PACE Financing Sets Its Sights on the Commercial Sector
This week, The YGRENE Energy Fund was lauded by the U.S. Department of Energy’s Better Buildings Challenge for facilitating more than $100 million in commercial energy efficiency projects through Property Assisted Clean Energy (PACE) financing.
That’s a lot of money – but just the start of the firm’s involvement with commercial entities, said Louis-Philippe Lalonde, YGRENE’s new Chief Marketing Officer. Lalonde said that the firm – and the PACE industry – is set up to more aggressively court the commercial market during the balance of 2016 and beyond.
The residential side, which dominates PACE financing, can be thought of as a proving grounds. “The commercial space is going to get better understood now that we have some perspective with residential, which focuses on simpler and smaller projects,” Lalonde said. “Now they are getting acclimatized to this asset class…I think it is the next big frontier and I think there will more and more appetite to get into this space.”
PACE is a financial vehicle in which funding for energy efficiency upgrades are paid for through assessments to the property tax bill. The loans take precedent over the mortgage payment and are thus likely to be paid even if the owner defaults. The financing is based on the property, not the commercial entities business. As such, they flow to the next owner if the property is sold, Lalonde said.
YGRENE – that’s energy spelled backwards, by the way – is one of the biggest providers of this type of financing. It current is active in California and Florida and soon will be in three states which Lalonde declined to name. Though the company was lauded by the DoE for its commercial projects – it has more than 300 underway, Lalonde says – the bulk of its business is on the residential side. The company says that it has been approved to operate in more than 240 communities.
PACE financing has gotten its earliest traction in the residential market, Lalonde says, because these loans are simpler and smaller. It was low hanging fruit that enabled companies such as YGRENE and lenders to get familiar and comfortable with the concept and its mechanisms. While residential PACE financing will continue to grow, he says that commercial PACE financing will become far more common.
Lalonde says that the universal acknowledgement that energy efficiency is important will lead to the increase commercial activity. Commercial property owners want to take part in these efforts. The huge corporations have a variety of financing options for energy efficiency projects. The vast majority of others don’t. It is difficult to find funding for these projects through traditional channels. PACE financing is more accessible because it is based on the value of the property and payment is included in the tax bill.
It could be a win/win, according to Lalonde. “On the commercial side there are buildings that are energy hogs,” he said. “Many of them are interested in looking at renewables or energy efficient-type projects that often don’t qualify [for traditional loans] because financial institutions have stringent rules for financing. They put a higher risk premium on these projects, which eliminates most that need this financing. PACE circumvents that. There is a lot more flexibility.”
There are several benefits to PACE financing, Lalonde said. In addition to the obvious – the financial and environmental benefits of the project itself, there are potential tax benefits (depending on the state and local rules) and the reality that the financing is not project-based. Thus, for instance, if PACE financing of $100,000 is approved and a project cost $75,000, there is $25,000 remaining for a subsequent project. Finally, PACE upgrades to commercial properties are likely to get more in rent or sale and attract a higher level tenant.
YGRENE works with about 3,000 contractors. They often lead the residential or commercial customer to the financing. The contractor may suggest to a prospective customer that the project seems like a good fit with the innovative approach to financing. If the property owner is working with a contractor not associated with YGRENE, it has gain certification in order for the financing vehicle to be used, Lalonde said.
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