What is PACE Financing?
Business owners know they can realize savings by investing in water and energy upgrades; however, they also know that the cost of such upgrades can be expensive. As a result, many upgrades are not made, and buildings continue to operate at sub-optimal levels. Texas Property Assessed Clean Energy ("PACE") financing is a tool for property owners that provides long term, low-cost funding for water and energy efficiency upgrades to existing buildings. By using PACE financing, property owners can lower their operating costs with savings to pay for permanent improvements aimed at decreasing water or energy consumption. Some examples of such eligible upgrades include:
High efficiency lighting
HVAC
Automated building and HVAC controls
High efficiency chillers
High efficiency boilers and furnaces
High efficiency hot water heating systems
Combustion and burner upgrades
Fuel switching
Renewable Energy Systems (solar, fuel cells, geothermal)
Irrigation improvements that decrease water consumption
Heat recovery and steam traps
Combined heat and power systems (CHP)
Water conservation measures
Microgrids
More
Process for Utilizing Texas PACE Financing
Texas PACE financing is private financing secured by a voluntary assessment lien that has the same priority under Texas law as a special assessment in place for the useful life of the improvements. Owners choose a capital provider and request that the local government place a senior lien on the property for the cost of the project. The owner then repays the investment through a voluntary property assessment, the proceeds of which are assigned to the capital provider.
The savings from the energy/water efficiency upgrades are structured to exceed the cost of the assessment—upgrades must meet a savings to investment ratio ("SIR") of greater than 1—resulting in increased property value and positive cash flow. A Property owner interested in PACE financing should first determine the scope of the project and if the SIR of the project is likely to be greater than one, which requires a calculation of proposed technologies and likely savings. The Texas Pace Authority ("TPA") or a developer can help identify the most promising technologies.
The owner should then choose a contractor and capital provider. Finally, the project will require submission of a PACE application to the TPA.
Existing Mortgages
If the property has an existing mortgage, the property owner must obtain the lien holder's written consent to the PACE assessment, since the assessment will constitute a senior lien. However, the PACE assessments are senior only for sums which are due and payable. The assessment cannot be accelerated and does not affect a lender's ability to foreclose even if the foreclosure is subject to the assessment. Further, the generated savings should increase the owner's operating income, which could increase the value of the collateral.
Eligibility
To be eligible for PACE financing, the property must be commercial property, industrial property, or multi-family residential (with five or more units) property located in a county or municipality that has adopted the PACE program. Additionally, the property must have a tax identification number; therefore, non-profit buildings may also be eligible. Residential properties (one – four units), government owned properties and new construction/undeveloped lots are not eligible. The TPA has an eligibility tool on its website to help determine eligibility.
Additional Financing
Property owners can benefit by stacking PACE financing with several different types of financing, including federal and state historic tax credits, low-income housing tax credits, new markets tax credits, preferred equity and mezzanine debt, opportunity zone investments, ground leases, city grants, tax increment financing and loans.
For more information, please contact Kennedy Sutherland LLP (lramos@kslawllp.com or dsutherland@kslawllp.com) and visit the TPA's website for a list of service and capital providers.