BY: JEFF QUACKENBUSH
NORTH BAY BUSINESS JOURNAL | May 4, 2018
Value-added commercial real estate investments have the promise of significant upside with the right amount of TLC and market repositioning.
But the prospect of shelling out money to fix or upgrade things tenants often don’t see can be a tough sell.
Now a Marin County-based investor is finding help from a relatively new layer of a property’s “capital stack”: property-assessed clean energy, or PACE, loans.
San Rafael-based Seagate Properties just inked 30-year PACE loans through Sausalito-based CleanFund for upgrades to two Marin office buildings. Seagate’s portfolio currently includes 2,500 apartments in the Denver area and about 2 million square feet of commercial, office, retail and industrial space in the San Francisco Bay and Sacramento areas.
On its 32,000-square-foot 3030 Bridgeway Building in Sausalito, Seagate installed a 76,000-kilowatt solar electricity array. And at its 11,300-square-foot headquarters building at 980 Fifth Ave. in San Rafael, Seagate put a 49,600-kilowatt photovoltaic array plus a new roof and more-energy-efficient boilers, chillers and mechanical systems.
“It makes economic sense, because you can upgrade buildings and lower the cost of operations,” said Mark Polite, one of three partners at Seagate. “Through PACE, you’re paying for the time you own the building, versus forever.”
WATCH – Overview of CleanFund C-PACE financing for two Seagate Properties buildings in Marin County
As “clean energy” in the name suggests, PACE financing focuses on energy-efficiency projects. It is tied to the property, not the current owner. The loans actually are tax assessments, paid back via the local property-tax authority. The Bay Area helped pioneer PACE financing, and the first voluntary-assessment districts were set up in California in 2008. The Sonoma County Energy Independence Program was launched in early 2009.
The two main varieties of PACE financing are residential (R-PACE) and commercial (C-PACE). Currently, 33 states and the District of Columbia have allowed for PACE financing by law, according to booster PACEnation, which has a board that includes funders such as CleanFund and Petaluma’s Ygrene Energy Fund. C-PACE programs are active in 20 states and D.C., and four more states are developing them. Only three states have R-PACE programs: California, Florida and Missouri.
“Most of these improvements have a 20- to 30-year life,” Polite said. “If you buy a building and own it for 10 years, you’re paying only for the 10 years you own it, then the next owner pays for the next 10 years.”
Pricing for PACE financing often comes in above what’s available from traditional lenders, such as banks, but below equity or “mezzanine” funding often used for property acquisition.
Polite said PACE financing makes it more feasible for a building owner to pursue LEED certification or higher Energy Star ratings. Such loans also can fund geothermal heating and cooling systems, dual- or triple-pane windows, and additional rigid insulation.
“All those flow directly to the bottom line as an owner in saving on expenses,” Polite said. “Also, as agents go out to talk to tenants, that’s another box to check for what tenants are looking for. Every real estate investor and operator sees benefit in putting money into cosmetics and the interiors, but it’s hard to put money into the guts of a building. This makes it an easier decision.”
Energy-efficiency is high on the list of priorities for a growing number of Bay Area tenants, because they want to promote their actions to reduce climate change, Polite said.
Seagate is exploring other properties where PACE-funded upgrades may make sense.
“We’re looking at substantial solar arrays, roof replacement and even solar carports on large parking lots,” Polite said. “That’s a two-fer, with lower electrical costs, and tenants love carports, especially in hot climates.”
Ygrene is anticipating its C-PACE lending volume this year will double from nearly $30 million in 2017, according to CEO Rocco Fabiano. Since it started C-PACE lending in 2013, Ygrene has financed nearly $75 million on over 600 projects for more than 460 businesses.
While Ygrene’s residential loans last year were virtually split between its two major markets, California and Florida, almost all the commercial loans were in the Golden State, he said. The company has refined its pricing for C-PACE to be more competitive with other capital options open to property owners and has bolstered its C-PACE sales efforts in Florida and soon Missouri, Fabiano said.
One reason for this focus on commercial loans is slower growth in residential, he said. Ygrene’s R-PACE loan growth is 10 percent to 20 percent and is expected to reach $500 million in volume this year.
“R-PACE is growing more slowly because of heavy consumer protections passed in California, effective April 1, makes R-PACE a more complex application process,” Fabiano said. “We’re not finding more people are turned down, but it is more cumbersome, so it has discouraged some.”
Those protections include conditioning R-PACE loans on homeowner income and ability to pay and standardizing property valuation. This action from Sacramento last year followed national news about some homeowners who got into financial trouble and said they didn’t understand PACE terms or payments. Borrower sophistication generally isn’t a problem with commercial financing, partly contributing to greater implementation of C-PACE districts nationwide.
But R-PACE has a big head start in total funding, according to PACEnation. Through last year, $4.89 billion in R-PACE funds were loaned on about 203,000 home upgrades, compared with $588 million in C-PACE loans on 1,445 projects. California has led C-PACE funding, with $208 million, followed by Connecticut at $101 million and Minnesota at $42 million.
Ygrene so far has packaged over $1 billion in PACE loans for sale as securities in the secondary market. Its seventh round, a $340.5 million note, closed April 30 and was the first PACE securitization to get a Standard & Poor’s rating, which was “AA.” Another novel feature to that security was about $14 million in C-PACE loans.
Ygrene employs just over 300, mainly at the Petaluma headquarters and in Miami. The company also has employees in about a dozen small offices to support the roughly 500 jurisdictions nationally with PACE programs.
CleanFund has 35 employees in three states, including a newly opened small office in Los Angeles. It is aggressively hiring in Mid-Atlantic and Northeastern states. The company closed $90 million in C-PACE financing last year, representing roughly 40 percent of U.S. volume for such funding, and since its founding $140 million in about 75 loans, according to Brandon Deno, vice president of solar.
Contact Jeff Quackenbush at email@example.com or 707-521-4256.
Link to article in the North Bay Business Journal