04 May Keeping Pace
By Dan Overbey
Unlocking the potential of the green economy through energy efficiency.
The lobby bar in the DusitD2 Constance Pasadena hotel in Pasadena, California, used a $6.8 million PACE bond to finance an energy upgrade.
The residual effect of the recession has exposed the flaws in our current economic models. Domestically, the building design and construction industry has been disrupted, and as various sectors have struggled for recovery, many are taking a closer look at the broader notion of a “green economy,” one that simultaneously promotes environmental responsibility and economic growth.
The potential of the green economy is staggering. According to a recent study by the Rockefeller Foundation and DB Climate Change Advisors, the United States is at the cusp of a $280 billion investment opportunity over the next decade—an opportunity that could yield more than $1 trillion in energy savings. If maximized, retrofits and building upgrades could generate over 3 million jobs and save the atmosphere from 600 million metric tons of carbon emissions per year.
An environmentally conscious investment opportunity that could create jobs and lower energy demand should be a winning proposition. However, there is an impediment to fully unlocking the potential of the green economy: the initial outlay of investment capital.
“It takes funds to invest in capital improvements,” says David Gabrielson. “In this prolonged economic recovery, neither homeowners nor facility managers have a tremendous amount of money available for deep energy upgrades.”
Gabrielson is the executive director of PACENow, a nonprofit organization dedicated to proliferating the green economy through an innovative financing model known as Property Assessed Clean Energy—or PACE. The model enables owners of residential, commercial, and industrial properties to obtain low-cost, long-term property improvement loans for renewable energy and energy efficiency with little or no upfront cost.
The idea seems simple enough and the benefits are enormous for both the property owner and local community. PACE programs can enhance the value and efficiency of existing buildings, save substantial amounts in utility costs, and promote green job creation within the building design and construction industry.
“PACE started out as this idea in California in 2008,” recalls Gabrielson. “State-by-state legislation followed. Within two years, half of the states had PACE-enabling legislation.” According to Gabrielson, the idea of PACE went viral around the country in the residential sector. In fact, PACE was named one of Harvard Business Review’s 10 breakthrough ideas of 2010 and Scientific American’s top 20 ideas that can change the world.
Then, the innovative financing model started to lose its luster under the scrutiny of lenders.
First conceived in the residential sector as a lien on the property, a conflict emerged about whether a PACE security interest should be considered a property tax (since it is associated with a property, not an individual) or a loan (since the lien pays back a fixed amount of funding). If considered a tax, a PACE lien would be repaid before a mortgage in the event of foreclosure—something Fannie Mae and Freddie Mac found unacceptable. Due to opposition from the Federal Housing Finance Agency (FHFA), which saw PACE programs as a threat to the unsteady housing market, most residential PACE initiatives quickly dried up.
It seemed as though emerging PACE programs would be dead on arrival, but in several states PACE was already evolving in response to regional market pressures and an expanded definition of what constitutes energy-related improvements. In Florida, for example, the scope of PACE-eligible improvements was adjusted to encompass retrofits for “hurricane hardening” that would increase the resilience of a structure. In drought-stricken California, the energy implications of water usage were leveraged to considerably expand PACE eligibility.
Today, the Golden State benefits from a competitive marketplace of about a dozen different PACE providers. For instance, the Sonoma County Energy Independence Program (SCEIP) provides financing for over 90 different improvements across both the residential and commercial sectors. In fact, PACE is witnessing a burgeoning force for nonresidential properties. Gabrielson points to the renovation of the DusitD2 Constance Pasadena as just one of several recent success stories in California. The hotel used a $6.8 million PACE bond to finance a comprehensive energy upgrade that included new heating and air-conditioning equipment, LED lighting, a water system overhaul, and insulation. These upgrades will help the property reduce its electricity consumption by over 200,000 kWh and water use by over 3 million gallons annually.
The Michigan adopted a PACE statute in December 2010. It allows financing for a wide range of energy and water performance upgrades on commercial, industrial, multifamily, and private nonprofit buildings. The statute also paved the way for Lean & Green Michigan, a statewide PACE program that any municipality or county can join for free. “It is an open market program, meaning building owners can work with any clean energy contractor and any PACE lender they wish,” explains Andrew Levin, president of Lean & Green Michigan. “So far, 17 local governments representing 48 percent of Michigan’s population have joined Lean & Green Michigan, making it one of the largest statewide open market PACE programs in the country.”
Lean & Green Michigan has announced its first group of PACE-financed projects and is currently considering or processing projects worth more than $50 million. Among them, the Michigan Public Services Commission (MPSC) and property owner Saginaw Plaza Ltd. have teamed up with Levin through his consultancy firm, Levin Energy Partners, and contractor Ameresco to complete the first PACE project for a state agency in the United States—a retrofit of the MPSC headquarters in Delta Township, near the state capitol, Lansing.
