If you Build It, Will They Come? · If you Build It, Will They Come? Presentation at ACEEE’s...

IfyouBuildIt,WillTheyCome?PresentationatACEEE’sEnergyEfficiencyFinanceForumMay23,2017

OurmissionistopromotePropertyAssessedCleanEnergyfinancingby providingleadership, support,problem

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PACEFinancingfortheCREMarket

ü TheCREMarketanditscharacteristics

ü WhyisEEatoughsellintheCREmarket?

ü WhatMakesPACEsoCompelling?

ü ExampleoftheFinancialImpactofPACE

• Buyitorbuilditright– CREcompaniesbuildandpurchasethecorrectpropertyinthecorrectlocation• Leaseitright– CREcompaniesleasespacetotherightmixoftenantstomaximizethevalueoftheproperty• Financeitright– CREcompaniesutilizetheappropriateamountofdebtandequitytoreducetheiroverallcostofcapitalandmaximizetheirreturnoninvestmentgivenaconservativelevelofrisk.

HowdoCREcompaniesmakemoney?

TheBasicObjectiveofCRECompanies

“…thetwomostimportantthingsinthefuturearetop-linegrowthandminimizingcapexoutflows.”

- RealEstateForum July/August2015

PrioritiesofCRECompanies

DespiteBenFranklin’smaximthat“Apennysavedisapennyearned”,assetmanagementandexpenseminimizationadistant4th onthelistofCREpriorities

Capitalexpendituresarededucteddirectlyfromcashflowü Lesscashavailablefordistributionü Lesscashfornewacquisitions/coreprojects

WhydoCRECompaniesMinimizeCAPEX?

NOI $1,000,000

LessCAPEX ($100,000)

CashAvailableforDistribution $900,000

Capital expenditures aredeemed to come from “theequity pocket”, andinvestments not related tothe core business arefurther subjected toallocation of capital, andare burdened with riskallocation premiums

WhyareHurdleRatesforCAPEXsoHigh?

CapitalExpenditures

PropertyAcquisition

Equity(12-15%)

Debt(4-5%)

OtherReasonsCREavoidEnergyProjectCAPEX

ü TimePressure:Peopleareoverworkedandhavelittletimeorinclinationtofocusonanythingnew

ü PoorCredit:CREpropertiesareoftenownedbyspecialpurposeentitieswithnoassetsbeyondthepropertyandparentcompaniesarereluctanttoprovideparentalguarantees.

ü HoldingPeriodBias:CREcompaniesarenotinclinedtoinvestinapropertyiftheydon’tknowhowmuchlongertheywillownit

ü PerceivedRisk:CREexecutivesdon’ttrustsavingsforecastsandaddsubstantialriskpremiumstohurdlerates.

ü SplitIncentive:Manyleaseformsprovidedis-incentivesforlandlordtoinvestinenergyprojects

TheCaseforPACEforCRE

TheCaseforPACE

CapitalExpenditures

PropertyAcquisition

Equity(12-15%)

Debt(4-5%)

PACE(5-6%)

üCashFlowvsCAPEX• PACEfunds100%ofhardandsoftcostsandeliminatesdeductionsfromcashflowforCAPEX.• PACEisacheaperformoffinancingforCAPEX

WhatMakesPACE soCompelling?

üPoorCredit• PACEisstrictlyproperty-basedfinancing• Goodrealestatetaxpaymenthistory,notcreditstrength,iskeytofinancing.• Reasonableloantovaluerequirements• Nonrecoursetobuildingowner

WhatMakesPACEsoCompelling?

üHoldingPeriodBias• Automatictransfertothenewowneruponthesaleoftheproperty• Non-accelerating

WhatMakesPACEsoCompelling?

üPerceivedRisks• 20-yrfundingavailablebasedontheaverageusefullifeofECMsreducesriskbymakingitpossibletogeneratemorepositivecashflow• Wellacceptedbymortgagees• Favorablebalancesheettreatment

WhatMakesPACEsoCompelling?

üSplitIncentive• Dependingontheleasestructure,theannualPACEtaxassessmentburdenmaybesharedwithtenants,alongwiththebenefitsofanenergyefficiencyorrenewableenergyproject.• Thetenants’cashflowsavingsfromreducedenergycostsfromtheimprovementsarepartiallyoff-setbytheincreaseinpropertytaxpassthrough,resultinginanetsavingsfortenants• Thiseliminatesthesplitincentiveimbeddedinmanyleaseforms.

WhatMakesPACEsoCompelling?

GeorgeC@PACENation.org