New Capital Source as Credit Markets Tighten

"Lenders are getting stingier when it comes to funding risky U.S. real estate developments ... Property owners are facing a host of challenges. Overbuilding in some areas, the protracted slump in oil prices, a strong dollar eating into tourism, declining stock values and slowing growth in China are all weighing on landlords. At the same time, the Federal Reserve is raising interest rates for the first time in nine years." Furthermore, the breakdown of the CMBS market is choking off funding for maturing debt. And borrowers are seeking out alternative sources of capital that may offer less-generous terms." Bloomberg March 15, 2016

For Houston the drop in oil prices, layoffs in the energy sector and uncertainty about near-term inventory absorption have further contributed to tighter bank and mortgage underwriting standards - constraining capital budgets; even for necessary capital improvements. Against this backdrop, many are struggling both to maintain their NOI levels and to obtain capital to finance improvements. 

For those investors who can access capital, many with financing needs must now pay higher rates and put up more equity. Many must even postpone projects that would improve their NOI and property valuation.  

The timing could not be better for the arrival of PACE. 

PACE addresses the tighter capital market with 100% long term fixed rate financing that can improve the property's NOI and valuation; both addressing existing lender credit concerns and enabling the owner to make the needed improvements.

Since PACE allows a property owner to borrow 100% of the capital required for the weighted average useful life of the improvements (up to 30 years), the annual loan repayment is a fraction of the amount of a typical short term loan amortization.  This smaller annual loan payment results in the annual energy savings exceeding the annual loan payment - resulting in improved property cash flow. The PACE loan is secured by and repaid through the property’s annual property tax bill verses the typical monthly P&I to a bank.  

So instead of putting down the required equity on a traditional loan and making larger payments, consider utilizing PACE’s 100% financing to pay for your energy saving improvements.

Consenting Lenders as of May 2016

One of the questions we receive is "Which lenders have agreed to subordinate their lien to a PACE loan?" The following list is excerpted from the PACENow Lender Support Update.

The underlying question is "Why would a lender agree to subordinate their interests to a new PACE loan?"

The answer is simple: The property receives the benefit of 100% of the improvements while only the annual assessment payments due are ahead of the existing lender's position.

Improved cash flow, property value, an improved tenant profile and a lower cap rate all go into making an existing lender want to support a property owner's efforts to improve their collateral value.

This is evidenced by a growing list of existing mortgage lenders who have consented to a PACE loan assessment.

We can help you prepare a Compelling Argument for your existing lender by your reading our PACE 101 Page.

For more information please review the PACENow Lender Support Update.

National PACE 75% Compound Rate of Growth is Impressive

While PACE is new to Texas and we are somewhat insulated from other states, especially "green" ones (as opposed to red or blue ones), in 2015 according to the National PACE organization PACENation, "PACE provided $93 million in financing for energy upgrades to over 140 commercial buildings."  But what is even more impressive is the growth rate - since 2009, the compound annual rate of growth in PACE deals is over 75%. Since inception, 734 properties have been financed for a total volume of $230 million. This growth is centered in Retail, Office, Industrial and Hospitality. While Non-profit represents a smaller percentage of the deal volume, there is strong interest among the sector. 

This growth is balanced slight more towards "energy efficiency" than "renewables", with the notable exception of the agricultural sector that is heavily weighted towards renewables. The majority of the volume is from projects that are in excess of $750,000. 

Source: PACENation May 5, 2016

Source: PACE Nation May 5, 2016

Counter for Houston Economic Woes

Forbes magazine's contributor Ely Razin wrote an article entitled "Houston We Have a Problem: How Dwindling Oil Prices Hurt Houston's Commercial Real Estate Market". He highlighted the doubling in the office building vacancy rate to 8 million available square feet even as leasing activity declined. As if that were not enough, he notes 22 office buildings are now under construction. 

For property owners feeling the pain of falling oil prices and cuts in the Oil & Gas sector, there is some good news.  Houston’s recent adoption of the PACE ordinance means landlords can now take advantage of 100% long term financing to upgrade their buildings. 

