ABS East: More commercial PACE providers eyeing securitization
Look for more providers of property assessed clean energy financing for commercial buildings to follow CleanFund and Greenworks Lending into the securitization market next year.
While underwriting of commercial PACE continues to lag that of residential PACE, the pipeline of deals financing energy efficiency projects is growing, according to panelists at an opening-day session of IMN's ABS East Conference in Miami Sunday.
”There are couple of different players that have put together equity facilities and are gearing themselves up to tap the debt markets, in particularly ABS,” said Benjamin Cohen, the chief executive of T-Rex, a software platform and managed data services vendor for the esoteric ABS market.
“Thirty-four states have passed PACE legislation,” and commercial PACE programs are active in 19 states, said fellow panelist Beth Starr, a managing director who leads structured finance activity for Credit Agricole Corporate and Investment Banking. “It is going to grow but it still has a lot of impediments from the origination side.”
This year, Pennsylvania, Illinois, and Utah have each passed legislation either enabling or expanding the use of commercial PACE.
To date, however, the only publicly rated commercial PACE deals have come from CleanFund, which completed a $109.3 million deal this year that financed projects in six states, and a $75 million deal sponsored by Greenworks Lending in the fourth quarter of last year.
Commercial PACE projects face several impediments that are not issues for residential PACE. Unlike residential PACE loans, commercial PACE lenders require mortgage lender consent to underwrite financing. Starr also said while residential PACE loans are “homogeneous” and have borrower credit histories and property records easily tracked by investors and ratings agencies. End-users, or “off takers,” of commercial PACE loans, on the other hand, “are harder to analyze” and usually consist of non-rated corporate borrowers with varying project needs, cash-flow projections and debt-service coverage.
T-Rex is building out a platform to provide a "transparent" data views into the performance of commercial property assessments, as well as the municipal bonds and the ABS portfolio they are rolled into. Cohen thinks this could atract more investors that will stir more commercial PACE originators to ramp up ABS issuance — perhaps building the market to as many as four or five issuers by the end of the year.
“There’s still a long way to go in terms of getting to scalability on origination, side but I think it’s an incredibly positive sign for this new esoteric class," said Cohen.
One driver of commercial PACE origination could be an increased demand for project financing in states like California and Florida where businesses look to retrofit building to better defend structures against natural disasters, as opposed to increasing energy efficiency or reducing water use.
In a report published on the eve of the ABS East confab, Morningstar Credit Ratings noted that many property assessed clean energy financings in both California and Florida have been dedicated to increasing resiliency to hurricanes, floods, and earthquakes. “Given the increase in natural disasters — including 2017 hurricanes Harvey, Irma, and Maria — it is not surprising that property owners have migrated their building enhancement efforts toward wind, flood, and seismic resiliency,” the report states.
Morningstar thinks that legislation in California and other states could be a catalyst for future PACE-funded retrofits.
In October 2015, The Los Angeles City Council passed an ordinance requiring select buildings identified by the city’s Department of Building and Safety to improve their structures to increase seismic resiliency. Targeted buildings include wood frame and non-ductile concrete structures deemed to be at risk from an earthquake. Once a property owner receives an order from the DBS indicating that the building is potentially at risk for seismic damage, the owner must provide documentation regarding the building’s structural analysis and its adherence to minimum earthquake standards within three years to help the DBS determine the level of risk.
"For property owners that received those orders shortly after the passing of the ordinance, that three-year deadline is looming," the report states.
In addition, the recent proliferation of wildfires in the western U.S. increases the likelihood of more stringent fire-protection building standards. And across Florida, numerous disaster prevention initiatives, including “Get Ready, Florida” and “Be Ready Florida,” are dedicated to encouraging property owners to take proactive measures against major weather disasters.
According to PACENation, there have been roughly $712 million in cumulative commercial PACE financings through mid-September, nearly doubling the prior year-end level. Of the total amount financed, approximately 7% of the improvements have been to increase resiliency. Most of that, however, is because of the $40 million Seton Medical Center financing in California, the largest commercial PACE origination closed to date. Nonetheless, residential PACE cumulative originations, totaling $5.17 billion through the same period, dwarf that of commercial PACE.