Office Properties

Page 16

— Office Properties Quarterly — July 2015

Sustainability

roperty Assessed Clean

Energy is an innovative way

to finance energy-efficient,

renewable energy and water

conservation measures by

allowing property owners to obtain

low-interest, long-term financing

(up to 20 years) for eligible improve-

ments that are paid back through

a voluntary special assessment in

connection with annual property

tax payments. PACE is designed

to incentivize the installation of

energy-efficient, renewable energy

and water conservation measures

that often are overlooked by prop-

erty owners due to the higher cost

and long payback periods, which

can exceed occupancy expectations.

Because the special assessment

stays with the property on sale,

PACE financing is attractive particu-

larly for owners looking to redevel-

op and reposition a property.

PACE provides up to 100 per-

cent financing, including all soft

and hard costs so there is zero

upfront investment. The benefits

of using PACE for the property

owner includes energy cost savings,

operation and maintenance savings,

favorable balance sheet treatment,

improved building efficiencies,

eliminating the split incentive with

tenants, and increased property val-

ues and rental rates.

The long-term nature of PACE

financing can be beneficial to

property owners. PACE financing

mirrors the useful life of the eli-

gible improvements, typically 10-,

15- and 20-year

terms, as opposed

to traditional com-

mercial financing

terms between

two and five years.

PACE works well

with renewable

measures, which

often have payback

periods in excess

of seven years by

providing a 20-year

term, allowing the

property owner

to capture all federal tax credits

and incentives. Even if the prop-

erty is transferred, the benefits of

the energy savings are realized by

the next property owner, which is

reflected in the balance sheet and

the property value.

There are 33 states with PACE

enabling legislation, but only 14

states with active commercial PACE

programs. The PACE commercial

market became active in the last

few years, with 330 projects com-

pleted to date, representing over

$112 million and creating 1,620 jobs.

While not yet in Colorado, one

example of a recent PACE office

project that would be similar to

Colorado projects was done by

Forstone Capital in Connecticut.

The project involved a retrofit of a

112,000-square-foot office building

built in 1966. The project included

new chillers, building control sys-

tems, data center retrofit and new

cooling towers. The entire project

cost $2.47 million,

but the property

owner received

$469,000 in incen-

tives and used

PACE to finance

$2 million of the

project. The pro-

jected savings over

the useful life of

these measures

is $6.05 million.

PACE makes eco-

nomic sense to the

property owner by

allowing it to keep all incentives,

credits, rebates and savings gener-

ated from installation of the eligible

measures.

The Colorado commercial PACE

program is currently in the final

stages of development. The Colora-

do legislation created the New Ener-

gy Improvement District to admin-

ister the PACE program. Gov. John

Hickenlooper appointed a board of

directors for the NEID charged with

developing and launching commer-

cial PACE in Colorado.

Expected to launch third-quarter

2015, commercial PACE in Colorado

will permit commercial, industrial

and multifamily (five or more units)

properties to participate in the pro-

gram. The program will be available

for redevelopment of existing prop-

erties as well as new construction

projects that include eligible mea-

sures. Intended to be a streamlined

PACE program, Colorado permits a

property owner to use any third-

party financing options to facili-

tate the transaction. This means a

property owner could obtain PACE

financing from his community

banker if the bank offers a PACE

product.

The program has the potential

to provide many community out-

comes, including stimulating eco-

nomic development activity for

members of the energy, construc-

tion and lending sectors, reducing

greenhouse gases, reducing local

energy consumption and improv-

ing individual commercial property

owners’ balance sheets.

What the PACE program means to office owners

Keirstin Beck

Principal, Integro

LLC, Boulder

J. Drever

Principal, Integro

LLC, Denver

The requirement in Colorado

for Property Assessed Clean

Energy projects is that the eli-

gible measure must produce an

“energy savings.” Eligible mea-

sures available for office prop-

erties include:

• Heating, ventilating and air

conditioning

• Building control systems

• LED lighting

• Energy-efficient roofs

• Upgraded insulation

• Upgraded windows

• Elevator modernization

• Renewable measures such

as solar

Eligible PACE measures