In an increasingly competitive environment, PACE may be the secret weapon needed for owners to re-position their properties - to retain their existing tenants and attract new tenants.  While building energy improvement modifications to HVAC Equipment, Lighting, Energy Management Systems, and Windows generally result in an immediate negative cash flow, PACE enables the building owner to upgrade the property and simultaneously lower the building’s operating expenses. Taken together - an upgraded building/lower operating expenses - the owner  acquires that needed marketing edge.  This may all be accomplished by PACE 100% financing of energy improvement modifications without the owner spending their own capital budget dollars.

Source: Houston Biznow Kyle Hagerty, May 3 2016

PACE’s 100% long term fixed rate financing timing couldn’t be better. PACE may indeed be the best financing for energy improvement upgrades.

If you would like us to highlight these benefits to your company or trade association let us know. 

Tim Crockett tim@cbarc.net 713-530-7922

PACE Industrial Capital Improvement Projects

A recent study concluded that industrial users are the highest users of electricity and water, a fact known by those of us in the PACE Houston market. PACE can enable industrial users to do the very capital projects that are needed to reduce their consumption and reduce their operating costs. This is the backdrop to today's seminar put on by the Texas PACE Authority and the Texas Industry of the Future organization.

Texas House Representative Jim Keffer of District 60, as both an industrial manufacturing business owner and a State Representative, introduced the first TPA Industrial Seminar.

Representative Keffer highlighted the traditional maxim that return on investment is everything. Jonathon Blackburn of the Texas PACE Authority noted that industrial entities typically rank capital projects by ROI, resulting in many additional worthy projects not being done due to of a lack of sufficient capital. PACE Houston can address this issue for area concerns.

PACE financing actually eliminates a property owner’s need to make any capital investment – so ranking capital projects by ROI becomes less of an issue – since with 100% PACE energy financing there is no investment. With PACE, the industrial entity has the ability to do all capital project improvements that reduce operating expenses in an amount sufficient to cover the annual PACE assessments. This ratio of savings to investment calculation is called the property's SIR, or Savings to Investment Ratio. Even more important than the project's SIR is the traditional Net Present Value calculation which includes a time value of money aspect and enables the financial manager to utilize their own long term cost-of-capital rate, which may differ from the lender's rate.

While the same general rules apply to manufacturing, industrial operations and office buildings - the project must demonstrate the capacity to reduce electricity or water demand or onsite generation - industrial projects are special due to the magnitude of the potential net savings. Jonathon Blackburn of the Texas PACE Authority highlighted the following potential PACE Industrial projects.

Potential PACE Industrial Projects

• High efficiency chillers, boilers, and furnaces
• Combustion and burner upgrades
•  Heat recovery equipment
• Mechanical system modernization
• Industrial energy system sensors and controls
• High efficiency lighting
• Building enclosure/envelope improvements
• More efficient manufacturing process equipment

Water Conservation

• Waste water onsite reuse systems
• Water conservation equipment
• Systems to capture, treat and use other on-site sources of water
• Condensate, rainwater, reverse osmosis reject water

Onsite Generation and Resiliency

• Combined Heat and Power
• Energy Storage
• Fuel switching

Interested Industrial or Manufacturing entities may contact Tim Crockett at 713-530-7922.

Houston Flood 2016 and Financing Replacement Equipment With PACE

The commercial business impact of Houston's record rainfall can be somewhat mitigated through the use of a new public-private partnership program. The program is called Property Assessed Clean Energy, or PACE for short. 

Houston Flood 2016 Affects Shopping Center at Stuebner Airline and Cypresswood

The program is actually designed for energy efficiency improvements but if those energy efficiency improvements just happen to be for new high efficiency air conditioning units that replace older less efficient (and now underwater) air conditioning units, PACE can help. In the process, other energy efficiency improvements can be (completed), such as outdoor LED lighting, (new) insulation or a cool roof.

PACE gives the owner access to 100% long term fixed rate financing that is tied to the property (not the owner) but enables the owner to get the facility back in shape, more quickly, for the benefit of the tenants hurt by recent floods. 

