The National Association of Realtors published this article "Financing Energy Efficiency" by Mr. Bobby L. Hickman. In this article Mr. Hickman reviews the evolving and fragmented residential PACE market and interviews Tim Crockett about Commercial PACE in Texas. Tim's comments highlight how Texas has chosen an open lender model, requires an engineer to stamp the energy report prior to funding and requires that the existing lender consent to the PACE loan. (Click on the above Picture for the full article)Read More
Benefits of Going Green
By Jeff Thompson GHRA April 2017 Issue Page 14
"If you’ve been in the convenience store business for any length of time, you’ve probably been approached by one or more vendors offering to reduce your energy costs with LED lights. This can be a costly conversion. What you may not know is that you can accomplish many energy saving goals for your business by utilizing a PACE loan. PACE stands for Property Assessed Clean Energy, and the loan structure is unique in that it is capitalized by independent lenders. Property owners like the PACE Loan program because it presents positive cash flow benefits immediately, and the annual assessment can usually be passed through to the tenants, who benefit from the lower utility bills. Even if you are intending to sell your property in the near future, there may be benefits for you since the financing stays with the property. Specifically, in the event the current owner should choose to sell the property, the current owner is not obligated to pay anything more than the Annual Assessment then due. As such, any a capital improvements made to your property using this loan structure can benefit your property value and resulting selling price. Perhaps the biggest benefit to a PACE Loan is that it requires an independent assessment of the loan and the anticipated energy savings. Also, a PACE energy efficiency project potentially increases the property’s Net Operating Income and building value. This independent assessment requires that upon analyzing the projected green energy savings, that the Savings to Investment Ratio (SIR) must be greater than "1". The Savings is calculated as the sum of the savings over the useful life of the project. The Investment is calculated as the Principal value of the Investment. Another simpler way to state this, is that the amount you save in utility payments must be greater than your annual assessment payments. This Benefits of Going Green means that in addition to having a zeroinvestment capital improvement to your property, your net operating income will see positive monthly benefits or else the loan won’t be approved. Rather than spending the entirety of this article discussing the benefits of a PACE loan we can also talk about what types of energy efficiency improvements can qualify for PACE funding. In the Houston area, the items which will produce the most benefit are HVAC, insulation, lighting (indoor and outdoor), cool roofs (reflective white roof), energy management systems, car charging stations, bike racks, windows, glazing. HVAC components include chillers, cooling towers, air handlers, thermostats, boilers, variable drive fans (VDF's). If you decide to pursue this type of funding, you can learn more at www. pacehouston.com, and keep an eye out for potential energy saving LED manufacturers in future issues of In Action Magazine. Keeping it Green can help keep you in the green."
Time is Money - Delaying Cost Savings Measures Means Permanently Lost Income
I’ve heard this saying so often that it has lost some of its impact on me yet it remains as true as ever. After recently completing an energy efficiency study for a building owner where all parties agreed that certain actions would result in this 600,000 SF building immediately reducing their electricity expenditures by 20% there seemed to be no sense of urgency. Given this building is currently spending $2.00/SF per year on electricity, taking this action would save them $20,000/month. Unlike a one-time saving such as a discount on a purchase, we’re talking about operational savings where they will achieve the savings each and every month if and when they implement the prescribed action. So for every month they delay they forever lose the opportunity to save those dollars.
Let's say the improvements that would generate savings are delayed 6 months. That would represent $120,000 in lost savings.
Using a 5% discount rate, the present value of that lost 6 months of $20,000/month in operational savings would be $101,513.
Today [January 10, 2017] The Wall Street Journal published a front page article about the California residential PACE program highlighting problems relating to consumer protection and other issues. Fortunately, none of these problems or issues are relevant to, or cause for concern under, the Texas PACE program for the reasons listed below:
The purpose of the Texas PACE statute is to enable energy-efficiency financing for commercial and industrial properties.
Residential PACE loans are not permitted in Texas.
The Texas PACE statute does not authorize single-family residential PACE loans.
PACE financing for residential property is available only to borrowers who are in the business of operating multi-family properties containing 5 or more units.
The Texas PACE statute includes multiple layers of protection for commercial property owners and lenders, including:
Commercial property with a mortgage is not eligible for a PACE loan without the written consent of the mortgage holder. This approach protects preexisting lien rights of the mortgage holder.
Prior to closing a PACE loan, an independent professional engineer must confirm that projected savings are consistent with applicable technical standards.
