New financing mechanism provides pollution prevention opportunities while attracting new companies

Buildings use 43.1 percent of the energy consumed in Colorado1 and provide an extensive opportunity for increased energy efficiency, renewable energy, pollution prevention, and cost savings. While Colorado has made vast strides in energy efficiency and renewable energy over the last decade, there are many notable and cost-effective opportunities still untapped. However, a variety of market failures and barriers, including financing, have prevented both small and large building owners and managers from aggressively pursuing energy efficiency and renewable energy.

Lack of information, high up-front costs, budgetary and debt constraints, and split incentives are commonly cited barriers that prevent cost-effective energy efficiency and renewable energy from being fully realized. To help address these barriers, Colorado became one of the first states to pass Commercial Property Assessed Clean Energy (C-PACE) legislation. C-PACE is an innovative mechanism for commercial, agricultural, institutional, industrial, non-profit, religious and multifamily properties2 to obtain low-cost, long-term financing for renewable energy, efficiency and water conservation upgrades. Owners repay the cost of eligible improvements over time through an additional charge on their property tax bill. Notably, if the building is sold while the C-PACE assessment is still being paid, the assessment is inherited by the new owner. How it works

The C-PACE program operates within a statewide, voluntary special assessment district called the New Energy Improvement District (NEID). Each county

can opt in with a resolution by the Board of County Commissioners. Once a county opts in, qualified commercial building owners in that county can apply to the NEID to receive financing from private lenders for eligible energy and water improvements. As of Aug. 29, 2016, four counties were a part of NEID, and eleven others were considering it.

When applying to the program, a property owner may have an eligible contractor and/or lender selected. The C-PACE program administrator, Sustainable Real Estate Solutions, Inc. (SRS), then will review the project application to ensure it meets program requirements. If the project moves forward, SRS and the NEID will work with the applicant to get mortgage holder consent for the C-PACE special assessment. If consent is granted, a special assessment (also called a lien) will be recorded in county land records, and the project will move forward. C-PACE repayment is collected with property taxes, with no additional paperwork for the property owner. The county treasurer will remit the PACE assessment payment to the NEID, which in turn, remits those payments back to the private lender. This continues until the entire amount is repaid.

Unique financing attributes

C-PACE is uniquely set up to support pollution prevention strategies such as energy and water efficiency and renewable energy in both small and larger properties:

> Long financing term: C-PACE allows financing for up to 20 years (standard commercial loans extend 5-10 years). Typically the resulting energy and water savings outweigh the annual assessment payment; therefore, the cash flow for the project remains positive. The Colorado program is unique in that there are no statutory requirements that

ColoradoCommercial Property Assessed Clean Energy (C-PACE)

projects generate positive cash flows based on energy savings.

> Small and large projects benefit: According to PACENation, an organization that tracks PACE financing across the U.S., as of June 2016, 30 percent of financed PACE projects were less than $75,000, 53 percent of projects were between $75,000 and $750,000, and the remaining 17 percent were greater than $750,000.3 As such, PACE financing has the ability to support small and large projects alike.

> Soft costs can be financed for existing buildings: C-PACE can finance 100 percent of the project costs for existing buildings, including soft costs such as energy audits, feasibility studies, commissioning, measurement and verification, and permits. Many times the cost of an audit deters energy and water upgrades or owners forgo an audit and only make piecemeal upgrades. > New construction can use C-PACE: C-PACE can finance, with certain limitations, up to 20 percent of the project costs for new construction.

> Financing is tied to building: Unlike traditional financing that is tied to the owner, C-PACE is tied to the building. Therefore, if a building owner switches properties after a few years, the savings and financing costs remain tied to the building. This decreases risk.

> Addresses the “split-incentive” problem: In C-PACE, the benefits and cost of the projects are shared with the tenant. Many times building owners will not make upgrades if their tenants pay their own utility bills because building owners pay for the project costs, while tenants get the benefit of lower utility bills. This is called a “split-incentive” problem. C-PACE helps address this issue because property owners can pass the costs through to the tenants in the form of a triple net lease.4

C-PACE’s potential effect on Colorado

To date, no projects have been completed in Colorado; however more than 150 projects have been pre-screened for more than $50 million in potential financing. Small and larger property owners are interested, and projects that have been screened range from under $100,000 to well over $1 million. The first project likely will be financed in September 2016. C-PACE has the potential to have a huge financial effect on the commercial sector in Colorado by reducing ever-increasing utility costs and creating local jobs. In fact, several companies

have moved to Colorado to take advantage of this new financing including Microgrid Energy, a clean energy Service Company that focuses on cutting energy costs through efficiency, solar photovoltaics and financing.

“Microgrid started an office in Colorado in large part because of the C-PACE program,” said Mat Elmore, a managing director of the company. “We think C-PACE is a game-changer on a variety of levels. In Colorado, there is a huge opportunity to use C-PACE for new construction.”

C-PACE could greatly benefit all Coloradans. The state has seen a significant spike in population over the last five years, and this increase in net migration is expected to accelerate. By 2040, Colorado’s population is expected to grow by 2.3 million, which will take a toll on the state’s infrastructure and water supplies. Pollution prevention initiatives are critical to ensure Coloradans maintain their lifestyle without depleting natural resources.

1 http://www.eia.gov/state/?sid=CO#tabs-2). Referenced on 8/10/16.2 For more information see: http://www.pacenation.us/wp-content/uploads/2016/06/Market-update-Q1-2016.pdf

3 Residential units with four or fewer units are excluded.

4 A triple net lease is a lease agreement on a property in which the tenant or lessee agrees to pay all real estate taxes, building insurance and maintenance (the three “nets”) on the property in addition to any normal fees that are expected under the agreement, such as rent, utilities, etc.

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