First PACE Financing in Nebraska Closes in June 2018

PACE-Sage-Capital-Logov2PACE Sage Capital announces the first PACE financing in Nebraska that closed in June 2018.

$3.4 Million of PACE funds are being contributed to the conversion of a 105-year old iconic office building to the “Hotel Peregrine” by Curio boutique hotel, which is projected to be completed in the spring of 2019.

“We were intimately involved in the transaction, including capital sourcing and deal structuring, energy engineering, assisting the City of Omaha with its first PACE application and assisting the developers with the whole PACE process”, said Rob Shear, CEO of PACE Sage Capital, the PACE origination company who brought PACE financing to Nebraska.

“The Hotel Peregrine is the first of a building pipeline of projects that have circled PACE in their capital stack”, said Shear.  “We expect the market in Nebraska to be robust and very accepting of PACE as an effective tool for retrofits, upgrades, conversions/rehabs and ground up commercial building projects, both prospectively and retroactively”.

Here are articles from the Omaha World-Herald and the Energy News Network that describe the Hotel Peregrine PACE project in Nebraska.

First Look: Peregrine boutique hotel at 18th and Douglas is partly financed by new clean energy program

Omaha hotel is first project financed with Nebraska’s PACE legislation

Omaha is Beyond Expectations and Will Get CEO Attention

Rob-Shear

Rob Shear

Post written by Rob Shear, CEO of PACE Sage Capital, LLC

PACE Sage Capital is getting ready to close the first PACE projects in Nebraska after the company was instrumental in the passage of the Legislature’s Nebraska PACE Act and then a City of Omaha Ordinance creating the first PACE District in Nebraska (Eastern Nebraska Clean Energy Assessment District – ENCEAD).

“The response to the new economic development tool for developers and commercial property owners in Omaha has been well beyond our expectations”, said Rob Shear, CEO of PACE Sage Capital. “The commercial real estate community has embraced PACE and I plan to personally build the market in Omaha for our company for the foreseeable future.”

The City of Omaha as the PACE Administrator has been great to work with and the Mayor’s Office and the City Council have been very supportive of our efforts.

We look forward to bringing our financial product of long-term, low cost, fixed rate and Non Recourse financing in the equity stack to a plethora of building retrofits and upgrades and Re/development projects in the Omaha area market.

We also look forward to establishing PACE Districts in other municipalities in Nebraska in the near term.

Omaha-Skyline

PACE Energy Engineering – Qualifying PACE Projects

Rob-Shear

Rob Shear

Post written by Rob Shear, CEO of PACE Sage Capital, LLC

For many PACE enabled states, there is a process that we call “Energy Engineering” to qualify the PACE Project measures and dollars. How it works depends upon what the state PACE statute says about qualification and what, if any, calculation has to be made by an Engineer to meet the qualifications.

All of this ties into the public policy of PACE to improve and encourage energy efficiency and conservation for buildings and new property developments.

For illustrative purposes, we will discuss Missouri and Nebraska.

SIR – before we begin, there is a key term called SIR, an acronym for “Savings to Investment Ratio”, that is a critical ratio for PACE qualification. SIR generally means the estimated energy (and water in Nebraska) cost savings over the useful life of each energy conservation measure (ECM) being financed by PACE, compared to the cost of the PACE Project. The definitions of “cost of the PACE Project” are slightly different for each of our illustrative states.  For both states, the SIR has to be equal to or greater than 1.0.

The PACE statute in Missouri says the following:

67.2815. 1.  A clean energy development board shall not enter into an assessment contract or levy or collect a special assessment for a project without making a finding that there are sufficient resources to complete the project and that the estimated economic benefit expected from the project during the financing period is equal to or greater than the cost of the project.

The bold/underlined part of the paragraph is the SIR for Missouri. What is included in “economic benefit”?  For Missouri, Engineers calculate energy cost savings, deferred maintenance savings (eg, if a roof is replaced, whatever deferred maintenance there was for the old roof has been eliminated and that is an economic benefit) and capital cost avoidance (capital cost reduction that results from a spend that is lower than the spend that would otherwise been required if the project was not done).

What is the “cost of the project”? The PACE Clean Energy Boards in Missouri have interpreted “cost of the project” to mean hard and soft costs for each ECM being financed by PACE and fees and transaction costs of the PACE financing. Notably, not the interest cost of the PACE financing.

Energy-EfficiencyThe PACE statute in Nebraska says the following:

…there are sufficient resources to complete the energy project and that the estimated economic benefit, including, but not limited to, energy cost savings, maintenance cost savings, and other property operating savings expected from the energy project during the financing period, is equal to or greater than the principal cost of the energy project.

The two differences in the Nebraska SIR from Missouri are:

  1. Nebraska will include water cost savings in the calculations;
  2. The estimated savings have to be equal to or greater than the “principal” cost of the energy project, and the fees and transaction costs of the PACE financing are not included in the principal cost of the energy project.