Upon completion of the project, an independent professional engineer must confirm that the equipment was properly installed and is operating as intended.
The term of the commercial PACE assessment cannot exceed the projected useful life of the improvements.
Private, open-market lenders provide all PACE financing in Texas. The Texas PACE program does not utilize government bonds or public funds.
All PACE programs established in Texas are administered by the Texas PACE Authority, a non-profit organization whose sole purpose is to operate PACE programs for local jurisdictions. This arrangement is unique to Texas and avoids conflicts that can arise when the PACE administrator is a for-profit organization that receives compensation for both facilitating the program and arranging the loans.
Lenders, contractors and other service providers for all PACE projects in Texas are selected independently by the property owners in a free-market, competitive environment not restricted to any particular or favored contractors or lenders.
The Texas commercial PACE program was designed by a group of more than 130 stakeholder-volunteers dedicated to ensuring that the problems and issues highlighted in The Wall Street Journal article will not arise in Texas.
Begin Quote of WSJ Article by Kirsten Grind
"America’s Fastest-Growing Loan Category Has Eerie Echoes of Subprime Crisis
Lenders offering energy-conscious loans care little about borrowers’ creditworthiness, contractors function as loan brokers—and investors can’t get enough
Cindi Ventura helps her mother out of the San Jose, Calif., house where they live. They got a PACE loan for $16,732 after eroded sewer pipes caused a flood. PHOTO: PRESTON GANNAWAY FOR THE WALL STREET JOURNAL
Updated Jan. 10, 2017 2:41 p.m. ET
Deanna White told a contractor she couldn’t afford the $42,200 loan he recommended for improvements to her house in Inglewood, Calif. The contractor, she recalled, said she wouldn’t be on the hook because the loan was part of a “government program.” She applied and was approved.
Two years later, Ms. White is struggling to make payments on the loan, which was packaged with more than 10,000 similar loans into bonds and sold to investors. Under its terms, Ms. White’s five-bedroom house could be foreclosed on if she defaults.
Her loan is part of a booming corner of the lending industry called Property Assessed Clean Energy, or PACE. Such loans, set up by local governments across the U.S., are designed to encourage homeowners to buy energy-efficient solar panels, window insulation and air-conditioning units.
About $3.4 billion has been lent so far for residential projects, and industry executives predict the total will double within the next year. That would likely rank PACE loans as the fastest-growing type of financing in the U.S.
As the loans spread, so do problems that echo the subprime mortgage crisis. Plumbers and repairmen essentially function as loan brokers but have scant training and oversight. They often pitch PACE loans to help land contracting jobs and earn referral fees from lenders, according to loan documents and more than two dozen borrowers, industry executives and employees.
Creditworthiness matters little to lenders, because loans are based on the value of a homeowner’s property. PACE loans typically require no down payment, and the debt is added to property-tax bills as an assessment. Ms. White’s annual property taxes soared to $6,500 from $1,215.
Loan growth is fueled partly by investor appetite for bonds created from PACE loans, especially among mutual funds and insurers. Investors like the bonds’ relatively high payouts, environmentally friendly reputation and lofty credit ratings. On the other hand, rating firms have said there aren’t enough historical data on PACE loans to forecast potential defaults.
Some local governments that embraced the loans as a way to bring clean energy to the masses didn’t anticipate the messy consequences.
“We wanted to put ourselves in the thick of this,” says Rick Bishop, executive director of the Western Riverside Council of Governments, a group of city and county governments in California that helps run the largest PACE program. “The downside is now we hear about these stories from people who feel like they’ve been misinformed in some fashion.”
The government group tries to resolve problems for borrowers. Riverside County, Calif., has opened an investigation into marketing practices for PACE loans, and California Gov. Jerry Brown signed into law in September new requirements establishing uniform disclosures for PACE loans, an effort to make lending terms closer to those for mortgages. Homeowners who get a PACE loan now have three days to back out.
The largest PACE lender, Renovate America Inc., is accused in three lawsuits filed in November by borrowers of double-charging interest and administrative fees and failing to immediately credit loan payments. The suits seek class-action status. The company denies the allegations and says it will “defend PACE, our company and the program vigorously.”
In November, the Energy Department urged administrators of the loan programs to clearly explain loan costs and other terms, allow borrowers to cancel their loan during a short period and deter kickbacks to contractors.
Industry executives say most borrowers are satisfied with their loans and defaults are rare.
