Sustainable: MinnPACE helps finance efficiency projects
DECEMBER 5, 2017
This article was originally published on Finance-Commerce.com.
Even after more than two decades in operation, the Greenway Office Building in Minneapolis remains a stellar example of sustainability. From geothermal heating and cooling to native gardens on the rooftop and a rainwater-retention system, the Greenway combines many innovative energy-efficiency elements.Two years ago, however, the building needed to replace its aging solar arrays. The building’s owner, Wellington Management Inc., installed a new solar photovoltaic system in 2015 with double the capacity of the old one while dramatically reducing the amount of rooftop space required for it.
The $150,000 project was financed by MinnPACE, a program providing private loans administered by the St. Paul Port Authority. PACE, which stands for “property accessed clean energy,” allows building owners to pay for energy-efficiency improvements through their property-tax bills over a 10- to 20-year period.
As the statewide PACE administrator, the Port Authority has joint-powers agreements with more than 50 counties and 20 cites, allowing property owners in those jurisdictions to pay for energy-efficiency improvements through MinnPACE. More than 80 percent of state residents live in counties with PACE, according to Pete Klein, Port Authority vice president of finance.
Wellington Management’s Vicki Karr, who manages the Greenway (2801 21st Ave. S.), said PACE was the key to making the new financing work. Because the building is owned by a partnership, the owners could not take the 30 percent investment tax credit offered by the federal government for solar projects, she said.
“We had a hurdle to cover 30 percent of the cost of installation, and PACE helped us fill that gap and made it possible to install the new 80-kilowatt system,” Karr said. Combined with the other novel energy-saving technologies in the Greenway, the panels impress current and potential tenants while supplying about 15 percent of the building’s electricity needs, she added.
Although the Greenway was a small deal by PACE standards, it contributed to the Port Authority’s standing as one of the nation’s leading PACE administrators. Minnesota was ranked fifth recently by PACE Nation in a study that showed more than half of PACE deals underwrite energy efficiency, while 26 percent of them go for renewable energy projects.
So how big a deal is PACE? Raphael (Rafi) Golberstein, a PACE financier, says business has been very good. The Minneapolis native attended college and worked in commercial real estate financing in New York City for more than a decade before returning to Minnesota and starting the PACE Loan Group, which works with clients around the country.
International Market Square just signed onto a $3.8 million, 20-year PACE loan to replace heating and cooling equipment, windows and lighting while making other improvements, Golberstein said.
His organization financed a $7 million PACE loan for the Treasure Island Center in the old downtown St. Paul Macy’s at 400 Wabasha St. N. A $1.8 million project in efficiency upgrades will begin soon at a new senior housing facility in New Prague. “We have a robust pipeline of deals that will close this quarter,” he said.
The MinnPACE program joins an existing one the Port Authority started in 2010 called Trillion BTU. A BTU, short for British Thermal Unit, is a measurement of energy expended; the fewer used, the less energy consumed, and the less carbon emitted.
Klein helps oversee MinnPACE and the Trillion BTU program, both which can be used for energy-efficiency projects. The Trillion BTU program has a revolving fund of $17.5 million available and works in partnership with the Center for Energy and Environment and Xcel Energy, said Klein.
Over the years Trillion BTU has financed 184 projects worth $66 million and has saved hundreds of billions of BTUs annually, said Klein.
PACE, meanwhile, differs from Trillion BTU by adding solar energy to the mix and private financing. A project can cost no more than 20 percent of a property’s assessed value, and in case of default, lenders will be among the first paid, Klein said.
Private lenders generally will not lend to clients until a county approves the PACE assessment on their taxes, he added.
The financing option works especially well with renewable energy projects and multitenant buildings. Property owners pay 4.5 percent on a fixed loan for solar installations, Klein said, and do not have to begin paying till May 15 of the following year.
Building owners can take advantage of tax credits and accelerated depreciation before even making the first payment on the loan. “It truly makes it a positive cash flow investment right away,” he said.
Multitenant property owners have a different struggle since tenants pay their own energy bills. Putting money into energy efficiency becomes a harder sell when there’s no easy way to get some of that money back from tenants. Having PACE payments on property tax statements allows the cost to be assessed to tenants through rent or property tax payments, Klein said.
Ideally, the improved energy efficiency lowers utility bills by an amount greater than any increase in the tax bill.
Offering his best example, Klein points to the largest PACE project ever in Minnesota, the more than $12 million retrofit of three downtown St. Paul properties — the First National Bank Building (332 Minnesota St.), U.S. Bank Center (101 Fifth St. E.) and 375 Jackson Building (375 Jackson St.).
The 2 million-square-foot project is expected to save nearly $1.4 million yearly in energy costs. The PACE assessment rings up at more than $963,000 annually. “That’s $400,000 annual savings the tenants are enjoying,” Klein said.
While some of the financing for the St. Paul retrofits came through Trillion BTU, the clear majority, more than $10 million, was brokered by Austin, Texas-based Petros PACE Financing. Having private market financing available allows for much larger PACE projects, Klein said.
James Crockarell, whose St. Paul-based Madison Equities owns the buildings, said the project was prompted by a need for new heating and cooling systems. As the project grew to include lighting and other efficiency measures, he saw the advantage of MinnPACE in being able to finance the entire project with no down payment.
Madison Equities has no need for PACE financing for any projects now, but he was happy to use it for the three properties. “I think it’s a good program which fits the needs of a lot of people,” he said. “It worked out well for us.”
Wellington Management’s chief operating officer, Dave Bergstrom, said PACE is simpler to manage than conventional real estate loans, a common option for paying for efficiency upgrades. He is in the process of adding two more projects focused on energy efficiency because “you can get significant savings by doing these upgrades,” Bergstrom said.
The Port Authority’s MinnPACE has completed more than 105 projects totaling nearly $40 million, Klein said. Solar projects accounted for more than $12 million, while the rest went for energy efficiency.
Golberstein, the financier, was asked if PACE had any downsides for building owners. After a pause, he said, “None.”