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Use Somebody Else’s Money for Energy Projects? Yes, Please!
If you’re like me, borrowing money is not your favorite thing. Especially for investments with long payback periods, even if they actually may be wise in the end. Good thing not all money is created equal. Clients often ask me about grants, tax credits, and other non-traditional financing options to support energy-efficient upgrades or features. While I’ve done my share of those, I’m most excited about a relatively new option known as Property Assessed Clean Energy financing, or PACE.
What is it?
Governments all over the country are moving toward enabling PACE as a long-term, fixed-rate financing solution for energy efficiency, water efficiency and renewable energy upgrades. Boiled down to its most basic level, PACE allows property owners to finance energy improvements using better terms than traditional commercial loans.
How does it work?
The property owner voluntarily takes on a special assessment, which they then pay off as part of their property tax bill. Every state is different, but here in Michigan our PACE statute allows financing, or refinancing, of virtually all construction and retrofits on commercial, industrial and multi-family property. The loan is made by private parties, as negotiated by the property owner, and facilitated through the local taxing agency.
CFO’s love this part:
PACE projects are immediately cash-flow positive, since savings generated from PACE projects are guaranteed to exceed the loan repayments. This frees up internal capital for other purposes. Essentially, any decision to use PACE is a question of each client’s internal cost of money. Use your money for its highest value.
Common features of PACE loans include:
- Cover up to 100% of project costs
- Typically pay nothing down
- Terms can be up to 20 years
- Assessment “runs with the land” (meaning payments are tied to a building, not a business)
- May be treated as off-balance sheet for accounting purposes (taxes are often considered operating expense – consult your accountant for your specific situation)
- Guaranteed energy savings
What do PACE loans cover?
Making updates to save energy doesn’t have to mean huge changes to your building. PACE covers a number of things from roofing to boilers. Some of the initiatives include:
- Caulking, weather-stripping, and air sealing
- New windows and doors
- Energy control systems
- Energy recovery systems
- Lighting fixtures and day lighting systems
- Electrical systems to charge electric cars
- Water use reduction or efficiency
- Energy-efficient or water-efficient manufacturing processes and/or equipment
- Biomass, solar electric, solar thermal, and geothermal energy sources
PACE applies not only to retrofit projects, but also to new-builds. Nonprofit? No problem because PACE still applies!
Because PACE needs to be adopted by the local taxing entity, your facility may not yet be covered. We’re working closely with Lean and Green Michigan to help expand the program. Lean and Green Michigan’s website is a great resource to see if your local government has signed on.
Want to find out even more about PACE? Check out pacenow.org for additional reading, case studies and other information. Or, feel free to contact me.