Lenders are working with consumer groups to create nationwide standards “to prevent things that wouldn’t benefit consumers,” says JP McNeill, Renovate America’s founder and chief executive.
The growing pains are largely the result of the industry’s young age, the executives say. The first PACE program was started in 2007 by Cisco DeVries, then chief of staff to the mayor of Berkeley, Calif.
Cisco DeVries, center, at the Cities for Tomorrow conference in New York in July 2015, calls himself a ‘capitalist hippie’ and is chief executive of clean-energy company Renew Financial Group. PHOTO: LARRY BUSACCA/GETTY IMAGES
Thirty-four states and Washington, D.C., have passed legislation allowing the creation of PACE programs, according to PACENation, an industry trade group in Pleasantville, N.Y.
Mr. DeVries, who calls himself a “capitalist hippie” and now is chief executive of Renew Financial Group LLC, a clean-energy finance company in Oakland, Calif., says he is “really proud of what we’ve accomplished.” He adds: “We set out to help people save money and save energy, and it’s under way.”
The industry could get a new growth spurt from a July decision by the Department of Housing and Urban Development to allow the Federal Housing Administration to purchase mortgages on homes with PACE loans.
PACE loans range in size from about $5,000 to more than $100,000, with an average of about $25,000, and charge interest rates of 6% to 9% over a repayment period of usually five to 25 years.
Instead of making monthly mortgage payments, PACE borrowers pay what they owe once or twice a year along with their property taxes. Cities and counties collect the loan payments and pass along the money to lenders.
Local governments collect fees from finance companies. In the fiscal year that ended June 30, the Western Riverside Council of Governments collected revenue of $7.1 million, or about 15% of its budget, from the PACE program.
Another quirk of PACE loans is that the debt usually goes to the front of the line, ahead of the homeowner’s mortgage. Like a typical tax assessment, that means if a homeowner defaults on the PACE loan, the property can be seized as collateral and sold to repay the lender.
That setup puts local governments in the awkward position of potentially foreclosing on their constituents. If that happens and the house turns out to be worth less than the amount owed by the homeowner, other taxpayers could be stuck with a loss on the difference. So far, that hasn’t happened.
Some investors say the extensive involvement in PACE loans by governments across the country amounts to an implicit financial backstop. The belief that governments stand behind the loans is a major reason why investors are attracted to the bond deals, according to investors.
“There is such big national and state backing,” says Mike Warmuth, portfolio management vice president at FBL Financial Group Inc., the owner of Farm Bureau Life Insurance Co. in West Des Moines, Iowa. The insurer owned $22 million of PACE bonds at the end of September.
Mr. Warmuth says the insurer’s broker suggested the bonds, which generally yield about 4%. He says he isn’t aware of any underwriting deficiencies with the loans, adding that Farm Bureau only had access to aggregate loan data before buying the bonds.
Defaults on loans in PACE bond deals overall have been less than 1%, according to Kroll Bond Rating Agency Inc. Cecil Smart, a senior director at the ratings firm, says the bond deals are structured so that lenders bear the brunt of any losses, rather than investors.
Germany’s Deutsche Bank AG is one of the largest packagers of PACE loans into securities and led a $284 million deal in mid-December, which drew far more investor demand than expected. The bank is aware of problems stemming from the role of contractors, says a person familiar with the matter.
Contractors often line up loans while on house calls and can earn a referral fee of at least $500 per borrower, according to current and former employees. The loans also are marketed at county fairs and by cold calling, borrowers say.
Renovate America uses about 8,000 contractors to help line up loans, according to bond documents. Those contractors are overseen by 23 employees at the San Diego company.
The company says it recently put in place a more-stringent contractor management program. Renovate America says only about 200 contractors are actively arranging PACE loans.
Cindi Ventura, 65 years old, says she was urged last summer by her plumber to apply for a PACE loan after sewer pipes eroded underneath her three-bedroom house in San Jose, flooding the property. She said she had recently filed for personal bankruptcy, didn’t have the money to make all the repairs and couldn’t qualify for a home-equity line of credit.
She and her mother, 83, received a $16,732 loan for five years from Ygrene Energy Fund Inc. with a 6.5% interest rate. Ygrene (“energy” spelled backward), based in Santa Rosa, Calif., is the second-largest provider of PACE financing in the country, based on loan volume.
