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Accessible Financing for 'Green’ Commercial Properties

OCT 15, 2012 4:29pm ET
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Data show there are untapped energy savings and mortgage financing potential in turning “green” the old and future stock of commercial real estate.
Department of Energy researchers find there is noteworthy potential for energy and cost savings in the CRE market. The department’s calculations show that if all U.S. businesses and institutions conducted cost-effective upgrades, they could reduce their average energy use by 25%. The total cost of this work would be roughly $100 billion, “which would be offset as a result of lower energy bills.”
“Green” real estate is a long-term goal supporters see as an opportunity despite upfront transition costs.
As the number of “green” single-family homes increases, some public and private entities in California are trying to promote similar upgrades in the commercial real estate side of the market.
But since large commercial properties incur higher transition costs and require more complex financing, fewer programs offer “green” CRE financing.
To fill the gap the California Statewide Communities Development Authority has created the commercial version of its Property Assessed Clean Energy program that was initially designed for residential properties.
The commercial PACE financing tool assists CRE property owners as they increase energy and water use efficiency, or implement renewable energy upgrades. Starting in September the program is available in 14 counties and 126 cities in California.
Commercial PACE is a public-private partnership initiative.
Private capital funding is delivered upfront to help minimize financial burdens faced by local government budgets. In addition, participating CRE property owners can use municipal bonds to finance their water and energy upgrades. After completion owners can repay borrowed funds in annual increments “through a special assessment” on their property tax bill.
Since PACE investments benefit neighborhoods and the communities where upgraded CRE properties are located, owners can access additional state financing through CaliforniaFIRST, a community-development financing tool developed by the California Statewide Communities Development Authority.
Renewable Funding, a Walnut Creek-based firm that is credited for launching the nation’s first PACE program in Berkeley in 2008 is one of the commercial PACE program administrators in California that makes CaliforniaFIRST available to CRE owners. The multi-jurisdictional program is applicable statewide.
“Commercial PACE gives businesses a great option for pursuing energy efficiency projects that may have previously been out of reach,” says Dianne Jacob, county supervisor in San Diego, one of the first 14 counties currently implementing the program.
In San Jose, the county’s partnership with Renewable Funding provides the CaliforniaFIRST financing option to PACE program participants. San Jose Mayor Chuck Reed stated in a press release that he sees commercial PACE not only as a lower-cost energy incentive for owners, but also as a way to support green jobs and helps reduce greenhouse gas emissions.
The PACE financing mechanism was pioneered by the City of Berkeley as residential property energy upgrade platform in 2008 but was approved by the regulators in 2010. Last year several local jurisdictions, including San Francisco and Los Angeles County, along with Washington, D.C., started to market-test the commercial version of PACE.
“What has been lacking up until now was affordable upfront capital to do the work,” says Beau Engman, VP of commercial energy solutions at Johnson Controls Inc. Engman calls PACE “a promising means of financing deep commercial energy efficiency upgrades.”
Recent findings from various studies, including the Johnson Controls annual Energy Efficiency Indicator, have pointed to the lack of attractive financing options as one of the key barriers that prevent owners from making energy efficiency upgrades, Engman says. The CaliforniaFIRST program indicates California is “the state with the greatest potential to unlock the promising energy efficiency market.”
Wayne Seaton, managing director Wells Fargo’s Sustainable Public Infrastructure group, finds CaliforniaFIRST’s approach “has potential to promote energy efficiency retrofits of commercial properties” while maintaining lien security for mortgage lenders.
Building owners have always been very interested in saving money and energy. Now interest from the mortgage industry appears to be in the rise. In addition to large banks such as Wells Fargo, smaller-size innovative financial institutions are becoming more active in the PACE market.
The San Rafael-based Clean Fund is one example. The firm’s CEO, John Kinney, sees great potential in PACE financing because it can save energy and money, and create nearly 25,000 jobs in California.
In partnership with local governments Clean Fund already has financed PACE projects offering low-cost capital to CRE owners in California and Minnesota.
According to Renewable Funding, the official advisor of the Department of Energy on commercial PACE financing that operates commercial PACE programs for local governments, the program is well received in the U.S. and abroad and among others is being tested in Melbourne, Australia.

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