What is Commercial Property Assessed Clean Energy?
Commercial property-assessed clean energy (CPACE) is a financing structure in which building owners borrow money for energy efficiency or renewable energy projects and make repayments via an assessment on the their property tax bill. The financing arrangement then remains with the property even if it is sold, facilitating long-term investments in building efficiency. CPACE may be funded by private investors or government programs, but it is only available in jurisdictions that have passed the required legislation.
CPACE may be a good fit if your organization...
- Owns or occupies facilities located in jurisdictions with CPACE programs
- Wants long-term financing (10+ years) at low interest rates
- Prefers to do pilot projects at a few locations before implementing more broadly
- Does not plan to own or occupy its facilities long-term and wants to transfer financing obligations at the time of sale
To compare CPACE to other financing options that might be a good fit, answer a few questions about your organization.
How it Works
To be eligible for CPACE financing, a project must be located in a county or municipality that has approved CPACE programs within a state that has passed PACE-enabling legislation. For more details on where CPACE is available, use the tools provided by PACENation. Note that residential PACE (RPACE) is also available in some jurisdictions, but only CPACE is covered in this fact sheet.
The parties involved in a CPACE deal usually include:
- A PACE administrator that manages the project;
- A local government that collects the property tax assessment;
- A contractor or energy services company (ESCO) that installs the equipment;
- The building owner (customer) receiving the upgrade or tenants working in concert with their landlord; and
- Private investors, bondholders, or a government to provide the capital.
The PACE administrator will typically conduct marketing and sales to originate potential customers. Before financing is disbursed, the project must be approved by the PACE administrator. For properties with a mortgage, consent from the mortgage lender is usually required. Depending on state statute, capital for CPACE projects may come from the government through reserve funds or bond issuances, from private investors, or a mix of the two.
Once the project is approved and financing is secured, the contractor installs the efficiency measures and the customer begins to realize energy savings. The loan is then repaid in the form of an assessment on the building owner’s property tax bill over a period of typically 10-20 years. To accomplish this, a PACE lien is placed on the property. The lien is senior to most other debt on the property, which helps encourage investors to provide capital at lower cost and over longer terms than with standard loans. If the building is sold during the PACE repayment period, the lien securing the assessments remains on the property and becomes an obligation of the new building owner. Nonpayment results in the same set of repercussions as the failure to pay any other portion of a property tax bill.
CPACE financing can be structured in a variety of ways depending on the jurisdictional laws, available providers, and project details. Building owners should be aware of the following details:
- Funding Source: A PACE jurisdiction may have an open market, in which private financiers compete to provide competitively priced capital, or a turnkey program, in which a single public or private financing source is pre-selected to simplify the funding process and reduce complexity for the building owner.
- Management: Some PACE programs are administered directly by the local government, whereas others are run by a third-party administrator. Many programs take a blended approach where responsibilities are split.
- Underlying Financing and Balance Sheet Treatment: PACE is a repayment mechanism that can have several different types of financing backing it (e.g. loan vs. lease vs. other arrangements). CPACE is most commonly backed by debt or loan financing, which typically must be reported as a liability on the building owner’s balance sheet. However, some organizations believe that because these loans are repaid via property tax bills that are often treated as off-balance sheet operating expenses, there may be some off-balance sheet benefit to PACE. This remains an open question subject to varying accounting opinions, as no consensus has been reached. In some cases, PACE can be backed by off-balance sheet financing such as an operating lease or energy services agreement (ESA), but these structures are not common.
Advantages and Disadvantages
State of the Market
Commercial PACE is a fast-growing financing structure that has attracted much industry and legislative attention due to its potential to overcome common financing barriers. CPACE financing can work for buildings in any sector, including in some cases non-profit and government facilities that would not normally pay property taxes.