Cindi Ventura helps her mother sort old family photographs. She says she was confused about terms of their PACE loan because it was called an assessment. PHOTO: PRESTON GANNAWAY FOR THE WALL STREET JOURNAL
Ms. Ventura, a receptionist, says she was confused about the loan’s terms because it was called an assessment. She says she called and emailed Ygrene several times with questions about her loan documents and never heard back. “I still don’t really understand what the program is,” she says.
Louis Lalonde, chief marketing officer of Ygrene, says company representatives had a call with Ms. Ventura and her mother to answer all their questions before the loan was signed. He says he has no record of any further attempts to contact them.
The 3,200 contractors who drum up business for Ygrene are regularly screened for compliance with contractor licensing requirements and receive training before they are allowed to pitch loans to homeowners, he adds.
Malcolm Scott, 61, was planning to pay in cash the $34,000 it would cost for a new air-conditioning unit, furnace and other improvements at his house in Woodland Hills, Calif. His contractor suggested applying for a PACE loan.
Mr. Scott was surprised to find out less than 24 hours later that he had been approved for $94,000. Renovate America says he qualified for the larger loan based on the amount of equity in his house. He decided to borrow just the $34,000.
Michael Gardner, who runs Mediterranean Heating & Air Conditioning, which lined up the loan, says he has been recommending loans for about two years and got “an hour or two” of online training from Renovate America.
The program “is real nice because there are no FICO score requirements or anything like that,” says Mr. Gardner.
Some lenders have taken steps to strengthen underwriting practices, make loan documents more transparent and boost contractor oversight. Renovate America now requires in-house representatives to speak with a borrower by phone—outside of the room and away from the contractor—before signing a homeowner up for a PACE loan.
Renovate America, which is backed by nine private-equity and venture-capital firms, says it has spent the last several months working with consumer groups and regulators to come up with national lending standards for PACE. The new standards could include a year with no payments for borrowers who are suffering from an economic hardship.
“At the end of the day, PACE is an unregulated industry, and it’s just a matter of time before we get regulated,” says Mr. Lalonde of Ygrene.
Phil Adleson, a lawyer in San Jose, Calif., who represents borrowers, says PACE is “a very great idea implemented in a dangerous fashion.”
Ms. White, the borrower in Inglewood, a neighborhood in Los Angeles County, says a contractor from a company named the House Next Door told her in late 2014 not to worry that she couldn’t afford the $42,200 loan because “it wouldn’t be coming out of my pocket.”
The company says no one there would ever describe PACE loans like that and says Renovate America has held weekly training sessions for its contractors for “more than a year.”
Ms. White says the contractor finished the drought-resistant landscaping at her house only after being contacted by a Journal reporter. Renovate America says the contractor has been “under suspension” for the past several weeks.
Her loan went into a pool of 11,282 PACE loans that are collateral on bonds issued by the Western Riverside Council of Governments. Deutsche Bank packaged the bonds into a $240 million deal called “HERO Funding Trust 2015-1.” Kroll gave it a AA rating, the firm’s third-highest.
According to the latest available figures, fewer than 70 of the underlying PACE loans have defaulted, and Kroll said the transaction “has performed as projected.”
Ms. White’s next loan payment is due in April. She says she doesn’t know how she will be able to pay it."
End Quote of WSJ Article by Kirsten Grind
Write to Kirsten Grind at firstname.lastname@example.org
Charlene Heydinger, Keeping PACE in Texas; Kristine Canady, Simon; Jack Belt, Ft Bend Economic Development; Don Massey, Katy Mills; & Tim Crockett, PACE Houston; after appearing with others in Ft Bend County Commissioners Court in support of PACE. To view the resolution of intent click here: FORT BEND COUNTY COMMISSIONERS COURT RESOLUTION OF INTENT TO ESTABLISH A FORT BEND COUNTY PACE PROGRAM.
Today the City of Houston announced the official launch of PACE Financing in Houston. PACE Houston along with many other private organizations, non-profits and individuals have worked tirelessly to bring this powerful new financing tool to owners of commercial property in Houston and its Extra Territorial Jurisdiction "ETJ".
In our Mayor's own words, "Houston is the global energy capital of the world and today we are demonstrating that our leadership extends above and beyond to responsible resource management. And today we continue our role as the energy efficiency capital of the world." Mayor Sylvester Turner, August 3, 2016 Houston City Hall
PACE, or Property Assessed Clean Energy, provides 100%, long term (up to 30 years), fixed rate, non-recourse financing for air conditioning upgrades or replacement, lighting retrofits, energy management system controls, energy efficient "cool" roofs and windows, elevator modifications, water conservation and CHP or renewable energy projects. Because PACE provides long term financing, the energy and water savings can exceed the outgoing financing cash flow - making the project cash flow positive. Existing rebates are separate from the PACE program, enabling an owner to receive both preferential financing and the rebates associated with the equipment purchased.