Weighted Average Useful Life of ECMs

Both Missouri and Nebraska PACE laws say that the term of the PACE financing cannot exceed the weighted average useful life (weighted by amount spent on each ECM) of the PACE ECMs. Missouri, however, has a maximum PACE term of 20 years even if the weighted average useful life of the PACE ECMs is longer. Nebraska does not have a maximum term.

Baseline Calculations and Reasonable Assumption for Increased Costs

The Engineer that provides the calculations to meet the SIR requirements first creates a baseline year 1 savings estimate for each PACE ECM for the first year after the PACE project completion. Then the Engineer adds a compounding factor assumption for annual estimated increases in utility and other related costs. The baseline savings are then increased each year by the compounding factor (eg 5%) for the useful life of each ECM and then a total savings amount (economic benefit) for the PACE Project is calculated.

To visualize and simplify these calculations, here are two real Engineer charts for a recently closed PACE Project financing:

Project Details chart

The first chart describes each of the six PACE ECMs. The second chart shows the costs of each ECM and the ECM total cost ($1,304,796), the useful life of each ECM, the year 1 estimated baseline cost savings for energy ($27,653) and maintenance & operating items ($13,050), the total estimated savings for each over the PACE financing term using a 5% compounding increase factor and the total estimated savings for the whole PACE Project ($1,381,994).

The SIR is greater than 1.0 ($1,381,994/$1,304,796) = 1.06.  All of the ECMs in the chart qualify for this PACE Project financing.

Nebraska’s Law is a PACE Setter

Chris Peterson

Chris Peterson

Post written by Chris Peterson | Managing Partner, Nebraska

Not every “Property-Assessed Clean Energy” (PACE) law is created equal. Since the nation’s first PACE law was enacted in California about ten years ago, more than thirty states have adopted their own PACE Acts.

Some are written broadly while others are narrowly constructed – all are intended to encourage energy efficiency and reduce energy consumption.

The Nebraska PACE Act is among the best laws in the country. What makes the Nebraska PACE Act better than some (or many) other states?

EXHAUSTIVE LIST OF ENERGY CONSERVATION MEASURES

The Nebraska law has an exhaustive list of energy conservation measures that can be funded by PACE, both conventional and renewable resource measures. This encourages property owners to consider all types of energy efficiency or water conservation systems and upgrades for their buildings.

LONGEST FINANCING TERM POSSIBLE

The Nebraska law says that the PACE financing term cannot exceed the weighted average useful life of the PACE energy conservation measures. This allows financing for up to 30 years for a solar project and between 20 and 30 years for a typical blended and comprehensive energy project.

RETROACTIVITY

In some states, PACE loans can only be financed before the energy or water conservation measures are installed. Nebraska’s law is different in that projects completed a week, a month, a year, or even five years ago can be financed.

nebraskaThis gives property owners and investors the opportunity to redeploy capital and/or take advantage of PACE today even though the financing mechanism wasn’t in place a few years ago when an energy project was completed.

NEW CONSTRUCTION

Nebraska’s PACE Act can be used to help finance ground-up construction projects. Some states restrict PACE financing to renovations or retrofits of existing buildings – but not Nebraska’s law.

DIRECT COLLECTION

Property owners, lenders and local governments all win with Nebraska’s direct collection provision. Borrowed from laws in Texas and Michigan, Nebraska allows lenders to collect PACE payments directly from property owners.

Local governments will appreciate not having to serve as a pass-through for PACE payments where funds might be held up for weeks or months before being disbursed and the additional burden that could be placed on county collectors.

These are just some of the reasons why PACE financing in Nebraska is attractive to commercial real estate property owners and investors.  For more information about how your energy project in Nebraska can be financed with fixed-rate, long-term, non-recourse PACE financing, contact PACE Sage Capital today!

You’re Kidding Me? – PACE Retroactivity Option for Commercial Property Owners

Rob-Shear

Rob Shear

Post written by Rob Shear, CEO of PACE Sage Capital, LLC

Did you know we can retroactively finance energy projects up to 3 years after completion (we are considering up to 5 years)?  This feature of PACE financing is unprecedented.

When we tell developers and property owners about Retroactivity, we usually hear “You’re kidding me?!”  PACE is meant to finance energy efficiency which is what State PACE laws typically say is the good public purpose for the law.

Because PACE is relatively new, many commercial property owners didn’t have access to or weren’t informed about PACE when they did their project. Retroactivity solves that for them.

For PACE financing, the reimbursed costs (hard and soft) are Energy Conservation Measures, i.e. any measure that was installed and creates energy cost savings (and related maintenance and operating cost savings) in Missouri, or energy and water cost savings (and related maintenance and operating cost savings) in Nebraska.

These measures and costs are for long useful life (15 to 30 years) energy efficiency items that have much of their useful life remaining when PACE funds are obtained retroactively.

Wish We Could Go Back What does this mean?

