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Resiliency, gut rehabs to drive growth in commercial PACE

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The Property Assessed Clean Energy sector is getting a boost from the expansion of improvements eligible to be financed via tax assessments, according to DBRS.

However, the expansion will primarily benefit providers of PACE for commercial property, as residential PACE providers are struggling under the headwinds of new consumer finance protections in California, by far the biggest PACE market.

Following years of devastating wildfires, California Gov. Jerry Brown signed SB 465, the Wildfire Safety Finance Act, which is expected to go into effect in January of 2019. The bill would expand the use of PACE financing for resiliency improvements for residential and commercial properties in high fire zones.

In a report published Tuesday, DBRS noted that in Florida, 70% of PACE financed projects have been for resiliency projects. This percentage is expected to increase given the surge in recent spending on weather-related disasters, the rating agency said.

Many of these projects have an energy component, such as energy efficiency, distributed generation, or microgrid; others, including seismic retrofits, wind hardening, fire hardening, do not.

Financing for protective measures against natural disasters, such as hurricane strengthening in Florida and seismic strengthening in California, represented 7% of total C-PACE funding through the first quarter of 2018 — but that does not include projects with an energy component, so actual spending on resiliency is likely higher than 7%.

Another place for PACE is expected to come in the form of projects related to total renovations, or “gut rehabs," of existing buildings and new building construction. “In many cities across the country, projects focused on revitalizing downtown areas have multiple goals, including adaptive reuse and redevelopment of vacant or under-utilized properties, preserving historic buildings, sustainability and reducing carbon footprints, among others,” the report states. “These projects are ripe targets for energy efficiency and renewable energy installations financed through C-PACE.”

In other areas, buildings are being repurposed from single-use properties into mixed-use properties, as was the case in Dallas, where the Butler Brothers building, an historic warehouse, was converted into apartments and two Marriott hotels, with a $23 million PACE assessment representing a reimbursement for qualified energy improvements including lighting/electrical, control systems, solar reflective roofing, water conservation and more. The assessment is payable over 20 years. As these major projects get underway, energy conservation measures can easily be part of the architectural design and financing plan, according to DBRS.

PACE is a national initiative carried out through local and regional governments. If a state has enacted PACE legislation, PACE programs can be set up by local municipalities to provide for financing of renewable energy, energy efficiency, water conservation improvement and, in some states, resiliency projects for privately owned residential and commercial properties.

DBRS reiterated that growth in PACE over the next 12 to 24 months is likely shifting from residential to commercial, in part because new states enact enabling legislation and existing C-PACE programs. There are 17 states with funded commercial PACE projects and six states with new programs in development.

Also, residential PACE, which has largely been confined to California, has fallen sharply as originators grapple with new consumer protection regulations in that state. The regulations include income verification and ability-to-pay rules that have extended the time and effort required to obtain financing for PACE improvements. "The easy application and approval process, often taking no more than 30 to 45 minutes to complete, has been replaced by one that can take multiple days," the report states.

So far this year, residential PACE volume is down some 50% from 2018, when it hit a high of $1.6 billion.

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Property Assessed Clean Energy Commercial mortgages CMBS Natural disasters California