CPACE Financing Overview

Transcription

1 CPACE Financing Overview Commercial Property Assessed Clean Energy (CPACE) Introduction CPACE is an innovative financing tool that enables building owners to fund 100% of the cost of energy efficiency and water conservation improvements. No longer do these projects have to compete for the limited capital budget. CPACE long-term financing (up to 20 years) enables cash flow positive projects with no upfront capital outlay. Owners repay the cost of eligible improvements over a period of up to 20 years through an additional charge ( assessment ) on their property tax bill (similar to a sewer assessment). The resulting energy savings typically outweigh the annual assessment payment thereby enabling cash flow positive projects from day one. Because the assessment is tied to the property, the repayment obligation automatically transfers to the next owner if the property is sold. CPACE is a program that is rapidly growing across the United States, to date there are 32 states that have enabled this innovative form or financing, and over $1.5 Billion in capital deployed! Lever partners with real estate owners and developers on a national basis to provide turnkey CPACE project development. Lever has been a leader in the CPACE sector since its inception into the markets in the United States. It is our mission to leverage CPACE to create individual projects that maximize the profit opportunities for your building assets. Lever has a unique set of skills both internally and through strategic partnerships that will insure that your project is developed efficiently and no profits are left off the table. We work with all types of clients and projects whether it is a new construction development, major renovation or existing building retrofits. Our goal is to understand the goals of the project whether they are maximizing sustainability opportunities and/or raising capital to fund a development. The major benefits of CPACE financing include: 100% financing of all CPACE project costs Long term (up to 20 years), fixed, low interest financing Owner retains all tax incentives and rebates Off-balance sheet transaction Increased net operating income and building value Treated as equity in the capital stack Ease in passing costs onto tenants Automatic transfer upon property sale CPACE was named one of the top 20 world-changing ideas by Scientific American magazine! 1

2 How CPACE Works CPACE allows a building owner to pay for energy improvements with future energy savings. There is some variation in how programs operate, state to state, but the general concept is the same - projects are financed through private funding sources (investor funds, banks) and in some cases are backed by municipal bonds. The financing is paid back through an annual assessment on the property. The capital provided is a debt attached to the property, not to the credit of the property owner, and the assessment stays in place after the property if the property is sold. All costs of the project, including development, administration, and transaction fees are financed through the assessment. CPACE for New Construction CPACE can be used with both existing buildings and new construction. New construction projects that utilize CPACE have an added benefit due to the equity treatment of the CPACE loan. For the project developer, this translates into less cash or other forms of equity invested in the project and a higher return on investment. Further, due to the inherent nature of CPACE equity in new construction, developers can now achieve once hard to reach sustainability goals for their individual projects. What Energy Projects Qualify Under CPACE? Any project that is a permanently affixed capital improvement to the building is eligible, including those listed below. Projects which are permanent, but which do not yield energy savings, can also be included, so long as the Savings to Investment Ratio (SIR) is at least 1.0 (some CPACE programs do not have an SIR requirement). All soft costs related to the energy projects and financing costs can also be included under CPACE. Solar PV HVAC Systems Refrigeration Systems & Equipment Lighting & Controls Windows Fume Hoods Water Conservation Measures Motors Retro-Commissioning Upgraded Roofing/Insulations Demand Charge Reduction Measures Geothermal Many Other Energy Improvements Some Non-Energy Capital Improvements Benefits to Property Owners Due to the unique benefits it offers, Lever believes CPACE is one of the best finance vehicles for energy improvements. 100% Financing - requires no up-front cash investment. Broad Range of Credit Accepted CPACE is underwriting the building, not the credit of the owner. This means a simple underwriting process. Off Balance Sheet Due to it s status as an assessment, CPACE may be treated as off balance sheet financing, so it does not limit the ability to acquire additional debt for other needs. 2

3 Long-Term Financing - (up to 20 years) enables immediate positive cash flow (savings on utility bills exceeds payments on financing) No Payoff Upon Sale of Property - CPACE assessments (and energy savings) remain with the property Tenant Accessible - CPACE assessments qualify as an operating expense under most triple-net lease agreements, which means payments, as well as the energy savings, can be passed on to tenants. Preferred Loan Terms No personal guarantee, non-recourse, non-accelerating financing Marketing Benefits - CPACE programs enable private investment and property improvements that indirectly benefit all in a community. Municipalities typically are excited to help promote CPACE projects as success stories. Combine multiple energy improvements use one finance package to cover a wide range of energy projects; even non-energy improvements can be included under certain conditions Qualification of Projects Project qualifications vary depending on requirements of particular CPACE programs and particular CPACE financing companies. The following criteria are typical: Location of property The local government must have adopted or be willing to adopt CPACE. In many cases, Lever can help cities offer CPACE, where state-enabling legislation exists. Project size Depending on the state, minimum loan amounts may apply. Savings to Investment Ratio (SIR) In most CPACE districts, but not all, total energy savings (Savings) must exceed total loan amount (Investment); ratio must be > 1:1. Loan to Property Value Loan amount cannot exceed 20% - 30% of the after-improved property value (varies by program). Investment Grade Audit (IGA) required to demonstrate savings on energy efficiency. Solar requires investment grade energy modeling. Lever provides both of these. Existing Loans Status - Property owners must be current on mortgage and property taxes, with no federal or state liens against the property. Consent from current mortgage lender must be received (Lever assists with this). Term Length - Term of financing may not exceed the weighted average of the lifecycle of the improvements. 3

