PACE Across Texas
by Charlene Heydinger
Across Texas, a voluntary program is being implemented that helps improve the environment, creates jobs and saves Texans money on their utility bills. Commercial Property Assessed Clean Energy (C-PACE) is a proven, accessible financial tool that enables Texas building owners to upgrade facility infrastructure with little or no upfront capital outlay. The program is designed so that building owners lower their operating costs and, with the savings generated, pay for eligible water, energy efficiency and distributed generation improvements by taking advantage of affordable, long-term financing. Owners see immediate savings on utility bills by investing in efficiency or generation upgrades, and are cash-flow positive upon completion of the work.
C-PACE can be used to pay for new heating and cooling systems, lighting improvements, solar panels, water pumps, insulation and more, for commercial, industrial, agricultural, non-profit and multifamily properties. This program accelerates upgrade investments in existing buildings, empowering owners to use their available capital on revenue-generating items including employees, technology and products.
C- PACE was identified by Scientific American as one of the top 20 “world changing” ideas as it provides a new source of property-secured financing for energy efficiency and water conservation retrofits that does not affect conventional lending sources and does not compete for capital with other investment opportunities.
C-PACE is also an economic development tool that creates jobs, improves property values and reduces harmful pollution, all at no cost to the local government treasury. The Texas PACE program has already funded nearly $34 million in energy and water efficiency upgrades over the past year, generating work for the local contracting community that cannot be outsourced. Looking at the economy at a macro level, a recent analysis showed that “energy efficiency is the largest sector within the U.S. clean energy economy, accounting for three in four of its jobs and employing nearly 1.9 million people nationwide.” Even with the oil-and-gas fracking boom, “Texas is seeing strong energy efficiency employment.”
How does PACE work in Texas?
The owner of a commercial, industrial, agricultural, non-profit or multifamily property chooses eligible improvements, a contractor and a private lender. The building owner applies to the C-PACE program for confirmation of building type and improvement eligibility. The program administrator provides technical support and administration services. If the project meets all statutory and program best practices, it qualifies as a C-PACE project. Through the program, the local government allows the property to become responsible for the repayment, via a voluntary senior lien for the cost of the improvements, in exchange for the economic improvement on the property. The lender then provides funds to pay for the project. The property owner installs the eligible upgrades and a project review is conducted by an independent third-party. Owners repay the cost of eligible improvements over a period of up to 20 years or more, with payments secured by voluntary assessments (similar to sidewalk or sewer district assessments) on the property. The energy and/or water savings are structured to exceed the annual assessment payment, resulting in projects that are cash flow positive. As the C-PACE assessment is tied to the property, the assessment automatically transfers to the next owner if the property is sold.
Image courtesy of Texas PACE Authority
This straightforward approach encourages commercial building owners to upgrade infrastructure using the most-efficient technologies. Even though a higher up-front investment in a more-efficient product or technology can save operational expenses and reduce emissions over the lifetime of the equipment, many times the least cost replacement option is chosen because of the initial price tag. By selecting the less expensive up-front option, property owners forgo far greater long-term operational savings. As commercial building owners qualify for C-PACE based on the equity in their property and not their income, the base of financeable projects is expanded and new private investment can be brought into communities.
Where is C-PACE in Texas?
Local regions must opt into the program in order for building owners to be able to take advantage of C-PACE. Currently available in 13 regions across Texas, that number is growing. To date, the counties of Brazos, Cameron, El Paso, Fort Bend, Hays, Hidalgo, Jefferson, Nueces, Travis, Willacy and Williamson, as well as the cities of Dallas and Houston have established programs. All are market-based and flexible, allowing property owners to do business with the parties of their choosing at the lowest possible administrative cost. Additionally, a high level of consumer protection is included to ensure that the projects will deliver the anticipated savings and are based on the “PACE in a Box” model, designed by over 130 Texas stakeholders and used in every Texas PACE program. The Texas PACE Authority, a private non-profit, administers this model program in all of the Texas PACE regions.
A typical capital stack falls short of the funds necessary to cover the additional upfront cost of modernizing building infrastructure. Using C-PACE, owners can enjoy immediate positive cash flow with no upfront costs. C-PACE empowers owners to lower utility and operating costs, and increase building comfort and asset value by installing energy and water saving equipment. C-PACE financing replaces more expensive partner equity with low-cost, long-term financing that has many additional benefits:
- Assessments do not accelerate; if the property is sold, the remaining payments transfer to the new owner
- Operational savings exceed the cost of repayment
- 100% financing with no down payment
- Complements historic grants, economic development incentives, rebates, tax incentives, etc.
- C-PACE financing for energy and water efficiency measures and distributed generation technologies allow the developer to focus available capital on other parts of the project
- Improvements will enhance the value and efficiency of existing buildings, enabling some buildings to become LEED certified
- Reduce demand on the energy grid
- Support the state’s water plan
- Reduce greenhouse gas emissions
- Mitigate split incentive issues between landlords and tenants as to investments in energy efficiency and water conservation improvements
In the aggregate, PACE improvements will promote long-term economic development in Texas by helping the state obtain energy and water security, grow and retain jobs, improve property values and reduce harmful pollution.
C-PACE Success in Texas
Butler Brothers Building
In July, the largest C-PACE project to date in Texas, and the third-largest in the nation, closed in the City of Dallas. Alterra International, a Dallas-based global real estate development company, obtained $23.9 million in private capital at advantageous terms for the energy and water saving upgrades to the historic Butler Brothers Building. The 1910 nine-story mercantile warehouse had long been an empty eyesore across from City Hall. The redevelopment into 238 apartments, a 270-room dual-branded Fairfield Inn/Town Home Suites by Marriott, and retail and office space is expected to spur additional revitalization in the area.
Benefits and anticipated savings at the Butler Brothers Building include:
- Annual electricity use will be reduced by more than 6.6 million Kilowatt hours
- Annual water savings of almost 700,000 gallons
- More than 3,500 metric tons per year of Carbon dioxide emissions (CO2e) will be reduced
- Over 100 jobs in the Dallas area will be created
Simon Property Group
The largest shopping mall operator in America, Simon Property Group, has closed five C-PACE projects throughout Texas over the past year. Using C-PACE financing, Simon funded a number of improvements including interior and exterior LED lighting, HVAC replacement, smart glass, heat reducing awning technology, low-flow faucet upgrades and conservation updates to water features and irrigation technology.
Combined, benefits and anticipated savings at the five properties will include:
- Annual electricity use reduction of 3,983,000 Kilowatt hours
- Annual water savings of over 12,158,000 gallons of water per year
- Contributing to the creation of nearly 50 jobs across the state.
The ability of Simon Property Group to close multiple projects in different cities on the same day demonstrates one of many benefits of the uniform Texas “PACE in a Box” model used in every Texas PACE program.
The Solution is Here
Commercial buildings are responsible for an enormous amount of resource consumption and greenhouse gas emissions. New technologies help the state make the most of a limited water supply and develop an electricity grid that is cleaner and more reliable to sustain significant population growth. As the demand for more efficient buildings in Texas increases, a market-driven solution such as C-PACE fills the gap.
Texas C-PACE answers the question, “How are we going to pay for it?” This voluntary financing tool is transforming how developers, owners and contractors look at projects, proving that there is a clear path forward to operational savings brought about by energy efficiency, distributed generation and water use reduction improvements in existing buildings.
Visit www.texaspaceauthority.org to get involved and learn more.
Charlene Heydinger serves as President for The Texas PACE Authority (TPA), a nonprofit, 501(c)(3) third-party administrator for C-PACE programs across Texas.