Renewable Energy: PACE Financing For Energy Improvements

By Anne Cosgrove
Published in the January 2012 issue of
Today’s Facility Manager

Facility managers (fms) who are interested in installing a renewable energy system on-site will more often than not face financing obstacles. Even if first costs are expected to be recouped in several years’ time and incentives are available from government and utility sources, a “green” energy solution may still be out of reach for an fm’s budget.

An emerging financing tool, while perhaps not suited for everyone—and not available everywhere—is the PACE (Property Assessed Clean Energy) program. Introduced as a pilot program in California in 2008, PACE is a voluntary, locally based initiative that allows property owners to finance energy efficiency and certain renewable energy projects for their commercial buildings.

Interested facility owners opt in to receive financing for improvements that they repay through an assessment on their property taxes for a set period of time, up to 20 years. While it varies by program, eligible renewable energy projects typically include solar hot water, solar photovoltaics, and geothermal systems. Meanwhile, other energy efficiency measures that can be installed with PACE money are weather sealing, insulation, energy efficient boilers and cooling systems, and new windows. If the property is sold during the repayment period, the loan payments transfer to the owner via the property tax bill.

Since 2008, PACE enabling legislation has been passed in 27 states and the District of Columbia. The most established and active commercial PACE programs operate in California (Sonoma County, Los Angeles County, Sacramento, and San Francisco) and in Boulder County, CO. As of March 2011, these programs represented nearly $10 million in funding for 71 projects, with costs ranging from $2,000 to $2.3 million.

While PACE operates on a local level, funding can come from private sources or from governments using their own available funds or raising money in the capital markets. Federal grant monies are being used by some to either fund projects or provide credit support for borrowing.

In July 2010, the Federal Housing Finance Agency effectively halted residential PACE by prohibiting Fannie Mae and Freddie Mac from buying mortgages with PACE assessments. While that step is being contested in federal lawsuits filed by the State of California, and others, interest has shifted significantly to commercial programs.

David Gabrielson, executive director of PACENow, a group formed in 2008 to broaden awareness, notes that several parties must work in concert for a successful project to occur, which is one reason this financing model is just beginning to take hold. “Local government must first allow the model to be used in its jurisdiction,” he explains, “financing must be available (whether from public or private sources), and the mortgage holder on a property must consent to the use of PACE financing.”

Early PACE projects were primarily backed by funds made available by the American Recovery and Reinvestment Act (ARRA) of 2009, but as that source dried up, potential projects have increasingly been supported by federal grants; local, county, and state resources; and private investors.

The impact of PACE on commercial building energy improvements remains to be seen. At press time, the city council of Ann Arbor, MI had moved one step closer to approving a PACE program for its commercial property owners. If finalized, qualifying property owners in the city could borrow money for energy efficiency projects ranging from $10,000 to $350,000 and then pay back the loans through special assessments added onto their tax bills for up to 10 years. This is a joint effort of the City of Ann Arbor and the Clean Energy Coalition, which works with 40 municipalities in Michigan.

Vendors with experience in commercial PACE projects can be a resource for fms. Beau Engman, vice president, commercial energy solutions at Johnson Controls, says, “With offices in each state, [we] understand the laws and program requirements for each local market to develop prospective scenarios that optimize the project benefits including interest rates, energy savings, rebates, and other operational efficiencies. Commercial PACE applies to various project types and ownership structures, but one size does not fit all.”

Concerns about energy availability and the associated rising costs are not going to disappear. In fact, the issue for fms and society at large is expected to impact operations and budgets even more over time. The PACE approach to energy improvements can be another tool for fms to access as they seek ways to improve sustainability, while keeping costs under control.

Research for this article included information provided by PACENow and Johnson Controls.