As Michigan’s regulator of energy utilities, energy efficiency is important to MPSC. However, its headquarters is located in a privately owned building. This exemplifies what Levin calls the “split incentive” problem common in many types of commercial buildings where the best interests of the tenants (i.e., lowering utility costs rather than building improvements) are at odds with those of the property owner (i.e., improving the building rather than lowering utility costs). The nature of PACE in Michigan is designed to address this issue. “As a property tax payment in Michigan, PACE allows the building owner to share the costs with the tenants, who are already reaping the benefits. It’s a win-win all the way around!” states Levin. The $488,000 investment in energy conservation measures and onsite renewable energy is projected to yield approximately $800,000 in energy savings and tax benefits over the next two decades. “Without PACE financing, the MPSC project simply would not have happened.”
Deep in the heart of Texas, lawmakers passed a landmark statute in 2013 that authorized municipalities and counties to work with private sector lenders to finance improvements using voluntarily imposed contractual assessments on the property by the owner. Simply stated—Texas figured out a way to make PACE tax neutral.
“It passed in one session—it’s like it was meant to be,” recalls Charlene Heydinger, executive director of Keeping Pace in Texas (KPT). Both the legislature and business community saw an entirely voluntary PACE model as a business opportunity. “Not only did it have bipartisan support, it was advocated for by both the Texas Association of Business and the Sierra Club.”
“The timing for a conservative legislator to focus on water and energy conservation could not have been better,” Heydinger noted. Much like California and other regions, Texas is reeling from perpetual drought conditions compounded by a growing population. She points out that Texas has seen an average of a thousand people move to the Lone Star State every day for the past four years. “The economy is rising.”
Heydinger and KPT see a prime opportunity for PACE to unleash the green economy in Texas and provide the rest of the U.S. with the framework for deploying private-sector-driven PACE programs. KPT’s first goal was advocating for PACE-enabling legislation in Texas. Now, the organization assists counties and municipalities with implementing locally administered PACE programs. In order to achieve this goal, KPT organized a group of more than a hundred stakeholders. “A state-managed PACE program was not an option in Texas,” recalls Heydinger. “Private lenders had to step up.”
The lending associations supported the pro-business statute. “The best way to address agricultural water issues is through rural communities. We needed to bring small, local banks to the table,” says Heydinger.
With roughly 1,200 municipalities scattered throughout Texas, KPT quickly realized that in order to sustain the success of PACE in Texas, issues of scalability and regional adaptation would have to be reconciled with the need for user-friendliness. “A statewide PACE program didn’t seem realistic,” recalls Heydinger. “We’ve always held that PACE programs should respond to regional issues so that lenders, contractors, and property owners would only need to learn one system.”
This confluence of concerns for uniformity, user-friendliness, regionality, and scalability prompted KPT to develop a uniform standard for private-sector-driven PACE programs—a tool kit—aptly dubbed “PACE in a Box.” It was developed over the course of nine months by more than 130 business leaders. “The private sector designed it, so the business community has a great deal of confidence in it,” says Heydinger. In March, Travis County established the first PACE program under the KPT standard. The county approved a contract to engage a 501c3 nonprofit PACE administrator.
With a next-generation PACE framework in place, the lending environment in Texas is ripe for the green economy. Yet the statewide business community still lacked a strong outlet to establish significant business opportunities for engineers, construction contractors, commercial lenders, and investors interested in eligible energy efficiency and water-conserving improvements.
The Central Texas-Balcones (CT-B) Chapter of the U.S. Green Building Council recognized the many disconnects between markets across the largest state in the contiguous U.S. and took initiative to remedy the situation. “We thought we needed a platform to bring green building professionals together,” states Scott Gerhardt, the CT-B Chapter Chair.
The CT-B Chapter hired a consultant to conduct research and develop an internet-based resource that could serve as an online marketplace where project teams could easily find green building suppliers, designer, contractors, and other service providers. “The USGBC membership body represents a diverse cross section through the industry,” says Gerhardt. “A comprehensive umbrella resource made a lot of sense.”
Gerhardt recalls an important conversation with leaders from the other three Texas chapters during a USGBC leadership conference last year. “They saw a clear need for such a resource but none of them felt they had the means for such an undertaking.” Over the past several months, all four Texas chapters came together to support the green building industry in all regions of the state through the Texas Green Building Marketplace (texasgreenbuildingmarketplace.org).
“Through the general cooperation and collaboration for the marketplace, it became apparent that different communities had different strengths,” explains Gerhardt. The marketplace is the embodiment of a business-driven platform equipped to help regional networks grow organically, much like the PACE in a Box framework.
As Gabrielson has seen firsthand through PACE programs across the country, “Simple, local models are the key ingredients for success.” Much like KPT’s PACE in a Box, the Texas Green Building Marketplace is the product of commerce-oriented initiatives and private local mechanisms that are unlocking the potential of the green economy and providing the design and construction industry with new, innovative economic models that benefit both business and the environment. Heydinger attests, “Things grow more organically in Texas. The more the merrier.”