It means that funds can be withdrawn from commercial properties post completion on a non recourse, long-term and fixed rate basis and used elsewhere for a myriad of reasons. Some of these prudent reasons are:

  • Raise equity for other projects and to diversify risk;
  • Withdraw cash from existing properties to repay equity investors;
  • PACE is a pass-through financing tool. If a commercial property owner obtains a PACE financing post completion, they have a way to pass-through some or all of the costs of the completed energy project to their tenants who are receiving some of the benefit of the reduced energy cost.  This solves the split incentive of a landlord paying for energy efficiency measures that benefit the tenants but the landlord cannot recover any of the costs;
  • When PACE is passed through to tenants or hotel guests, some or all of the PACE net financing proceeds can be used to reduce existing senior debt and to lower the overall debt service of the property;
  • If the business in an owner occupied building used cash generated by the business to upgrade its building, the business can use PACE funds to put the cash back in the business where it can earn a higher return;
  • Some of the PACE funds can be used to create a reserve account that will pay for unexpected expenses and vacancy costs, re-leasing costs and future capital costs.

This blog post is meant to inform commercial property owners of the Retroactivity option with PACE.  If this sounds like a good solution today for any of your properties, contact PACE Sage Capital at info@pacesage.com or call 913-667-0971 to further explore the cost-benefit of this retroactive solution.

Omaha Adopts Nebraska’s First PACE Ordinance

Chris Peterson

Chris Peterson

Post written by Chris Peterson | Managing Partner, Nebraska

Commercial property owners and developers in the Omaha area will be the first in Nebraska to have access to “PACE financing” – fixed-rate, non-recourse, long-term loans in the equity stack used to finance the energy and water conservation measures of either retrofits, redevelopment or ground-up construction projects. Nebraska joined more than thirty other states with a PACE law when the Legislature adopted LB 1012 in 2016.

On May 16, 2017, Omaha’s city council unanimously passed Nebraska’s first PACE (Property Assessed Clean Energy) ordinance and in doing so, the city took a big step forward toward allowing the use of this new commercial real estate financing tool.

PACE Sage Capital worked closely with city council member Aimee Melton and Mayor Jean Stothert’s administration, including Jennifer Taylor from the city law department, to develop the city’s ordinance.

PACE is intended to encourage and support the use of energy efficiency and water conservation measures and reductions in energy and water usage by commercial property owners. Eligible items for financing include lighting, windows, HVAC units and ductwork, temperature controls, low-flow fixtures, boilers/chillers, renewable resources such as solar and a long list of other measures.

PACE loans are repaid in the form of a special assessment on the improved property and the annual assessment is billed to the property owner in the same manner as property taxes.  At the time a PACE loan is closed, an assessment contract is filed with the county and attached to the property’s title.

Omaha’s PACE ordinance establishes the Eastern Nebraska Clean Energy Assessment District (ENCEAD), which includes the city of Omaha and its zoning jurisdiction, and places responsibility for administering the program with the city planning department.

The department is expected to begin accepting applications from property owners in the near term after they have published the application form and set a fee schedule. PACE Sage Capital expects to fund projects as early as this summer.

To learn more about PACE lending in Omaha or elsewhere, visit the www.PACESAGE.com website or contact Chris Peterson, PACE Sage Capital Managing Partner for Nebraska, at chris@pacesage.com or 402-470-7294.

…But the Rate!

Rob-Shear

Rob Shear

Post written by Rob Shear, CEO of PACE Sage Capital, LLC

Commercial PACE financing is new in the markets that we operate in and we spend a lot of time educating developer and property owner clients and those who serve our clients.

Most are intrigued with this novel program and appreciate the nuances and benefits of this financing, especially the unique ability to go back up to two years and reimburse (take out cash) for project costs already incurred.

More than a few times we hear the following: “Sounds very interesting and relevant, BUT THE RATE!”

Today’s PACE fixed, non recourse rates for 20 years are in the 6.25% to 7.0% range.  When one compares that to a shorter term, recourse conventional financing (construction, mini-perm, bank mortgages), the rate sounds high.  That is the issue: comparing the rate to conventional senior debt.

PACE is not a replacement for conventional senior debt financing.  We tell our clients to obtain as much conventional senior, shorter-term debt for their projects that they can get and our financing will be a GAP filler in the equity stack.  PACE combines with TIFs, historic and new market tax credits and other financing incentives and is best positioned with these other incentives in the equity stack.

Screen Shot If one compares PACE to mezzanine debt or equity hurdle rates, 6.25% to 7.0% fixed for 20 years is very competitive.  It’s all about what PACE is replacing.  When PACE is part of the equity stack and it reduces the amount of cash equity required for a project, that could be a real boost to the IRR of the investment.

When one can passthrough some or all of the annual PACE special assessment to tenants (triple net leases and leases with expense stops) or hotel guests (energy efficiency surcharge below the daily rate line), the effective rate of PACE capital can be driven down to zero.

The math works that for a PACE fixed rate of 6.50%, if 45% of the annual special assessment cost is recovered by a passthrough, the effective PACE rate is 0%.  It would be hard to say “But the Rate” if the rate is effectively 0%.

Finally, some of our clients are using part of the PACE funds to pay down their senior debt to below a threshold LTV that gives them a reduced senior debt rate.  After the senior debt rate cut, when they combine the new senior debt rate and the PACE rate, their overall debt service is lower.

I hope this helps to put a real perspective on the RATE!