Already proven effective by both large and small property owners spread across 33 states since it was first launched in 2008, in Councilman Christie's own words, PACE is a “win-win” for Houston. PACE is good for the property owner because they can use Other People's Money instead of their own capital; good for the tenants because it lowers their operating costs; and is good for the building because it receives better quality and more reliable mechanical systems, quicker - accelerating future year's capital budgets and improved cash flow to "today".
PACE both creates jobs and is good for the environment. PACE reduces utility consumption and extends the time our existing utility infrastructure will meet the State’s needs. PACE is a public-private concept that uses no public funding - it uses private capital.
“PACE is the single best new idea I have seen in my 35 year commercial real estate career.” Tim Crockett, President PACE Houston.
PACE Houston was created to help bring PACE to the Greater Houston region, educate the marketplace and help property owners use PACE to upgrade their properties. And PACE Houston is already working to help extend the boundaries to neighboring cities and counties.
We can help with any or all steps required in the process, including access to competitive capital.
All Star Panel Speaks at Bisnow Sustainability Event
Senior adviser in the Mayor's Office of Sustainability Marina Badoian-Kriticos said "The goal of the city is to make it more than the energy capital of the world. Houston can also be the efficiency capital of the world. The key to achieving that is through improvements in construction, renovation and property management."
"Sustainability and business are [often] inconsistent. Capital improvements and investment decisions often work against each other. PACE is a new financing concept to solve that problem. Started about eight years ago, fairly new to Texas, and brand-new to Houston, the program allows property owners to access 100%, fixed-rate, long-term non-recourse financing on building improvements that conserve energy or water. The loans require the savings be greater than the cost of implementation, so they're actually self-funding. This effort isn't about being green, it’s not about decreasing electricity or saving water. It’s about increasing NOI. Economics is the primary driver, but sustainability and efficiency are the primary benefits. Think this sounds like a great idea? So do others. Harvard named PACE one of the top five breakthrough ideas and Scientific American named PACE one of the 20 best ideas in the world." PACE Houston president, Tim Crockett
"Texas was actually already at the forefront of green building, so this push could make us one of the leaders in the space. The US Green Building Council ranked Texas eighth in the country (to many's surprise, we're sure) largely due to sustainability efforts in Houston."
Skanska chief sustainability officer Elizabeth Heider shared the stats: "In 2005, Doge (at the time, McGraw-Hill), found only 2% of real estate was green. By next year, between 48% and 54% of the market will be green. She says sustainability is no longer a fad, it is a trend."
JLL EVP of sustainability, energy and safety Robert Best (co-author of "Green + Productive Workplace The Office of the Future" (available on Amazon) noted:
"Not only does sustainability help your bottom line and the environment, but it can also improve productivity. All nine cognitive aspects that make up productivity (like memory, mental acuity and math ability) are improved by sustainable efforts, according to research. A study about kids taking the SAT found they do consistently better when they take the test in a room filled with daylight. Minimizing CO2 in the workplace is another focus of the USGBC. A study by three Harvard professors found a stunning correlation in how people perform across the nine cognitive area while in the presence of varying levels of C02. These can have a major impact on your bottom line. Energy savings at best are a few dollars per SF, but if you can improve productivity, it blows energy savings out of the water. That's the potential building owners and managers are dealing with."
TrueGrid CEO Barry Stiles noted an innovative solution to Houston's reliance on concrete in parking lots. "True Grid is a form of permeable pavement made from a unique design of plastic and gravel that not only saves concrete, but also functions as stormwater retention. Businesses all around Houston have seen the benefit, and True Grid is in talks to work with the largest building in the world, the 13.1M SF Tesla factory. Because of potential cost savings on land required for stormwater retention, True Grid is a prime candidate for PACE funding." Their website is www.truegridpaver.com
While PACE is focused primarily on reducing the amount of energy consumed, PACE Houston also asks its clients to consider the historic low energy prices that we have been experiencing as an opportunity to fix the cost per kWh of energy consumed. While gas does not impact electricity rates on a 1:1 basis, it does have an impact.
