Texas Property Assessed Clean Energy
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This document outlines key questions about Texas Property Assessed Clean Energy (PACE) financing. PACE loans provide long-term financing for energy efficiency, renewable energy, and water conservation upgrades. Eligible properties include commercial, industrial, agricultural and multi-family residential buildings. PACE is available in many Texas cities and counties, and more programs are planned. PACE financing overcomes barriers to energy projects by providing 100% financing with repayment via property taxes. The future of PACE includes greater use of energy management software, artificial intelligence, and integrating renewable energy.
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Texas Property Assessed Clean Energy
- 2. Outline of Questions to Be Addressed Today • Why PACE? • What Is PACE and What Are the General Terms of PACE Loans? • What Properties Are Eligible? • Where Is PACE Available? Where Is It Going to Be? • What Are the Advantages and Problems Addressed Through PACE? • How Does Solar Work with PACE? S Deatherage Law, PLLC 2
- 4. What is PACE and What Are the General Terms of PACE Loans? • Property Assessed Clean Energy loans provide up to 100%, long-term financing for energy efficiency, water conservation, and renewable energy upgrades or retrofits • PACE statues are passed at the state level, adopted at the city/county level and implemented at the local level by the taxing jurisdiction or designated servicing entity Property owner repays loan through special assessment on property taxes Financing provided by lender to property owner to pay for energy projects Property owners voluntarily sign-up for financing to implement energy/water projects After State legislation passed, city or county creates type of assessment district S Deatherage Law, PLLC 4
- 6. Term of Loan: Weighted Average Using Projected Useful Life Example: HVAC and Light improvements HVAC - $500,000 and useful life 20 years Weighted Average ($500,000)(20 years) + ($100,000)(10 years) = 10,000,000 $yrs + 1,000,000$yrs Projected Life ($500,000+$100,000) $600,000 = 18.3 years S Deatherage Law, PLLC 6
- 7. Costs That May Be Included in Loan and Assessment • The cost of materials and labor necessary for the installation of a qualified improvement; • Permit fees; • Inspection fees; • Lender’s fees; • Program application and administrative fees; • Project development and engineering fees; • Independent Third-Party Reviewer fees, including verification fees; • Any other fees or costs that may be incurred by the property owner incidental to the installation, modification, or improvement (limited to no more than 20% of the total assessment); • Legal, consulting and other fees on an actual cost basis; and S Deatherage Law, PLLC 7
- 8. What Types of Buildings Are Eligible? • Office Buildings • Commercial • Industrial • Warehouse • Nonprofit: private schools and colleges/universities, medical facilities, churches, synagogues, etc.; • Agricultural; or • Residential (multi-family): with five or more units S Deatherage Law, PLLC 8
- 9. What Types of Buildings Are Eligible? • Existing Buildings • What Types Are Ineligible? • Residential property (i.e., single family homes, as opposed to multifamily with five or more units) • Government owned property (including public universities and school districts, and city, county, and state-owned) • New construction (i.e. greenfield) • Torn Down and Rebuilt Buildings Might Be Eligible S Deatherage Law, PLLC 9
- 10. Typical Underwriting Criteria • Project must decrease energy/water consumption or self generate power • Savings to investment ratio (SIR) > 1 (can file for exceptions) • Useful life is equal to or exceeds financing term • Energy audit by independent third party • PACE loan cannot exceed 20% of property FMV (30% w/out mortgage) • No tax delinquencies in past five years • No mortgage payment defaults in last three years • No declaration of bankruptcy in past five years • Lender consent required if property is mortgaged S Deatherage Law, PLLC 10
- 11. What Improvements Are Covered? • HVAC upgrades; • High efficiency chillers, boilers, and furnaces; • High efficiency water heating systems; • Energy management systems and controls; • Renewable energy systems; • Mechanical system modernization; • High efficiency lighting upgrades; • Elevators; • Energy storage, e.g., batteries; • Building enclosure/envelope improvements; • Roofing; • Water conservation systems; • Combustion and burner upgrades; • Heat recovery and steam traps; • Wastewater recovery and reuse systems; and • Water management systems and controls (indoor and outdoor). S Deatherage Law, PLLC 11
- 12. Documents Are Standardized • PACE in a Box • Goal in Texas—Develop standard set of documents to reduce transaction costs • Streamlining of Process • Nationwide PACE lenders S Deatherage Law, PLLC 12
- 13. Where Is Commercial PACE Available in Texas? City Programs City of Dallas City of Houston County Programs Travis County Williamson County Fort Bend County El Paso County Brazos County Nueces County Hays County Willacy County Cameron County Hidalgo County Jefferson County Cities Included Austin, Round Rock, Pflugerville Round Rock, Georgetown Katy, Sugar Land, Richmond El Paso Bryan, College Station Corpus Christi San Marcos Raymondville Brownsville, Harlingen McAllen, Hidalgo, Weslaco Beaumont, Port Arthur Programs now available in… S Deatherage Law, PLLC 13
