency measures attached to the property, as well as on-site renewable energy projects, qualify for PACE financing. In California, Colorado, and Milwaukee, a certain portion of new construction costs can be financed via PACE. California also permits seismic strengthening, while Florida permits wind resistance improvements to help prevent damage from earthquakes and hurricanes. CleanFund maintains a list of generally eligible measures on its website.

What are the most common types of PACE-financed commercial projects?

PACE is an incredibly flexible tool. CleanFund has worked with a number of solar PV projects, where we offer ownership and power purchase agreement (PPA)[note]Power Purchase Agreements (PPAs) are contracts for selling power between a seller, who generates electricity, and a buyer, who purchases it. In this context, PPAs are often used when a solar host cannot monetize solar tax incentives. Under a PPA, the solar host pays the system owner for energy produced by the solar array. The system owner, who is able to monetize tax incentives, passes the benefits through to the system host in the form of a discounted $/kWh rate (often less than the current utility rate).[/note] financing structures. We are also seeing projects that run the gamut of eligible measures of all different sizes – from $250K lighting or HVAC projects on smaller commercial buildings to an $8.4 million central heating and cooling plant project CleanFund recently closed in Hartford, CT. New construction projects are also beginning to gain traction as project developers become more familiar with the advantages of PACE financing as a key method to close their financing gap between equity and debt.