CREJ - Retail Properties Quarterly - November 2016
Retail property owners have a new financing option available that provides an economic incentive for installing energy-efficient, renewable energy and water conservation measures. This option is available through Colorado’s Property Assessed Clean Energy program and anyone looking to develop, redevelop or reposition retail property should take note. Co-PACE permits commercial and multifamily (five or more units) to obtain long-term, off-balance-sheet financing for the installation of these measures. Co-PACE financing is provided by third-party lenders and is repaid through a special assessment as part of the property tax collection process. It is not traditional debt but rather an obligation to pay the special assessment for the Co-PACE term. Typical property assessed clean energy qualified investments for retail properties include interior/ exterior lighting upgrades, building control systems, roofs, heating, ventilating and air conditioning, water conservation fixtures, windows, escalator/elevator modernization and solar. PACE allows up to 100 percent financing of all eligible measures, including all soft and hard costs so there is zero upfront investment. Eligible measures include any energy efficient, renewable energy and water conservation measure that produces an energy savings. Co-PACE is available for new construction for any project that complies with the 2015 IBC as well. There are three key features to Co-PACE that are beneficial to retail property owners. First is the extended term. Co-PACE is long-term financing for up to 20 years, based upon aggregate useful life of the improvements. Next, the Co-PACE special assessment transfers with the sale of the property to a new owner, as do the benefit of the energy efficient, renewable and conservation measures. For property owners with potential disposition plans on the horizon, this makes Co-PACE particularly attractive since there is no repayment of the Co-PACE financing at closing. Lastly, in triple net leases, tenants pay the Co-PACE special assessment, which is offset by tenant’s reduced utility and operation costs. This means tenants are paying to improve your property’s building systems and ultimately enhance property values. The overall triple-net charges should remain the same but the amount tenants are saving in utility costs are instead used to pay the Co-PACE special assessment. Retail market leaders like Simon Property Group have discovered the economic benefits of PACE, recently completing over a dozen PACE projects in the U.S., with more planned. The group’s success with PACE demonstrates why PACE can benefit retail property owners. The commercial PACE market is growing across the country with 33 states and Washington, D.C., enacting PACE-enabling legislation and 16 states with active PACE programs. To date, almost 800 commercial U.S. PACE projects have been completed, for a total of approximately $300 million. The Co-PACE program officially launched with its first closing in August for an energy-efficient Co-PACE project in Boulder. The CoPACE statute created the New Energy Improvement District to administer and run the Co-PACE program. For a property owner to participate, the county where the property is located must “opt-in” to the program. So far, Denver, Adams, Arapahoe, Boulder, Broomfield, Eagle, Gunnison, Jefferson and Pitkin counties have opted into Co-PACE, with other counties in discussions to do the same. Across Colorado, jurisdictions like Boulder and Denver are adopting or planning to adopt mandatory benchmarking measures for property owners to meet stated community sustainability goals. Denver soon will adopt some form of its Energize Denver initiative and as part of that initiative all commercial properties over 25,000 square feet will have to go through an energy audit. If a property scores below a certain level then the property will be required to make energy-efficiency upgrades to score at a higher level. Property owners can use Co-PACE to make the improvements and offset some of the expense that the program will require. Any retail property owner planning a renovation or capital improvement project should consider Co-PACE as an option to facilitate positive economic returns and a more efficient property.