Help is on the horizon for some of the hardest hit in California’s downturn economy. And while it involves no public monies, this help was inspired by local government — the City Council in California’s top solar city – San Diego. On October 23, 2012, San Diego became the first municipality in the state to introduce a competitive PACE environment for contractors and property owners by introducing FIGTREE PACE to the mix of commercial PACE providers.
PACE (Property Assessed Clean Energy) financing is a municipal funding mechanism that provides up-front financing for commercial and residential property owners to improve their property values and realize the money-saving benefits of energy efficiency, renewable energy and water conservation upgrades utilizing no public dollars. What a concept!
So how does this new PACE phenomenon work and why is a competitive PACE marketplace important?
PACE funding can put cost-cutting, property-improving energy and water upgrades within reach of most any property owner. PACE requires no minimum FICO score for property owners and no money down. Financing is based strictly on property values. And PACE provides for attractive off balance sheet financing that can be amortized for periods of up to 20 years via property tax bills.
PACE improvement financings can provide for up to 100% cash-up-front financing for property-improvements of all scope and scale — from water conservation improvements to solar PV, solar hot water, and electric vehicle charging stations.
Financing terms are based on the warrantees commensurate with the type of improvement a property owner wishes to incorporate, i.e. 10 years for HVAC upgrades or 20 years for solar PV. PACE also provides commercial property owners with a useful vehicle to address the provisions of California Assembly Bill 1103, which requires benchmarking and disclosure of energy usage for nonresidential buildings (over 5,000 sq. ft.) involved in financial transactions, i.e. those being leased or sold.
PACE does not encumber a property owner’s ability to borrow from conventional sources. Projects can be funded for up to 10% of an assessed property value — in FIGTREE’s case, up to 20% (though at a higher interest rate). This inspires new projects and gives contractors a unique funding vehicle to jumpstart projects that may have stalled because of a property owner’s aversion to additional debt or a credit rating concern. Johnson Controls’ Institute for Building Efficiency Report suggests that five direct jobs, five indirect jobs, and ten induced jobs are created for every million dollars invested in PACE projects.
While the residential market was the initial focus of many PACE programs (including San Diego’s) the Federal Housing Finance Agency’s (FHFA) view that their liens would be subordinated with PACE liens have stalled programs in that sector.
Thus, San Diego’s immediate opportunity is with the commercial sector, although there are myriad initiatives being considered to revive residential PACE for San Diegans.
Note: Municipalities, trade organizations, environmental groups and businesses (including California’s Attorney General) are contesting the FHFA’s view with proof that PACE improves property values and benefits the primary lien-holder’s position; there is optimism residential PACE — perhaps a model similar to what Riverside County is using — can return to San Diego (and additional markets) in 2013.
When administered properly, PACE can be a terrific economic development tool.
PACE projects can improve property values, help property owners slash energy costs, put contractors back to work, increase local cash flow and help cities meet their AB 32 emissions goals. But not all PACE programs are created equal. Some require property owners to sell the concept of PACE to lenders and bring their own funding to the table. Others use private sources of capital. Others use a lender-notification type of program that doesn’t require consent for the primary mortgage holder, something that has created a stir among primary mortgage holders and could possibly put property owners in default of their mortgage covenants.
The seeds of incorporation for San Diego-based FIGTREE PACE were sown when markets with the property-owner arranged brand of financing (markets like Los Angeles and San Francisco) weren’t financing deals. FIGTREE arranges financing (and lender consent) for property owners by aggregating and selling the projects as municipal bonds. FIGTREE was the first in California to successfully initiate this new mode of financing in multiple markets. The next bond issue is slated for early December 2012.
Adhering to the principle that competition drives excellence, the City of San Diego — known for its successful Managed Competition Program — has opted to avoid the pitfalls encountered in Los Angeles and San Francisco by going with a menu of PACE options so property owners can select the program that meets their needs.
A competitive PACE marketplace also allows more businesses and property owners to participate in the program. FIGTREE finances projects ranging from $5000 to those in the millions of dollars (all contingent upon qualified property values). Others have a minimum $50,000 threshold or restrict the kinds of projects they choose to fund.
We commend Mayor Sanders and the San Diego City Council for bringing this unique, privately-funded economic development tool to the San Diego marketplace — and for inspiring the principle that a competitive PACE marketplace will drive more adoption, create more jobs, lessen risk and provide property owners and quality contractors with funding options to spur economic development. All this using no public financing? Now that’s the kind of government action municipalities from California to Connecticut should embrace.