PACE, a Game-Changer for REIT’s

PACE is becoming the ultimate financing solution for business owners who are looking to invest in energy efficient projects. With PACE, the upgrades create a positive cash flow for the owner immediately due to the long-term financing.

REIT’s (Real Estate Investment Trusts, securities that trade on the stock exchange) can benefit significantly from PACE. Institutional investors provide the capital and in return, receive bonds that pay 6-7%.

Many companies are seeing the benefits due to improved operating income and a boost in revenues for companies with energy upgrades. The only disadvantage for PACE is that it is still not available in all states. This is changing though as the program has grown rapidly mainly due to increasing demand in sustainability.

Due to the various monetary benefits of PACE, REITs could eventually use PACE as a regular way to finance energy improvements.

Overview

PACE takes an old concept of the tax assessment and gives it a new twist. The financing gets wrapped into tax payments collected by a participating municipality, which protects bondholders in the event of default, as the debt would be picked up by any new owner and paid rapid through assessments.

PACE pays 100% of a project’s cost and is repaid for up to 20 years.

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The proponents say the financing can help justify energy efficiency improvements because it stretches out amortization of the repayments. Expensive upgrades might be difficult to justify over a 5 to 7 year period of mezzanine financing.

One big proponent of PACE is George Caraghiaur, a former Senior VP of sustainability at Simon Property Group, who left the company in January. He has crisscrossed the country promoting the financing of PACE. He is a managing member of consulting firm Energy & Sustainability Services and a senior fellow at PACENow.

Caraghiaur has endorsed PACE as an attractive option for REITs going forward.

Summary

If there’s one thing holding back use of PACE on a large scale by REITs and other real estate companies, it’s the number of states where it’s approved. PACE first started in California in 2008 and has since grown to 32 states along with Washington D.C. as of this past April.

For many developers, PACE has show improvement to the bottom line. Goals behind PACE-financed energy efficiency retrofit include deploying LED lighting and new HVAC system, and central controls for lighting to reduce wasted energy in unoccupied rooms.

With the incredible opportunity for high returns, REITs could eventually turn to PACE as a regular way to finance energy improvements. REITs were limited in their ability to take on energy efficiency in the years following the financial downfall, but are now better positioned to focus on making improvements.

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