The process involves defining the project scope of work, determining if the savings are enough to service PACE payments and receiving appropriate acknowledgement from the existing lender.  Identifying the project specifics ahead of time may enable the owner to receive a refund for monies already expended, subject to approval. The insurance proceeds would be handled separately between the property owner and the insurance company according to the terms of the property owner's policy. 

The process involves defining the project, determining its eligibility, determining if the savings are enough to service the PACE payments. Approval is then needed from the existing lender, the local PACE administrator and the new long term lender.

For more information, contact PACE Houston's Tim Crockett at 713-530-7922

Texas PACE Authority Announces first Texas PACE Deal

The Simon Property Group, Inc. will use Travis County's PACE program to finance $1.5 million in water conservation, mechanical and lighting retrofits at Barton Creek Square, an enclosed mall in southwest Austin built in 1980. The retrofits will conserve water and lower utility costs with the savings used to pay for the financing costs. The savings, according to the Texas program rules, must be greater than the financing costs. Construction will start in the first quarter of 2016.

The Barton Creek project is part of Simon's $500 million commitment to use PACE to finance improvements to its malls throughout the country.  

The Texas PACE Authority made the announcement on December 22, 2015. 

Simon Properties speaks on PACE Value Proposition

PACE Houston Presented at GRIDNEXT on November 11, 2015

PACE Houston presented PACE to the members and attendees of the Texas Renewable Energy Industry Alliance Conference at:
Westin Galleria Hotel
5060 West Alabama St.
Houston, Texas 77056

The Pre-conference PACE Presentation was on November 11th, 3:00 – 4:30 pm.

Our presentation was entitled:                           Property Assessed Clean Energy - A Real Game Changer for Energy Saving Improvements

For more information on TREIA - Texas Renewable Energy Industry Alliance you may view the confernce Agenda or  GO TO THE TREIA SITE

Contact: Raina Hornaday
Phone: 512-971-8825
Email:  raina@treia.org

November 4th, 2015 City of Houston Approves PACE District for Houston ETJ

On November 4th, the City of Houston, with a unanimous vote, approved a PACE district. Property owners in the Houston Extra Territorial Jurisdiction are now able to take advantage of PACE financing.

PACE (Property Assessed Clean Energy) is a public private partnership using a financing method that re-characterizes a property improvement loan (that saves energy or water) into a Loan Assessment recorded with the local taxing district that is then repaid via Annual Assessments over a number of years, reflecting the average life of the improvements being financed. The loan is fixed rate, cannot be accelerated and is for 100% of the improvements and related costs being financed.

For more information please contact us. 

Types of Green Energy Upgrades | PACE Houston

Qualifying improvements may include HVAC, chillers, lighting retrofits, insulation, windows/glazing, window coverings, energy management software, reflective roofing "cool roofs", car charging stations, water conservation improvements and renewable energy projects such as solar. 

An MEP Engineer who is qualified to assess a building's mechanical, electrical and plumbing systems and/or the building envelope can come up with the best combination of improvements.

The PACE National Case Studies may be of interest.

Benefits of Energy Efficiency Loans | PACE Houston

Property owners achieve numerous tangible benefits in implementing energy efficiency upgrades  - especially when one considers that the PACE financing program guidelines specify that 100% of the architectural, engineering, related fees and construction costs are covered.  

PACE Benefits to Property Owners
Immediately improve their cash flow with the next utility bill
Improve the property value to tenants
Turn marginal energy efficiency improvement projects into profitable projects
Accelerate projects otherwise delayed due to a lack of capital

Finally, property managers may pass all costs along to tenants who benefit from the lower utility expense (in most leases) and from a more comfortable work environment. 

For more information see the PACENow Lender Support Update.

PACE Ordinance on the Houston City Council Agenda for November 4, 2015

CITY OF HOUSTON - CITY COUNCIL
Meeting Date: 11/4/2015
ALL
Item Creation Date: 10/27/2015

City of Houston Seal

ARA-PACE Adoption Ordinance

Agenda Item#: 27.

Summary:

ORDINANCE establishing a program under the Texas Property Assessed Clean Energy (“PACE”) Act of 2013 for City of Houston and its extraterritorial jurisdiction, as provided by Texas Local Government Code Chapter 399

Background:

 The Administration and Regulatory Affairs Department, with the support of the Mayor’s Office of Sustainability, requests City Council approval of an ordinance establishing a Property Assessed Clean Energy (PACE) financing program.

