by Andy Holzhauser
Like any new financing solution, as demand grows, so too does creativity and innovation. With PACE financing now close to turning 15 years old and representing a multi-billion-dollar clean energy financing marketplace, it, too, has responded to recent market dynamics and developed an expanded offering.
(If you need a quick primer on PACE, feel free to check out this previous article I wrote.)
The last 14 months have unquestionably brought about much uncertainty and turmoil as businesses have slowed down and even shuttered completely. While the economy seems to be making some recoveries, many companies find themselves in need of cash because of depressed business activity. In this current environment, PACE financing volume has actually grown quite substantially. One big reason for this growth is that opportunities for PACE to be used retroactively in a cash out refinancing have skyrocketed.
Here is a representative scenario that illustrates how retroactive PACE financing is being used in today's market and why it’s so appealing.
Imagine you’re a commercial building owner or a developer and you finished a project 18 months ago. This project could have been a ground-up construction of a senior living facility, or an HVAC overhaul in a commercial office building. In either case, you’re beginning to explore a planned refinance of the property, or you’re interested in restructuring some debt in response to market conditions. In these types of situations, PACE should be on your radar as a potential solution. Here’s why.
Higher Loan-To-Value Ceiling
The PACE market can often be comfortable going up to 80-90% loan-to-value including both your mortgage and PACE. So, in situations where banks are pulling back or limited to 65-75% for the senior loan, PACE may be able to fill as much as 35% of the capital stack. Depending on your goals, PACE could be the singular solution, or part of a solution in coordination with a restructured commercial mortgage. Some banks have more experience lending alongside PACE than others, but there are over 200 financial institutions that have figured it out so you have plenty of options.
2-3 Year Lookback Period
In Ohio, Kentucky, and most of the other 35+ states that enable PACE financing, there’s a “lookback” period of 2-3 years to allow you to access PACE capital after you’ve made the investment. There are over 200 senior lenders that have lent alongside PACE so the coordination between two different components of the capital stack should not be an impediment. But adding PACE into the mix can increase the total leverage from 3rd party capital providers. The cost of PACE capital could render a significant savings as compared to mezzanine debt or equity, and could provide advantageous cash flow benefits since PACE amortization schedules can give you fixed rate for as long as 30 years.
Even if a completed project wasn’t originally thought of as an “energy project,” there's a good chance you can actually access PACE to finance it AFTER THE FACT. It’s not too difficult to look at a budget for work already completed and identify qualifications that would allow it to be refinanced with PACE, regardless of whether it’s a ground-up construction, redevelopment, or retrofit.
PACE is still a relatively new financing method. However, the features and flexibility accessed via PACE are increasingly making it a sought out means of raising capital. And now, PACE financing is accessible not just for projects being planned but from those already completed.