Contributed by Jeff Craig, Houston EEB Finance Committee Chair
In today’s world of ever-increasing dependence on energy and water resources, the importance of energy efficiency, distributed generation and water conservation cannot be over emphasized. Despite the fact that commercial and industrial buildings in Texas consume over 60 percent of all energy in the state and approximately 30 percent of all energy in the nation, economic market barriers such as extended payback periods, negative cash flow and split incentives have discouraged investment.
With these obstacles in mind, Houston City Council on November 4th, 2015 passed the ordinance establishing a program under the Texas Property Assessed Clean Energy (“PACE”) Act of 2013 for the City of Houston and its extraterritorial jurisdiction, as provided by Texas Local Government Code Chapter 399.
PACE, which Harvard Business Review named as one of the ten “Breakthrough Ideas for 2010” and Scientific American listed as one of twenty “World Changing Ideas”, is a voluntary program that provides a simple and effective way to finance energy efficiency, renewable energy and water conservation upgrades to any existing agricultural, commercial office, industrial, multi-family, hotel, non-profit or retail building. The intent is to have the program administered by the Texas PACE Authority. The City is currently negotiating the inter-local agreement with TPA. Further, all funding will be exclusively supported by private lenders, no City funds will be used for this program.
Property owners in over twenty states and over two thousand municipalities across the U.S. are using PACE because it saves them money and makes their buildings more valuable. PACE pays for 100 percent of a project’s costs and is repaid for up to 20 years with an assessment added to the property’s tax bill. PACE financing enables utility savings provided to property owners to be greater than the cost required to finance them. In most cases, this means immediate positive cash flow. PACE financing stays with the building upon sale and is easy to share with tenants.
To begin, a property owner must find a contractor or facilitator and decide what conservation measures would be ideal for the property. After finding a qualified lender, mortgagee consent must be obtained and a technical analysis of the project completed by an independent third party reviewer. Once the application has been accepted by the Texas Pace Authority, the property owner can then close on the loan. At closing, a legal contract between the property owner and the City of Houston and between the lender and the City of Houston will be executed. A PACE assessment lien is then filed with the property and construction can begin. Similar to a property tax lien, a PACE loan has priority over other liens. In case of a default, the loan portion in arrears has priority over other debts, so the risk of loss due to non-payment is low compared to most other types of loans.
While energy costs in Texas are low relative to other parts of the world, real estate developers and owners are always on the lookout for ways to lower operating costs, improve NOI (net operating income) and maximize tenant experience. The latter is especially critical as it relates to the increasingly competitive millennial population segment who currently make up 20 percent of the U.S. population and are seen to be driving commercial real estate market growth. With lower crude oil and natural gas prices, a unique opportunity also exists for property owners to reposition well-located Class-B and Class-C office assets, especially in the potential context of a rising interest rate environment.
More can be found at the Texas PACE Authority web site. Also, continue following us at EEBHouston.org to keep up-to-date on the latest energy efficiency activity in Houston.