 The Property Assessed Clean Energy Act (PACE Act) was enacted by the State of Texas in 2013 (SB 385, 83rd session as amended by HB 3187, 84th session, Texas Local Government Code Chapter 399). It authorizes counties and municipalities to implement PACE financing programs.

 PACE is a voluntary financing program that allows owners of commercial, industrial, and multi-family residential properties (with five or more dwelling units) to obtain low-cost, long-term loans for water conservation, energy-efficiency improvements, and distributed generation. The PACE Act authorizes municipalities and counties in Texas to support private sector lenders and property owners working together to finance qualified improvements using contractual assessments voluntarily imposed on the property by the owner. In exchange for funds provided by a private lender to pay for the improvements, the property owner voluntarily requests that the local government place an assessment secured with a senior lien on the property until the assessment is paid in full. The term of an assessment may extend up to the projected life of the improvement, which can result in utility cost savings that exceed the amount of the assessment payment.

 As a result, improvements financed through a PACE program may generate positive cash flow upon completion without up-front, out-of-pocket cost to the property owner. PACE enables property owners to overcome market barriers, such as lack of access to capital and payback period requirements, which discourage investment in energy efficiency and water conservation improvements. 

 PACE provides the property owner with upfront financing for up to 100% of the cost of a qualified improvement and allows the property owner to amortize the debt over the useful life of the improvement. If a property is sold before the full amount of the PACE loan is repaid, the remaining repayment obligation automatically transfers to the next owner because the lien securing the PACE assessment follows the title to the property without recourse for subsequent payments on the previous owner. Successive property owners assume the lien and are informed of the assessment through the closing process.

 As required by the PACE Act, there are five steps that a local government must complete in order to create a PACE program:

1. Draft and publish a report for the proposed program. City staff drafted and published a report for the proposed Houston PACE program on October 1, 2015.
2. Make the report available for public inspection. The report has been available for public inspection in the Office of Sustainability (City Hall, 1st Floor) and on the website of the City of Houston at: www.greenhoustontx.gov/pdf/pace2015.pdf. 
3. Adopt an ordinance intending to create the proposed program. On October 14, 2015, the Houston City Council adopted Ordinance No. 2015-996 establishing City Council’s intent to create a Houston PACE program.
4. Hold a public hearing to receive comments on the proposed program. A hearing was held on October 21, 2015 at the Quality of Life Committee to receive comments on the creation of the proposed Houston PACE program. An informational presentation was given to the Quality of Life Committee on September 30, 2015.
5. Adopt an ordinance to create the program. With this agenda item, the Administration and Regulatory Affairs Department, with the support of the Mayor’s Office of Sustainability, request City Council authorization of an ordinance to create the Houston PACE program.

Departmental Approval Authority:

  ________________________________________

Tina Paez, Director

Administration & Regulatory Affairs Department

  ____________________________________

Other Authorization

 Prior Council Action:
Ordinance No. 2015-996

ATTACHMENTS:

DescriptionType

10.28.2015 PACE Adoption Ordinance RCA.pdf

Ordinance

Ordinance/Resolution/Motion

Where else in Texas are there potential PACE projects

PACE has been approved or is expected to be approved in other Texas jurisdictions and there are potential PACE projects as shown on the map.

Map courtesy of Dr. Gavin Dillingham from his HARC “Improving Opportunities in Energy Efficiency” USGBC Energy Summit presentation dated October 20, 2015 

Is my Houston area building or industrial site in an approved PACE area?

PACE is expected to be available in the Houston ETJ (Extraterritorial Jurisdiction). 

Map courtesy of Dr. Gavin Dillingham from his HARC “Improving Opportunities in Energy Efficiency” USGBC Energy Summit dated October 20, 2015 

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Houston City Council Committee on Quality of Life Discusses PACE

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Councilman Jack Christie and Tim Crockett visit at Quality of Life session.

Councilpersons Christie, Robinson and others asked questions about PACE to presenters Charlene Hydinger, Laura Spanjian, PACE Houston's Tim Crockett and several other interested parties.

