PACE IN THE CAPITAL STACKProperty Assessed Clean Energy (PACE) financing is the perfect tool for significantly reducing the growing need for mezzanine and equity financing, while potentially lowering your WACC.
Owners like PACE because it improves their property and lowers their cost of capital.
Financing is often better than traditional.
Comparable Dollars in the Capital Stack:
|Rate||Closing Fee||Max CLTV||Recourse||Financial Covenants and Reporting|
|Typical Mezz Debt||7-12%||2-4%||80-85%||Yes||Yes|
|Typical Preferred Equity||15%+||2-4%||90-95%||Yes||Yes|
|PACE||5.7 – 6.7%||2-4%||100%||NO||NO|
Comparison of Typical WACC vs CleanFund’s PACE Capital:
|Typical Financing||With PACE|
|% of Cap Stack||Interest Rate||% of Cap Stack||Interest Rate|
|Representative Capital Cost Savings on a $20MM Commercial Property|
|Capital Cost Savings/annum
|Annual Savings on $20MM Value Property
|Savings Over 10-Year Period
Types of Deals That Make Sense for PACE
Available in Certain Markets
- Depends on Local PACE Program
- Most of California
- Must be fully entitled
- Max C-PACE assessment is 20% of as complete value
- Funds must be applied to eligible items – not land or acquisition cost
- Must build eligible items greater than minimum code requirement (Not required in CA)
- Much of what’s already in your budget may qualify for PACE
- Funding draws require coordination with senior lender
Seismic Retrofit (CA Only)
Los Angeles Seismic Ordinance
- Released a list of 1,450 13+ story, non-ductile concrete buildings older then 1979 that require major seismic upgrades
- Released list of 13,500 soft story apartment buildings that require seismic upgrade
San Francisco has a similar program
- 6,744 soft-story buildings in San Francisco – DEADLINES ARE NOW
Negative PUBLIC RECORD against property
Major liability for property owners and existing lenders
- Reduce operating expenses with high efficiency upgrades, financed by low cost, long term financing
C-PACE Financing Prepayment / Transfer of Property Ownership
- CleanFund C-PACE financing can be Pre-Paid
- NO Defeasance
- NO Yield Maintenance
- Some Pre-payment Premiums
- Pre-payment premium decreases over time similar to a bank term loan
- Property Owner has the option to pre-pay the assessment or let it run with the asset and new owner continues assessment payments
- No assumption process or approval required
Lenders understand the value of PACE.
Bankers acknowledge PACE liens for 5 primary reasons:
- When a lender realized that the PACE financing does not accelerate in the event of foreclosure and is not senior itself to the mortgage financing. The passed due property tax payments is the only obligation that may be senior to a mortgage in the event of a foreclosure, which is a fraction of the value of the property and hence a very small amount of exposure and risk for a bank.
- PACE improvements help to increase the value of the lender’s collateral.
- Typically a PACE payment is 1% or 2% of the property value so a year’s missed payment does not represent a significant amount of seniority.
- Banks recognize PACE Financing enables improvements to properties that increase the value of their collateral and reduce their downsize risk. In many cases PACE increases the NOI of the property and modernizes the equipment so the property would be subject to fewer price concessions in the event of a sale.
- Most Bankers are relationship bankers and value their relationships with their borrowers, aiming to help them identify creative solutions to their property upgrade needs.
CleanFund makes it easy to get mortgage lender acknowledgment.
CleanFund facilitates lender acknowledgement on every transaction:
- CleanFund seeks an acknowledgement that is not a subordination agreement, but is simply an acknowledgement by the lender that they know PACE financing is taking place and it does not violate the covenants of their mortgage.
- CleanFund teams up with the borrower and uses special forms and templates that help to quickly educate lenders on PACE.
- An increasing number of lenders are acknowledging PACE as a valuable tool to build property value and to support their borrower relationships.
- PACE can finance capital improvements that increase the value and cash flow of the asset without requiring a refinance or additional funding of the senior loan.
PACENation List of Consenting Financial Institutions, May 2016
119 consenting lenders to date