Utilizing third-party financing to fund your building performance upgrades enables you to preserve capital for investments in core business activities, boost Net Operating Income, and create additional value. Structures such as PACE Financing and Energy Services Agreements solve the “split incentive” by enabling the payments to be classified as Operating Expenses, assigning the repayment obligation to the party that benefits from the energy savings. And because these structures offer a secure repayment stream to the investor, PACE PACE is an innovative bond financing mechanism that allows property owners to finance the entire upfront cost of energy efficiency improvements and repay the cost as a contractual assessment through the property tax bill.
PACE bonds are sold through a private placement on pre-arranged financing terms negotiated between the property owner and a PACE bond investor, who is committed to purchase the bond.
LABBC staff are available to coordinate the application process and work with first mortgage lenders to obtain their consent to PACE assessments. In many cases, it is expected that the first mortgage lender will determine that it is within their best interest and ESAs In an Energy Services Agreement (ESA) or a Managed Utility Services Contract (MUSC), the services provider typically offers 100% financing, with end-user payments tied to monitored energy savings. A goal of this structure is for the end-user contract to be treated as an off-balance sheet obligation and payments as an operating expense.
In some variations, an EE finance company will assume payment of their customers’ energy bills and integrate financing costs for EE investments with the energy bill payments; in others, the EE finance company will charge their customers on a cost per avoided energy unit basis for measured and verified savings. In the latter scenario, the project equipment is typically owned by the EE finance company and the end-user is given a fair market value purchase option at the end of the contract term. can fund longer-payback projects that don’t meet typical return requirements.
|Sample Project Economics|
|Energy Savings/NOI Increase||$150,000/year|
|Value Increase (@ 7.5% cap rate)||$533,000|
Directory of Capital Providers
|PROVIDER/TYPE||PACE||ESA||Lease Financing||Unsecured Loan||On-bill Financing (gas only)|
|Structured Finance Associates||✔|
|So Cal Gas||✔|
|National Development Council||✔||✔|
|Green City Finance||✔|
|Electric & Gas Industries Association (EGIA)||✔|
|US Energy Affiliates||✔|