The questions from Council centered on economic development with the council already having become familiar with the program. PACE 101 explains the program. While Tim spoke extemporaneously, the substance of his remarks addressed the benefit of PACE to the city and are reproduced below. 

October 21, 2015
Houston City Council Public Hearing
PACE (Property Assessed Clean Energy)
 
Thank you Madame Chair and Councilmembers and City staff for the opportunity to speak today.  I would like to recognize the countless foundational hours of hard work done by the Texas PACE Authority and HARC.
 
My name is Tim Crockett, a 35 year veteran of Houston’s commercial real estate industry. I am here today speaking in support of PACE and on behalf of my company, PACE Houston.  We are an independent, private company that will work within the City and State’s guidelines to assist Property Owners to implement PACE improvement projects.
 
PACE will allow commercial property owners to gain access to a powerful financing tool already in use across 32 states. 
 
PACE allows a property owner the opportunity, in an open market setting, to obtain long term, fixed rate, 100% private financing to make energy and water saving improvements.
 
PACE enables the property owner to decrease their operating cost, increase their cash flow and lower their CAP Rate. Having PACE included in the capital stack can also lower a property’s weighted average cost of capital.
 
PACE is the most significant new development I have seen in my 35 year real estate career.  It is a real game changer for our city, another great example of a public – private partnership and a win-win opportunity.
 
I personally experienced capital limitations during the 10 year redevelopment of the Esperson Buildings.  PACE would have addressed these limitations.
 
PACE extends the useful life of existing power generation and public water resources.
 
PACE and its energy conservation qualities will further enhance Houston’s image as the energy capital of the world.
 
PACE will improve the quality of our commercial real estate inventory and thus protect our tax base.
 
PACE represents an opportunity that reaches across the political aisle benefitting: big property owners and small tenants, business owners and environmentalists, energy providers and energy users and PACE provides job opportunities for the citizens of Houston.
 
In conclusion, I would like to express my personal support and the support of PACE Houston for this important program.  
Thank you.

PACE Houston @ USGBC Energy Summit

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Wind Production is Sporadic - 2015 USGBC Energy Summit

The 2015 USGBC Energy Summit provided a great opportunity for about 125 participants to share industry and product knowledge. PACE Houston was asked to be a Partner  and to provide education about Property Assessed Clean Energy. 

Participants included keynote speaker Dr. Peter Hartley of Rice University who spoke on energy resources. He highlighted the point that reserves are not an adequate reflection of the world's supply of fuel. The reason is that companies keep their reserves at about a 10 year supply before exploring for new reserves. So we are "Not about to run out of fuel!" 

The chart to the right shows (somewhat humorously) that wind energy can be sporadic!

H.B. "Trip" Doggett of ERCOT also spoke about the Texas electric grid. The most interesting point (for me) was the percentage of Texas power that comes from wind; that is, 20-30% of our power which represents about a fifth of the wind generation capacity in the U.S.  The problem with wind suddenly increasing and then dropping off just as quickly as a front moves across the state is being addressed by geographically separating wind farms so that as one drops off another picks up. 

Many speakers gave informative talks. The big elephant in the "energy efficiency room" is the building envelope - a subject of Peter Hutley of Curtainwall Design and Consulting thoroughly addressed. He gave an informative and in-depth talk on metal frame windows. 

Houston City Council unanimously passed its Resolution of Intent to create a PACE program in Houston

Dated October 14, 2015.

Houston City Council unanimously passed "Resolution of Intent" to create a PACE program. Councilman Christie and Mayor Parker shared their positive comments.

Councilman Christie "Incentivize energy conservation - incentivize water conservation. There is [required projected energy savings] ... enough to pay for the loans. This is a win-win situation."

Mayor Parker: "The City has to create it. There are no city dollars involved. We create the platform and the private sector does its work."

A PACE hearing is scheduled forWednesday, October 21st.

Councilman Christie first points out that this program gives the private sector opportunity "carrots" without using tax dollars "sticks".

Houston City Council adopts Resolution of Intent for a local PACE program: Property Assessed Clean Energy

When will Houston approve PACE?

