Recently, the New York Times wrote about the rapid growth of the green financing initiative called PACE (Property Assessed Clean Energy) and the infusion of cash available to lend. Many NYT stories are national or international in focus, so some digging was required to discover what Texas and Dallas were doing with the program.
Created in 2008, PACE enables a type of financing for new and existing commercial and multi-family buildings whereby owners can update their energy efficiency standards – e.g. water, electricity, or natural gas. This isn’t a bank, but rather a program that can be used by banks (or anyone with money to lend) and property owners. States and municipalities have independent nonprofit PACE operations that act as clearinghouses between the parties and administer the outcomes (the bank isn’t going to check an electric bill).
What makes this different from straight funding are the low interest rates (perhaps half the prevailing rates) and the longevity of the loans – up to 30 years at a fixed interest rate (Texas says it averages 10-20 years). But PACE isn’t typically the primary lienholder. They only support up to 20 percent of a project’s costs. Repayments are lumped in with other bills like property taxes – and because of the way they’re structured, when an owner sells, the obligation is transferred to the new owner. This is particularly interesting for energy efficiency.
Solar panels may eliminate an electric bill, but if I bought them a year ago, I’d have to sell my property by essentially front-loading future (non-existent) electric bills in order to recoup my investment. With PACE, any owner is just paying for what they’re using – like the electric bill itself.
After a rocky start due to the uniqueness of this program (banks went “Huh?”), PACE loans are booming. The Times points out that since their inception in Berkley, California, in 2008 through 2015, PACE loans totaled $208 million. But from 2016 to 2018 the number was $660 million nationwide. That’s essentially tripling in half the time.
It’s no surprise that California leads the way with projects utilizing $293 million in PACE monies since the program’s inception. Texas ranks sixth at $43 million to date.
One of the reasons for growth has been the availability of financing. Given the fairly high rates of return (compared to other types of bank investments – CDs, money markets, etc.) money has come out of the woodwork from traditional banks, to private equity to various PACE investment funds. Because the loans are primary liens, they’re protected in case of bankruptcy. And since banks and even HUD have blessed the program, it’s viewed as a good investment. And given the stringent qualification criteria, don’t look for a bubble here anytime soon.
But What About Texas?
Nearly all PACE projects deal with the Texas PACE Authority (TPA) who oversee PACE programs in 23 local municipalities and counties (Tarrant County and City of Dallas – not Dallas County). They’re also stewards of a statewide training program for developers, landowners, and banks as well as creators and maintainers of the successful PACE in a Box program that makes it easier for folks to navigate the system.
In 2016, their first year of operation, PACE dealt with approximately $4 million in loans, but that volume more than doubled in 2018 to $9.22 million in PACE-assisted funding. At nearly $30 million, 2017 was an aberration – and it was Dallas’ “fault.”
The renovation and restoration of the 1910 Butler Brothers mercantile warehouse building on South Ervay between City Hall and the library secured $24 million in PACE-related funding. Since we’re “Big D” it’s fitting that Dallas’ first PACE project was also the state’s largest.
Today, the mixed-use apartment and hotel building saves 6.6 million kilowatt-hours of electricity and 700,000 gallons of water annually, reducing expected utility bills by 40 percent. Considering the building had been derelict for years, it’s a definite win-win for Dallas and the developers who also took home three awards for sustainability (CoreNet Global), best public-private partnership (D CEO), and most creative financing (Dallas Business Journal).
The following year, Dallas also chalked up the smallest PACE project (at the time) with $74,000 used by Dallas Paint and Body Shop to install solar panels and LED lighting. It was also the first Latino-owned business to take advantage of PACE. Owner Felix Flores said the money saved from lowering his electricity consumption by 33 percent will pay for the loan. Another 40,572 kilowatt hours saved.
To date, Texas projects have secured $49.762 million in projects statewide. Dallas projects account for 60 percent of monies utilized, which has resulted in cutting their average utility usage by 79 percent for natural gas, 40 percent for water, and 57 percent for electricity – 19,690,710 kilowatt-hours in total – one-third of the state-level electricity reductions. Texas was a little late to the game with TPA beginning eight years after the initial 2008 start in California. Dallas signed up quickly in May 2016 and jumped in with both feet.
But I will give a bang-for-your-buck shout to Brazos County, who has just $68,851 in PACE investments but has saved 15,092,171 kilowatt hours – 24 percent of the state total – demonstrating that small projects can have a huge impact.
On a mildly humorous note, PACE has a special outreach on each end of the Texas-Mexico border for El Paso, Cameron, Hidalgo, and Willacy Counties. One wonders if slapping solar panels on “The Wall” would help secure funding via PACE instead of pesos.
Texas PACE Authority
TPA is a non-profit who relies on project fees and donations to keep the (solar-powered) lights on. Big donors include the Meadows Foundation, the Rockefeller Brothers Fund, the State Energy Conservation Office (SECO), Mitchell Foundation, and others. TPA is also efficient, having among the lowest administrative rates nationwide.
The one trick that seems lacking from Texas’ PACE program is the facility to use qualifying project dollars on new residential construction. Certainly, as costs increase for construction, developers’ ability to charge reasonable rents while adopting energy-saving technologies are strained.
This is especially true when one of the founding tenants of PACE was to enable the rehabilitation of energy-greedy multi-family residential buildings to lower their cost structures in a way that kept rents down. Surely that goal is equally true in the new-build market also?
Author Amit Kalantri said, “In modern time slowness is a new sickness.” I’m glad that after languishing in its initial years – the Texas legislature approved it in 2013 – PACE is gaining traction. I’m also happy Dallas is leading Texas in using PACE to exploit financing to improve its energy efficiencies.
Remember: High-rises, HOAs and renovation are my beat. But I also appreciate modern and historical architecture balanced against the YIMBY movement. In 2016, 2017 and 2018, the National Association of Real Estate Editors recognized my writing with three Bronze (2016, 2017, 2018) and two Silver (2016, 2017) awards. Have a story to tell or a marriage proposal to make? Shoot me an email email@example.com. Be sure to look for me on Facebook and Twitter. You won’t find me, but you’re welcome to look.