QUOTES IN THE MSN ARTICLE
"Gas has surged 18 percent this year, rebounding from a 17-year low. Drillers, burned by earlier declines, are refilling storage at half last year’s pace as extreme heat boosts the use of air conditioners, increasing gas demand from power plants. By November, supplies will probably drop below the five-year average, the benchmark for normal levels, for the first time in 13 months, based on storage rates."
"Just four months ago, gas plunged after the warmest winter on record left the market with a glut large enough to last through the year. Instead, hot weather and a slowdown in shale production are eating into the surplus, signaling an era of higher prices as gas exports rise and electricity generation cuts into excess supply."
"“We’re moving toward a potentially serious deficit in the supply-demand balance for this coming winter,” Andrew Weissman, chief executive officer of EBW Analytics Group, a Washington-based energy analysis company, said by phone."
See MSN full article for more information
In this interview, Mr. Gerald Hines discusses the business case for energy efficiency. Filmed on October 10, 2014 at Rice University, Mr. Hines used One Shell Plaza as an example of: building for the future, building with excellence and building with the goal of energy efficiency. This applies both to a building's operations and to a building's value upon its final liquidation or sale.
Built in 1971, One Shell Plaza became the tallest concrete building in the world and remains the tallest lightweight concrete building to this day. In One Shell, Hines used reflective glass while wondering if the public would accept it. They took a chance. The public did accept this energy saving innovation and their tenant, Shell, became an investor.
Mr. Hines grew up in Gary Indiana where gravity furnaces were used but in this building they used very low pressure duct work. The required 2.4 foot ceiling space gave them the room to upgrade throughout the years. Today (in new buildings) Hines adds one foot of under each floor to enable the building to keep up with future technology. Mr. Hines noted that "just keeping a building in play for 100 years is an energy saver."
With respect to the meticulous maintenance for which Hines buildings are noted, Andy Kitchens remembered that when the One Shell chillers were finally replaced, that they were spotless. Mr. Hines noted they were so clean you "could eat off of them".
For advancement in building design, engineering and energy efficiency, Hines brought in-house the best structural, mechanical, electrical and curtain wall experts to supervise work done by talented local partners. Completed projects are also rigorously evaluated. (Writer's note: This is similar to the way PACE loans require both a pre-project engineering assessment done by an MEP engineer and a post project engineering review by what is called an Independent Third Party Reviewer.)
Against a backdrop of excellence in everything from structure to energy efficiency, Gerald Hines said "When we decide to sell a building we get the best cap rate, which means the best price, for the same income that someone else would have because we have good efficiency in the way the building operates - mechanically, heating and cooling ... and people know it is ... either Gold or Platinum [LEEDS] - and that means something; and today financial institutions are limiting their financing to only good buildings [with] ... higher rating[s]."
Gerald Hines said "We are ... pushing the barriers [in energy efficiency]." He gave several examples: underfloor fresh air systems so that a building located in an agreeable climate such as San Francisco or San Diego will not have to use energy to cool the building for substantial portions of the year; their first net zero building that has used bio-gas to power itself under a net zero condition for a year and a half; or the 5 million square foot facility in the heart of Milan that tapped the underground water and used it to cool the condensers.
Gerald Hines noted (by way of example) their innovative young staff and he stressed the importance of innovation for success at Hines. He also noted that for those who become a part of the senior team that they receive 50% of the equity. He noted "No other real estate company does that."
In answering a direct question about how to best communicate the value of energy efficiency to the Class B & C buildings sector, Mr. Hines' answer emphasized the fact that the value of the building is a function of the energy efficiency and the cap rate.
For Class B and C building owners Mr. Hines noted ... the final liquidation of the building is going to be a function of its energy efficiency and the cap rate under which the building can be sold. He noted these are the biggest incentives you can have to get Class B and C building owners to move in the direction of energy efficiency.
Andy Kitchens summed up the man whom many of us have come to admire based on his company's final product and the people who have built their reputation.
"The greatest example Mr. Hines serves for the firm is beyond the buildings, the stadiums, the malls ... it is your integrity Sir and it is infectious."
Source Note: This blog is excerpted from a Video of the event during which Mr. Hines commented on the value of energy efficiency to Class B and Class B buildings - the cap rate and the liquidation value at 22:25 into the video. We had it posted but it was not available when we last checked.