The Houston City Council is expected to adopt PACE for Houston before the end of the year with the following schedule.

September 30: Quality of Life Committee Informational Hearing
October 1: PACE Report and Documents posted for public review
October 14: City Council Action: Resolution of Intent
October 21: Quality of Life Committee Public Hearing
November: City Council Action: Resolution of Adoption

More information can be viewed in this council presentation.

An Opportunity for Creating New Economic Activity With Property Assessed Clean Energy (PACE) Advancing Facility Improvements and Conservation Related Retrofits into Commercial and Industrial Properties  by the Quality of Life Committee, September 30, 2015

PACE Houston Sends PACE Support Letters to City of Houston Council Members

Typical Type of Letter

August 2015
 
Re: Support for adopting PACE (Property Assessed Clean Energy) in Houston
 
Dear Councilmember:
 
Thank for your service to the City of Houston in your role as Councilmember.  Your responsibilities are both numerous and significant discerning among the many issues that come before you for consideration. 
 
I am writing you in support of the City of Houston adopting the PACE program as made available by Texas House Bill 3187 which will allow commercial property owners in Houston to gain access to a powerful financing tool already in use by many cities and counties across 29 states.  Several local governments in Texas are considering making PACE available in their areas with two having already done so, Travis County (Austin) and Willacy County in the Lower Rio Grande Valley.
 
We also encourage you to name the nonprofit, Texas PACE Authority as “the Administrator” for your program.  An outside Administrator can streamline the application process, determine if projects comply with the legal requirements of the PACE statute, and ensure the filing of the assessment with the local taxing authority.  Having a single Administrator for all programs throughout the state will provide a professional and consistent platform.
 
Without using any public money, PACE allows a property owner the opportunity to obtain long term fixed rate 100% financing to make improvements to increase their property’s energy efficiency, water conservation, renewable energy and most importantly lower their operational cost resulting in an immediate increase in their cash flow.  PACE provides access to increased energy efficiency, improved quality of the local commercial building stock, increased property valuations and economic development by increasing the number of jobs in our city.
 
PACE is the most significant new development I have seen in my 35 year real estate career.  It is a real game changer for a city, helping local property owners, engineers, contractors, lenders truly providing a win-win-win-win situation.
It is a powerful financing tool because:
1) It allows the property owner to repay the loan via an additional line item added to their property’s annual tax bill
2) It connects the financing of the improvement to the actual property vs to the owner thus allowing the financing tenor to match the useful life of the improvement
3) Provides financing that will be fixed rate and cannot be accelerated by the lenders
4) With 100%, long term financing it frees up an owner’s cash for other uses
5)  It enables a property owner to do all construction projects that improve energy efficiency together now, receiving the benefits of lower utility bills immediately while paying back the funds over a much longer time period typically 20 years. I personally experienced the economic limitations while redeveloping the Esperson Buildings.  We had numerous projects we had to delay and spread out over many years because we could only justify spending so much money each year.  Had PACE been available back then we would have gladly used it to accomplish so much more.
6)  It provides better security to the lender by directing the loan repayment through the property tax assessment.
 
By increasing the number of energy and water conservation projects being completed in the private sector within the city, PACE also extends the useful life of existing power generation and public water resources.
 
PACE will further enhance Houston’s image as not only the energy production capital of the world but also the energy conservation capital of the world.
 
It improves the quality of our local inventory of commercial real estate and thus the long term tax valuation for the city thereby ensuring that during the next economic downturn Houston’s buildings will be less susceptible to the problems of urban blight that have afflicted other cities and not only hurting tax valuations but all the people in our city.
 
This is an opportunity that reaches across the political aisle benefiting: big property owners, small tenants, business owners, environmentalists and business, energy providers and users as well as the City itself.
 
PACE Houston is an independent private company that will work within the City of Houston and the Texas PACE Authority’s guidelines to provide strategic advice to property owners and assist them in developing their PACE Project.
 
Blessings,
Tim

Tim Crockett
President
Pace Houston and C-C Development, Inc
100% Financing for Energy Improvements
(713) 530-7922    
tim@CBarC.net
www.pacehouston.com