Private lenders finance energy efficiency measures

One-hundred percent financing. No down payment. And a fixed interest rate for up to 20 years.

For local developers, the prospects may sound too good to be true. But Property Assessment Clean Energy financing has brought those possibilities to Springfield’s table for commercial landlords seeking energy-efficient upgrades.

“From an environmental perspective, it’s about energy conservation,” said Barbara Lucks, the city’s sustainability officer. “For economic development, it’s another funding mechanism where we can encourage these projects. It’s another item on the menu of why you would want to do business in Springfield.”

In a typical PACE project, property owners obtain financing through a private lender and make annual payments based on the cost of the improvements and a fixed interest rate. The loan terms are designed for owners who don’t have cash to self-fund a project, can’t obtain a conventional commercial loan or won’t give up company equity to a new partner in order to bankroll improvements.

“We can only fund measures that are going to make the project cash flow neutral or positive,” said PACE Equity LLC Market Associate Juliet Mee, the local representative of the Milwaukee-based company, noting the property’s taxable appraised value helps determine a project’s eligibility. “Someone who wants to put in some insulation isn’t going to save that much money. The utility savings aren’t enough to justify the expense as a PACE project.”

Since Springfield City Council approved the program in July, no local projects have received PACE financing.

Mee said that soon could change. In early March, PACE Equity brought in St. Louis-based Microgrid Energy LLC to evaluate York Center, a multitenant property owned by Bryan Properties at 2240 S. Campbell Ave.

Owner Bryan Magers said the building, constructed by his father Bill Magers in 1964, is due for energy efficiency renovations. After the 2012 completion of Leadership in Energy and Environmental Design-Platinum certified University Suites at Drury University, Magers said he sought more environmentally friendly practices.

“Springfield will benefit from this ability to restore buildings and cut a lot of the costs to the owners and tenants,” Magers said. “This is the way of the future, and we’re willing to step out and give it a try.”

Once potential energy savings have been analyzed, PACE will assist the company with filing its application to a third-party administrator and either assume the role of the private lender or connect Bryan Properties with other financial parties.  

“Right now, we’re lending at about 6.5 percent, whereas someone with excellent credit and good relations with a bank will be able to get a lower rate,” Mee said. “But they’re not going to get that rate locked in for 20 years.”

Path to PACE
Although the PACE Act was authorized on the state level by the General Assembly in August 2010, local projects seeking funds weren’t able to do so until Springfield established an entity to serve as the third-party reviewer. Lucks said rather than stretch resources to create a new organization, a city ordinance and county resolution passed last year connected the city with the Missouri Clean Energy District.

MCED Executive Director David Pickerill said the group ensures projects applying for funding meet regulations and submits proposals to potential lenders, such as investment firms and insurance companies, to determine interest rates and fees. MCED borrows the money and is repaid by the property owner through the assessment over the allotted period of time.

“It’s not necessarily sitting in judgment of whether we like the project or not – it’s a standard,” Pickerill said.

He noted the property’s first lien debt and PACE lien combined can’t exceed 90 percent of the property’s fair market value, and project costs typically can’t exceed 20 percent of the value. Most applicants are developers overhauling commercial properties. But governments, schools and religious organizations that would normally go untaxed can apply through special assessments.

“It’s more assets-based lending than income-based lending,” Pickerill added. “We want to know the owner has the ability to repay us, but the big thing here is the energy savings.”

For its services, MCED charges a closing fee of 2 percent of the project cost and an annual fee of $500 for every year of the assessment period. Mee said five PACE districts, aka third party administrators, operate in Missouri. Show Me PACE, for instance, carries a minimum cost of $3,125 on each project and administrative costs of $250 to $500.

Mee said project budgets best suited to PACE funding range between $250,000 and $20 million.

“Some really large projects done through MCED can be bonded,” she said. “With this whole concept of having to be cash-flow neutral or positive, we can’t be tacking on unnecessary costs or we threaten the viability of the project. In other parts of the state, it’s not unusual to have multimillion-dollar PACE projects.

“We don’t have as many of those in southwest Missouri.”

According to nonprofit advocacy group PACENow, 734 commercial and 82,000 residential projects have received a total of nearly $2 billion in financing since 2009. In Missouri, projects include Wornall Plaza in Kansas City, Missouri Athletic Club in downtown St. Louis, Chesterfield-based Cambridge Engineering Inc. and a wastewater treatment center for the city of Otterville.

Pickerill said three of the four projects completed through MCED since its 2011 founding were for businesses and institutions in Kansas City, where the city officials have championed clean energy initiatives and Kansas City Power and Light Co. has endorsed PACE as a financing tool.

Local likelihood
Bryan Properties’ Magers said LED light retrofitting, new HVAC units and a solar array would cost an estimated $400,000 and could bring the 52-year-old York Center close to being a net-zero building, meaning it would create almost as much energy as it uses.

“We weren’t planning on putting that much money into it, but she convinced us of the long-term viability,” Magers said of Mee. “It’s going to hopefully make the utility bills much lower, and we’re going to learn a lot.”

Lucks said the city has received PACE inquiries from five developers and institutions she declined to identify.

Sarah Kerner, interim director of economic development for the city, said she anticipates more businesses will utilize alternative financing as awareness grows.

“It’s a relatively new law that allows it to be used, so we’re taking baby steps,” Kerner said, noting the city’s function is to educate interested parties on the availability of PACE and connect them with MCED. “It’s useful for projects where updating the energy-efficient parts of the building isn’t cost effective, so we think this could be an integral part of making sure those projects go through.”