"Lenders are getting stingier when it comes to funding risky U.S. real estate developments ... Property owners are facing a host of challenges. Overbuilding in some areas, the protracted slump in oil prices, a strong dollar eating into tourism, declining stock values and slowing growth in China are all weighing on landlords. At the same time, the Federal Reserve is raising interest rates for the first time in nine years." Furthermore, the breakdown of the CMBS market is choking off funding for maturing debt. And borrowers are seeking out alternative sources of capital that may offer less-generous terms." Bloomberg March 15, 2016
For Houston the drop in oil prices, layoffs in the energy sector and uncertainty about near-term inventory absorption have further contributed to tighter bank and mortgage underwriting standards - constraining capital budgets; even for necessary capital improvements. Against this backdrop, many are struggling both to maintain their NOI levels and to obtain capital to finance improvements.
For those investors who can access capital, many with financing needs must now pay higher rates and put up more equity. Many must even postpone projects that would improve their NOI and property valuation.
The timing could not be better for the arrival of PACE.
PACE addresses the tighter capital market with 100% long term fixed rate financing that can improve the property's NOI and valuation; both addressing existing lender credit concerns and enabling the owner to make the needed improvements.
Since PACE allows a property owner to borrow 100% of the capital required for the weighted average useful life of the improvements (up to 30 years), the annual loan repayment is a fraction of the amount of a typical short term loan amortization. This smaller annual loan payment results in the annual energy savings exceeding the annual loan payment - resulting in improved property cash flow. The PACE loan is secured by and repaid through the property’s annual property tax bill verses the typical monthly P&I to a bank.
So instead of putting down the required equity on a traditional loan and making larger payments, consider utilizing PACE’s 100% financing to pay for your energy saving improvements.
One of the questions we receive is "Which lenders have agreed to subordinate their lien to a PACE loan?" The following list is excerpted from the PACENow Lender Support Update.
The underlying question is "Why would a lender agree to subordinate their interests to a new PACE loan?"
The answer is simple: The property receives the benefit of 100% of the improvements while only the annual assessment payments due are ahead of the existing lender's position.
Improved cash flow, property value, an improved tenant profile and a lower cap rate all go into making an existing lender want to support a property owner's efforts to improve their collateral value.
This is evidenced by a growing list of existing mortgage lenders who have consented to a PACE loan assessment.
We can help you prepare a Compelling Argument for your existing lender by your reading our PACE 101 Page.
For more information please review the PACENow Lender Support Update.
While PACE is new to Texas and we are somewhat insulated from other states, especially "green" ones (as opposed to red or blue ones), in 2015 according to the National PACE organization PACENation, "PACE provided $93 million in financing for energy upgrades to over 140 commercial buildings." But what is even more impressive is the growth rate - since 2009, the compound annual rate of growth in PACE deals is over 75%. Since inception, 734 properties have been financed for a total volume of $230 million. This growth is centered in Retail, Office, Industrial and Hospitality. While Non-profit represents a smaller percentage of the deal volume, there is strong interest among the sector.
This growth is balanced slight more towards "energy efficiency" than "renewables", with the notable exception of the agricultural sector that is heavily weighted towards renewables. The majority of the volume is from projects that are in excess of $750,000.
Forbes magazine's contributor Ely Razin wrote an article entitled "Houston We Have a Problem: How Dwindling Oil Prices Hurt Houston's Commercial Real Estate Market". He highlighted the doubling in the office building vacancy rate to 8 million available square feet even as leasing activity declined. As if that were not enough, he notes 22 office buildings are now under construction.
For property owners feeling the pain of falling oil prices and cuts in the Oil & Gas sector, there is some good news. Houston’s recent adoption of the PACE ordinance means landlords can now take advantage of 100% long term financing to upgrade their buildings.
In an increasingly competitive environment, PACE may be the secret weapon needed for owners to re-position their properties - to retain their existing tenants and attract new tenants. While building energy improvement modifications to HVAC Equipment, Lighting, Energy Management Systems, and Windows generally result in an immediate negative cash flow, PACE enables the building owner to upgrade the property and simultaneously lower the building’s operating expenses. Taken together - an upgraded building/lower operating expenses - the owner acquires that needed marketing edge. This may all be accomplished by PACE 100% financing of energy improvement modifications without the owner spending their own capital budget dollars.
PACE’s 100% long term fixed rate financing timing couldn’t be better. PACE may indeed be the best financing for energy improvement upgrades.
If you would like us to highlight these benefits to your company or trade association let us know.
