CleanFund and other providers of Property Assessed Clean Energy financing for commercial building are increasingly focusing on larger projects. While this should boost underwriting volume over time, it may have slowed the growth of the industry in the short term, according to CEO Greg Saunders.
Speaking at the Structured Finance Industry Group's annual conference in Las Vegas, Saunders said that the sponsors of larger commercial developments are starting to see all kinds of advantages to PACE, which creates a lien on a property that is senior to a first mortgage and is repaid alongside property taxes. It is generally less expensive than some other means of financing energy and water efficiency improvements, such as mezzanine financing.
Local governments are also becoming more supportive, according to Saunders. They realize that they need to offer "policy accommodations" that help offset the added cost of elevated standards for energy efficiency for both new construction and existing buildings.
CleanFund has provided quotes for PACE financing as large as $350 million on a multibillion-dollar developments. "We see larger PACE financing happening at the expense of smaller projects, those of $500,000, partly because of the cost and time involved in getting commercial mortgage lenders to consent," Saunders said.
So far, CleanFund hasn't financed anything nearly as large as $350 million; most of the deals listed on its website are in the $1 million to $5 million range. For example, in October, it closed on day a $2.5 million transaction for a 178-room Hotel Indigo in Rochester, Minnesota. The hotel is undertaking a $20 million rehab-redesign of a former Holiday Inn. CleanFund’s portion of the financing is being used for things like energy-efficient HVAC, upgraded windows for efficiency and sound proofing, and LED lighting along with low-flow water fixtures.
The largest financing listed on CleanFund's website is a $40 million funding of seismic upgrades for the Seton Medical Center in Daly City, California. CleanFund provided half of the funding; the other half was provided by Petros PACE Finance.
There is a downside to pursuing larger projects, however. "We were a little disappointed" with industrywide volume last year, Saunders said. "It was only $20 million greater, on reported basis, than the prior year, but in 2017" volume rose 100% over 2016, he said. He noted that financing for larger projects is more complicated, and so requires more lead time, than does financing smaller projects. "We took our eyes off the ball for some origination," he said.