- 15. Commercial PACE in Other States • States with C-PACE legislation: 33 plus D.C. • States with active C-PACE programs: 19 plus D.C. Active Program w/ Funded Projects Launched C-PACE Program C-PACE enabled Program in Development S Deatherage Law, PLLC 15
- 16. Why Is PACE Attractive to Building Owners? Currently, cash or short- term loans are the only financing options. Big projects can have long paybacks so a traditional loan might not pencil out. PACE financing provides loans with terms up to 25 years at competitive interest rates Why invest in long payback projects when the property might be sold in the next few years? PACE liens remain with the property, so the building owner only “pays for what he uses” & assessment transfers seamlessly at sale Energy conservation measures can have a large upfront cost leading to large deferred maintenance and non- pursued EE improvement projects. PACE can provide for 100% financing so no initial capital outlay is required U.S. businesses spend almost $200B/yr. on utilities, at least 30% of which is unnecessary. PACE is a new funding mechanism that unlocks backlogged projects to reduce energy waste and conserve water INSUFFICIENT TRADITIONAL FINANCING OWNERSHIP UNCERTAINTY HIGH UPFRONT COSTS ENERGY WASTE S Deatherage Law, PLLC 16
- 18. Financial Impact of PACE Financing scenario assumes: 1) Conventional loan at 4% for 5 years 2) PACE loan at 6.09% for 20 years 3) Does not take into account the opportunity cost The same project yields vastly different cash flow positions depending on how the project is financed With PACE, you can begin generating positive cash flows IMMEDIATELY S Deatherage Law, PLLC 18
- 19. C-PACE in the Capital Stack Maximize PACE in your capital stack to fill a gap or replace more expensive capital, ultimately lowering your WACC 4.5% 4.5% 6.75% Without PACE With PACE Traditional Debt $20M Traditional Debt $20M Partner Equity $20M Owner Equity $10M Partner Equity $10M PACE Financing $10M Owner Equity $10M 18% 8% 8% 18% Example: $50M Hotel Renovation 10.6% WACC 8.35% WACC WACC is Weighted Average Cost of Capital or Cost of Capital S Deatherage Law, PLLC 19
- 20. How Does Solar Work with PACE? • Solar energy systems are covered • Tax incentives for solar panel installation are significant • 30% investment tax credit for 100% of qualified investment • Bonus and accelerated depreciation for 85% of qualified investment • Developing program with PACE lender to provide tax equity so nonprofits can take advantage of solar and tax benfits • Consult with tax advisor in evaluating tax benefits S Deatherage Law, PLLC 20
- 21. Revenue Streams from PACE Installations • Cloud-based energy management software is opening up new revenue opportunities • Grid Services: • Demand Response—payment to reduce electrical use from the grid • Frequency response—add electricity to the grid to keep at appropriate wavelength • Congestion—reduce electrical use so transmission or distribution lines not overused • Other grid services as grid and users become more digitized—smart grid S Deatherage Law, PLLC 21
- 22. Revenue from Cost Savings • Utilities Charge for Certain Types of Electrical Uses • These Can Be Reduced by Energy Management Software • Example: • Demand Charges: Charges that reflect highest point of use of electricity; reduce high demand and reduce costs on electric bill S Deatherage Law, PLLC 22
- 23. Industrial-Scale • A client and friend of mine is the CEO of Incenergy, an Austin-Based Company • Using software and metering saved company with world-wide contract manufacturing plants significant amount of energy use • $16 million per year is being saved by the customer with installations at only a smaller number of its 1000 plants S Deatherage Law, PLLC 23
- 24. Future • Disruptive Technology: Equipment Installation • Networking of equipment: Energy Internet of Things • Artificial Intelligence: Machine learning of how to use and coordinate all of these things to find lowest energy use and greatest cost savings and revenue generation for each building, portfolio of buildings • The grid and building energy use will look very different in 5 years, dramatically different in 10 years • PACE will finance the transition • Investment will start to grow rapidly in localities that have adopted PACE S Deatherage Law, PLLC 24
- 25. Google Acquired Deep Mind and Applied Technology to Energy Use by Datacenters • Deep Mind acquired by Google • Deep learning applied to datacenters • Reduced energy use by 15% • “We are planning to roll out this system more broadly and will share how we did it in an upcoming publication, so that other data centre and industrial system operators -- and ultimately the environment -- can benefit from this major step forward.” • https://deepmind.com/blog/deepmind-ai-reduces-google-data-centre-cooling-bill- 40/
- 26. Opportunities • Equipment Manufacturers • Software-based Companies • AI or Machine Learning Companies • Installers and Integrators—Those Who Bring Advanced Energy Technology into the Building and Make It Work in Integrated Fashion • Energy Efficiency, Solar, Water Efficiency and Reuse—The Whole Enchilada • Those Who See the Big Picture, Holistic Value May Be the Biggest Winners S Deatherage Law, PLLC 26