Following the introduction of residential PACE in 2007, commercial PACE programs began to appear in 2009. Commercial PACE has grown quickly in popularity, with incumbent banks and financiers as well as new companies entering the market to meet demand. According to the PACENation 2009 - 2016 CPACE Market Overview, 33 states and the District of Columbia have passed laws enabling CPACE programs as of 2016. However, only 19 states plus D.C. have active CPACE programs in operation. Approximately $340 million in CPACE financing has been provided to over 1020 commercial buildings, with over half of that total occurring since the beginning of 2015. The majority of completed projects fell in the $75,000 - $750,000 size range, though smaller or larger projects are not uncommon.
Better Buildings Implementation Models
This implementation model describes how Prologis, Inc., took advantage of PACE financing to retrofit its headquarters at the historic Pier 1 building in San Francisco.
Milwaukee, WI created a PACE financing option that allows building owners to pay for energy improvements through a voluntary municipal special charge which is attached to the property, not the owner.
Learn More About CPACE
- PACENation — http://www.pacenation.us/
- ACEEE — PACE Toolkit for Policymakers
- PACENow and Johnson Controls — Setting the PACE 2.0: Financing Commercial Retrofits
- Wilson Sonsini Goodrich & Rosati — Innovations and Opportunities in Energy Efficiency Finance
- Deutsche Bank Climate Change Advisors and The Rockefeller Foundation — United States Building Energy Efficiency Retrofits: Market Sizing and Financing Models
|Basic Attributes||Applicable Sectors?Which economic sectors does this option commonly serve?||Common: Commercial & Industrial, Multifamily, Affordable Multifamily, Non-Profit, Private University/School/Hospital
Less Common: Government
|Geographic Scope?Is the financing option available throughout the U.S., or limited to certain areas that have the appropriate policies and programs in place?||Limited by legislation|
|Building Ownership?Does this option work well for projects in leased space, owned space, or both?||Works well for owned; sometimes leased; the financing must be closed by the property owner|
|Typical Project Size?What range of project sizes does this option typically serve?||Typically $250k+, but some programs serve smaller markets|
|Contract Structure||Contract Complexity?How complex is the financing option from the customer’s perspective, in terms of the size and complexity of the financing contract, the number of parties involved, and other factors?||Medium|
|Parties Involved?Which types of organizations are typically involved in executing the financing option?||Building Owner, Local Government, PACE Administrator, Contractor/ESCO, Investor(s)|
|Payment Type?Are customer payments fixed over time or might they be variable based on factors such as energy savings or utility rates?||Typically fixed; variable in some programs|
|Guaranteed Savings?Is the customer typically guaranteed some amount of savings net of payments on the financing contract?||No|
|Measurement & Verification?Is measurement and verification (M&V) of project savings typically provided as part of the financing contract?||No; though some PACE programs require M&V to be conducted|
|Tax & Balance Sheet||Budget Source?Do customer payments made on this financing option typically come from an operating budget ("opex") or capital budget ("capex")?||Typically capex; sometimes opex|
|Balance Sheet Treatment?According to industry best practices, does the financing option typically appear as a liability on the customer’s balance sheet, or is it off-balance sheet?||Typically on balance sheet; potentially some off-balance sheet benefit|
|Tax Deductions?Which amounts can a customer typically deduct from its taxes under this financing option? In some cases all payments are deductible, and in other cases only interest and depreciation are deductible.||Typically depreciation and interest; all payments might be deducted if treated as off-balance sheet|
|Equipment Ownership?During the financing term, is the efficiency equipment typically owned by the customer (internal) or by an outside party such as the lender or contractor (external)?||Typically internal unless treated as off-balance sheet|
|Collateral Source?Which customer assets can the lender use as collateral to secure repayment?||Tax Assessment Lien|
|Contract Terms||Typical Duration?How long does a typical financing contract last?||10-20 years; may not exceed useful life of equipment|
|Typical Close Time?How long does it typically take to secure financing once you start speaking with providers?||Medium (3-9 months)|
|Market Attributes||Market Size?What is the total cumulative dollar value of projects financed under this option?||$340M cumulative as of Q4 2016|
|Time in Market?How long has this financing option been available in the market?||Since 2009|