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It has been estimated that electricity represents 55% of the energy used in commercial buildings, with 32% from natural gas. The largest uses of energy are for heating (36%) followed by lighting (21%). This can be a significant portion of a nonprofit’s budget. For nonprofits that own their buildings, it is estimated potential savings from cost-effective upgrade projects average 25%. The question becomes how an organization funds these potential upgrades. One of the alternative financing programs available to nonprofit property owners is Property Assessed Clean Energy (PACE) financing.
PACE is a municipal financing program that was originally signed into California law in 2008. Under these programs, the property owner enters into an agreement to increase their property tax assessment to repay the amounts borrowed to finance energy efficiency or distributed renewable energy generation improvements that are permanent improvements to the property.
The application process is no more involved than a bank loan application. The following is a summary of the key features:
- No money down. The organization identifies an energy efficient improvement such as; insulation, double pane windows, and high-efficiency HVAC systems, solar (of course) and cool roofs. The project must meet certain energy efficiency requirements.
- The organization selects a contractor. The contractor is subject to approval by the lender.
- Relatively low or no application fee. The application fee, if any, is rolled into the financing, so there is no money down.
- Financing of up to 20% of the property value. The financing agreement to use the property tax assessment to fund repayments gives the PACE financing a priority lien over other financing. This will require cooperation from an existing lender.
- Up to 20 years to repay the loan. Shorter loan terms may be selected.
- The lien stays with the property if the property is sold. The lien is not required to be paid off due to a change of ownership.
- Interest rates will vary with the length of the loan. Interest rates are advertised to be comparable to bank loan rates for similar term loans.
- There may be a prepayment penalty if the organization wants to pay off the lien.
Nonprofits that have little liquid cash, an older building and identifiable energy efficiency needs should consider the cash flow impact of using the PACE program. A substantial improvement which lowers annual operating costs could very well produce cash flow to the organization after the debt service.
PACE programs are available state-wide. Each county or city may have a different provider. Private company funding is used to fund the loans despite the government involvement in the debt service process.
Contact your RINA representative if you would like assistance with a cash flow analysis of your energy efficiency project.