4 Frequently Asked Questions Who is using CPACE? CPACE is growing exponentially, filling a strong need in the commercial-industrial sector to control utility costs, without having to allocate budget or take on debt reflected on the balance sheet. A wide range of businesses, from Fortune 500 companies and large portfolio owners to smaller property owners are using CPACE in states where it is available. How does the CPACE approval process work? The CPACE process typically takes 2-4 months to complete. Some of the steps below are completed in parallel. 1. If CPACE is not yet adopted in the City, the ordinance can typically be passed in 1-2 months. 2. Project application submitted and approved by CPACE program administrator 3. Consent from any existing lenders is received 4. The capital provider completes underwriting 5. Project closes Are triple net leased properties viable for CPACE? CPACE is viable for triple net leases, where the tenant is paying the utility bills. In fact, CPACE is particularly well suited to this situation since most triple-net leases include a provision that allows flow through of assessment costs. The property owner can make improvements that reduce common area loads. Or if the improvements benefit the tenant spaces, then the proportional share of the CPACE cost can be passed through to the tenant. Owners can pass through more than the proportional to net additional income, while still delivering a net savings to the tenant on utility bills. Property owner benefits include: Higher net operating income (NOI) and therefore higher property value. Better occupancy rates - improved spaces that helps attract and retain clients because it is less expensive to occupy and greener. Improved resale capabilities improvements are made without use of debt that needs to be included in the financing obtained by the next owner. The buyer of the property needs to put less cash/equity than otherwise would be required if the improvements had been completed with traditional debt. Lever can assist in discussing the benefits of the CPACE transaction with tenants, or in the case that the tenant drives it; we assist in discussions with property owners. How does the off-balance sheet treatment of CPACE work? CPACE can be treated as an annual expense and not book debt, similar to an operating lease. This is a result of the unique nature of CPACE financing, which offers 3 rd party debt that is secured by a property tax assessment. Since CPACE is a tax assessment, many owners treat it as a tax expense where only the current year s financing cost appears as an expense on the income statement. With this accounting, CPACE is not added to the balance sheet as debt. CPACE stays with the property, not the owner. In the event of a property sale, the CPACE 4

5 assessment transfers to the new property owner so that investor owners with shorter holding periods may still benefit from implementing efficiency upgrades. CPACE payments are non-accelerating; the property owner only ever owes the current year s payment. This is part of the basis for not recording it as debt; it is consistent with other property tax assessments. GAAP standards do not address CPACE specifically, but there is now substantial precedence for off balance sheet treatment. Property owners can choose whether to treat CPACE off balance sheet or not. Please note: Lever is not a financial advisor, and any accounting related explanations we provide should be confirmed with a qualified professional. Can I get better terms from traditional bank debt for these projects? What constitutes better terms will depend on the needs of each company and the projects under consideration, But CPACE is typically considered to offer better terms than any traditional bank financing, due to the following unique benefits it offers: Off balance sheet treatment Fixed rates up to 20 years without collateral Non-acceleration in the case of default Automatic transfer upon sale, and Treatment as equity as part of new construction. Because payments for CPACE are property assessment payments, they can be expensed entirely. On traditional debt, only interest portion of a debt payment can be expensed. This results in a significant tax benefit, and an effective interest rate (net of tax benefits) that is consistent with commercial mortgage rates. Is CPACE a government subsidized program; will it come and go like some energy incentives? CPACE is not an incentive and CPACE programs are not funded through tax dollars. CPACE is simply a means for a municipality to assist a property owner to make smart energy improvements to properties in ways that have indirect benefits to the community as a whole. Because CPACE is pro-business and costs the taxpayers nothing, there are no significant political opponents to CPACE, and it is likely to exist for a long time. Does performing these property improvements trigger a re-assessment? No, energy improvements to properties do not typically cause a reassessment. Will CPACE prevent me from selling the property before the Assessment term is complete? No. CPACE is attached to the property and transfers automatically to a new owner. The new owner will enjoy the same savings benefits, as well as the marketability of the progressive energy profile. CPACE normally enhances the marketability of a property. Can the financing be paid off early? Yes, if desired, terms can include an early payment option. This may be preferable as part of a property sale, or to yield higher net savings. Prepayment terms can be negotiated with the capital provider prior to closing. What is the role of the sponsoring City in CPACE? 5

6 CPACE does not require any budget from a sponsoring City, since all administrative costs can be included as part of a fee taken as part of each CPACE transaction. In most instances, a City simply passes an ordinance allowing it to participate in a statewide program, and the program administrator handles all components of the CPACE process, including putting the assessment in place. Cities generally embrace CPACE, since it is a simple way for them to assist business owners in investing in their properties, while producing economic development and a more sustainable building stock. Getting More Information The most comprehensive source for information on CPACE, including links to state level programs is PACENation.us. 6