Cheap Money Is Gone, PACE Capital Is Your ‘Cheat Code’
Real estate developers have a secret financing weapon with Property Assessed Clean Energy Financing (PACE)
Higher interest rates mean that cheap and easily accessible capital financing is gone — for the time being. Business leaders have warned about the end of “the cheap money party” for decades which has led media outlets like Inc.com to proclaim, “The Days of Cheap Capital Are Gone for Good” in 2009, and The Washington Post in 2022 asking, “The Era of Easy Money Is Over. What Does That Change?”
In this new environment, businesses are looking for solutions. A robust economy, flush with cash, and the resulting inflation have curbed the availability of inexpensive and easily-accessed senior debt, in particular. As senior lenders evaluate the resulting risk impact on their lending portfolios, many have become unwilling to lend more than 60% of a project’s total cost (down from approximately 75% previously). For real estate project developers, this creates a gap within a project’s capital stack.
Capital Stack Funding Gap Pitfalls
Deals are dying as some lenders are walking away from riskier projects
Deals now require developers to either post more of their own equity or raise more from their investors
Developers are forced into the mezzanine debt or construction loan markets at much higher interest rates (10%-14%)
Real Estate Developers Have a Secret Stash of Cash
Savvy investors and developers know they need a new plan. In many cases, Property Assessed Clean Energy (PACE) capital can be the gap-filling solution that completes a project’s capital stack, avoiding the three pitfalls listed above.
For the first time since the roll-out of PACE programs in 2008, developers are looking to PACE as THE solution for capital financing rather than a supplemental source of capital. It’s no wonder, either. In some cases, PACE interest rates are less than senior debt.
What is PACE?
Commercial Property Assessed Clean Energy (C-PACE, or simply PACE) is a financing mechanism that enables low-cost, long-term funding for energy efficiency, renewable energy, and water conservation projects. Whether for a renovation, new construction, or to finance deferred maintenance, PACE financing is repaid as an assessment on the property's regular tax bill, generating benefits that aren't available through conventional financing solutions. PACE-enabled legislation has passed in more than 40 states.
For more information on PACE, read:
Property Assessed Clean Energy (PACE): How It Works for Commercial Property Owners Hotels Groups Are Leveraging PACE Financing to Optimize Capital Structure
What projects qualify for PACE financing?
New construction and renovation projects alike are allowed under PACE financing. You can even retroactively fund projects up to 36 months old! If your projects fall under these categories, your real estate project is a good candidate for C-PACE funding.
PACE funds 100% of energy project costs (typically 30% of a project’s total cost), so property developers differ in up-front or out-of-pocket expenses.
Benefits of PACE Financing
PACE allows financing terms of up to 30 years, not exceeding the improvements' average useful life. This often generates positive cash flow and enables deep retrofit projects with paybacks of up to 30 years rather than only projects with quick paybacks.
Allows comprehensive projects with deeper impacts on energy usage and significant impacts on the bottom line, including increased net operating income (NOI).
30-year amortization allows annual energy savings to exceed annual PACE payments (but you can opt for a shorter term if desired).
PACE financing is attached to a building through a tax assessment; it's not attached to an individual or business.
Therefore, if the building is sold before the PACE assessment is paid off, it seamlessly transfers to the new owner as a part of the taxes. The savings from the energy project transfer to the new owner too.
If you are a real estate developer considering a new development project, or a retrofit of an existing property, then PACE can optimize the financing of your project.
Interested in learning more? Donovan Energy can provide a no-cost PACE assessment to evaluate its applicability within - and value to - your project.