Tim Crockett email@example.com 713-530-7922
A recent study concluded that industrial users are the highest users of electricity and water, a fact known by those of us in the PACE Houston market. PACE can enable industrial users to do the very capital projects that are needed to reduce their consumption and reduce their operating costs. This is the backdrop to today's seminar put on by the Texas PACE Authority and the Texas Industry of the Future organization.
Texas House Representative Jim Keffer of District 60, as both an industrial manufacturing business owner and a State Representative, introduced the first TPA Industrial Seminar.
Representative Keffer highlighted the traditional maxim that return on investment is everything. Jonathon Blackburn of the Texas PACE Authority noted that industrial entities typically rank capital projects by ROI, resulting in many additional worthy projects not being done due to of a lack of sufficient capital. PACE Houston can address this issue for area concerns.
PACE financing actually eliminates a property owner’s need to make any capital investment – so ranking capital projects by ROI becomes less of an issue – since with 100% PACE energy financing there is no investment. With PACE, the industrial entity has the ability to do all capital project improvements that reduce operating expenses in an amount sufficient to cover the annual PACE assessments. This ratio of savings to investment calculation is called the property's SIR, or Savings to Investment Ratio. Even more important than the project's SIR is the traditional Net Present Value calculation which includes a time value of money aspect and enables the financial manager to utilize their own long term cost-of-capital rate, which may differ from the lender's rate.
While the same general rules apply to manufacturing, industrial operations and office buildings - the project must demonstrate the capacity to reduce electricity or water demand or onsite generation - industrial projects are special due to the magnitude of the potential net savings. Jonathon Blackburn of the Texas PACE Authority highlighted the following potential PACE Industrial projects.
Potential PACE Industrial Projects
- High efficiency chillers, boilers, and furnaces
- Combustion and burner upgrades
- Heat recovery equipment
- Mechanical system modernization
- Industrial energy system sensors and controls
- High efficiency lighting
- Building enclosure/envelope improvements
- More efficient manufacturing process equipment
- Waste water onsite reuse systems
- Water conservation equipment
- Systems to capture, treat and use other on-site sources of water
- Condensate, rainwater, reverse osmosis reject water
Onsite Generation and Resiliency
- Combined Heat and Power
- Energy Storage
- Fuel switching
Interested Industrial or Manufacturing entities may contact Tim Crockett at 713-530-7922.
The commercial business impact of Houston's record rainfall can be somewhat mitigated through the use of a new public-private partnership program. The program is called Property Assessed Clean Energy, or PACE for short.
The program is actually designed for energy efficiency improvements but if those energy efficiency improvements just happen to be for new high efficiency air conditioning units that replace older less efficient (and now underwater) air conditioning units, PACE can help. In the process, other energy efficiency improvements can be (completed), such as outdoor LED lighting, (new) insulation or a cool roof.
PACE gives the owner access to 100% long term fixed rate financing that is tied to the property (not the owner) but enables the owner to get the facility back in shape, more quickly, for the benefit of the tenants hurt by recent floods.
The process involves defining the project scope of work, determining if the savings are enough to service PACE payments and receiving appropriate acknowledgement from the existing lender. Identifying the project specifics ahead of time may enable the owner to receive a refund for monies already expended, subject to approval. The insurance proceeds would be handled separately between the property owner and the insurance company according to the terms of the property owner's policy.
The process involves defining the project, determining its eligibility, determining if the savings are enough to service the PACE payments. Approval is then needed from the existing lender, the local PACE administrator and the new long term lender.
For more information, contact PACE Houston's Tim Crockett at 713-530-7922
The Simon Property Group, Inc. will use Travis County's PACE program to finance $1.5 million in water conservation, mechanical and lighting retrofits at Barton Creek Square, an enclosed mall in southwest Austin built in 1980. The retrofits will conserve water and lower utility costs with the savings used to pay for the financing costs. The savings, according to the Texas program rules, must be greater than the financing costs. Construction will start in the first quarter of 2016.
The Barton Creek project is part of Simon's $500 million commitment to use PACE to finance improvements to its malls throughout the country.
The Texas PACE Authority made the announcement on December 22, 2015.
PACE Houston presented PACE to the members and attendees of the Texas Renewable Energy Industry Alliance Conference at:
Westin Galleria Hotel
5060 West Alabama St.
Houston, Texas 77056
The Pre-conference PACE Presentation was on November 11th, 3:00 – 4:30 pm.
Our presentation was entitled: Property Assessed Clean Energy - A Real Game Changer for Energy Saving Improvements
Contact: Raina Hornaday