Shuttered during the pandemic, the historic Strand Theatre in Pontiac, Michigan, faced an uncertain future. But previous energy efficiency investments provided a lifeline.
The Strand was able to use C-PACE — commercial property-assessed clean energy financing — to retroactively fund and refinance those investments, essentially rolling the cost into their property taxes to be paid over time and freeing up cash for them to wait out the pandemic.
While the pandemic and worker and supply chain shortages have made the last two years rough across countless sectors, Michigan’s C-PACE program nonetheless enjoyed its best two years ever in 2020 and 2021, with 28 projects closed including the Strand.
This year at least five local jurisdictions in Michigan saw their first-ever C-PACE project, and four more are expected to do so this year or in early 2022. That’s according to Todd Williams, president and general counsel for Lean & Green Michigan, the company that administers C-PACE in the state, and recent winner of the Michigan Energy Innovation Business Council’s Business of the Year Award.
“PACE was a form of rescue capital for [the Strand]. It allowed them to refinance some loans, delay some payments, maintain the business through hopefully the end of the pandemic,” Williams said. “It was like a second mortgage on your house. You’ve already completed the projects, they’ve already been funded, and this is a method in which they were able to draw some capital back out. It was not necessarily a large project, but without it, it’s completely possible an asset in that community would have closed.”
As the Strand’s experience shows, C-PACE can be a tool not only to install solar or make energy efficiency improvements, but to provide financing in general, since it can free up capital immediately that businesses might otherwise have used on investments that qualify as clean energy or resiliency-related. This potential may be even more attractive in uncertain and rocky economic times like the current moment.
“Commercial PACE can be your financing tool to fill a financing gap and meet energy efficiency goals at the same time,” said Cliff Kellogg, executive director of the C-PACE Alliance, at a panel during the Urban Land Institute’s annual conference in Chicago in October.
Mansoor Ghori, co-founder and CEO of Petros PACE Finance, said during the panel that since many businesses didn’t know how long the economic uncertainty and recession caused by the pandemic would last, they “refinanced their equity using PACE, and used that money to make sure they had enough capital to get through however long it would take.”
“Covid for the PACE industry was actually an accelerant,” Ghori continued. “When other sources of capital seized up or pulled back, [businesses] had to find other ways to get projects done. All of a sudden PACE became much clearer in their eyes, they figured out what it does, how they can use it. We grew our business 300% during Covid.”
Hotels and housing
C-PACE is especially well-suited for businesses hard-hit by the pandemic, like hotels and entertainment venues, and indeed hospitality is the sector that has most utilized C-PACE funding thus far, followed by office and retail, according to the trade organization PACE Nation.
During the Chicago panel, Kunal Mody, CEO of Blueprint Hospitality — which works on PACE financing with hotels — noted that during the pandemic the tool “helped us move our trapped equity back out and refinance.”
Ryan Hoff, project manager at the engineering firm Bernhard, during the panel pointed to a number of hospitality projects his company has worked with nationwide, including a 60,000-square-foot hotel in Wisconsin that tapped $4 million in C-PACE financing. A Marriott hotel in Columbus, Ohio, in 2018 worked with Petros to retroactively tap $16.3 million C-PACE funding, a project that was the second-highest value C-PACE project in the country that year.
Williams noted that Treetops Resorts, “a classic golf and ski resort,” became northern Michigan’s first C-PACE project, with a retrofit that had been in the works for several years. The resort leveraged $2.9 million in C-PACE funding for a comprehensive energy efficiency overhaul projected to greatly reduce its carbon footprint and improve visitors’ experience. A Michigan Comfort Inn & Suites also tapped C-PACE for improvements last year.
Michigan also saw C-PACE used for new construction, including for The Henry, luxury townhomes near Ann Arbor that leveraged nearly $2 million in PACE financing for solar panels, LED lighting and other energy efficiency measures, in line with marketing the complex to environmentally aware young professionals. In September, construction started on a residential and commercial project in Detroit’s Greektown that, at $13 million in C-PACE financing, is the largest C-PACE project in the state. A fifth of the project’s rental units will be affordable housing, and it is seen as key in revitalizing that part of the city.
Williams said senior living facilities are especially well-suited to C-PACE funding, and Michigan has closed four such deals this year with another in the works.
“That’s become a trend nationwide where senior living projects are taking advantage of PACE,” he said. “They tend to be extremely long-term facilities; it fits well with the design of the property and how the property will be used.”
In all, Michigan has seen C-PACE support 52 projects totaling $115 million since 2015, with 17 projects this year alone. The investments included at least 13 solar installations, three EV charging stations and two green roofs, plus numerous energy efficiency and energy storage overhauls. Williams said he still sees C-PACE as in the early stages, but quickly growing.
“It’s just starting to self-perpetuate a little more. We’re not having to wave the flag quite as heavily — a lot more flags are being waved,” he said.
Across the Midwest
At least 38 states have laws allowing commercial PACE financing. Once a state passes such enabling legislation, then local jurisdictions need to pass their own ordinances to actually carry out the program. In the Midwest, Ohio, Michigan and Minnesota have robust programs, Illinois has a nascent program and Indiana, Iowa and Kansas do not currently have C-PACE enabling legislation, though efforts are underway in Indiana, according to the C-PACE Alliance.
Wisconsin’s growing C-PACE program saw at least one major project during the pandemic, as developers of the former Oscar Mayer headquarters in Madison, Wisconsin, used $7 million in C-PACE refinancing to overhaul windows, lighting and other efficiency measures in the mixed-use OM Station, which now leases to industrial, office and “creative” tenants.
Chicago, Philadelphia and Pittsburgh are among cities that have launched their programs in recent years. The need for local legislation means the process of actually rolling out C-PACE projects is slow, but advocates hope it gains prominence and becomes more of a priority for local leaders especially given the particular potential it offers in the current economy.
“C-PACE financing involves no public dollars whatsoever,” Ghori said. “The role of the state and local government is simply to approve the availability of this kind of financing.”
The trade organization PACE Nation says on its website that in all more than $2 billion has been invested in 2,560 commercial projects nationwide, with energy efficiency making up 49% of the investment and renewable energy representing 23%. Cumulative investment has grown from just over $100 million in 2014. California led the cumulative investment tally with $625 million, followed by Ohio at $376 million. Minnesota and Michigan ranked sixth and seventh, and Wisconsin ranked 11th, though current investment totals are likely higher.
Illinois passed legislation enabling PACE in 2017 and updated it in 2019 to include resiliency as among the categories eligible for financing. In 2019, before the pandemic set in, Eric Alini, CEO of Counterpointe Energy administering C-PACE in Chicago, predicted that “2020 will be the year of PACE in Chicago.” In May 2020, a hog slaughterhouse owned by the company JBS in Illinois launched its 2.6-megawatt solar installation made possible by C-PACE financing.
Alini said that about a dozen capital providers have signed on to provide financing for Chicago C-PACE projects, environmental groups have been helping to raise awareness, and the queue for potential projects is growing.
“Commercial PACE is a strong financing option in any market because of its ability to fill a gap in a development’s capital stack or help transform a capital expense into an operating expense,” Alini said. “ In this market though, that becomes even more true as you see mortgage lenders taking a more conservative approach to their portfolios.”
“We’re now at the tipping point,” Ghori said, “where we’ve got enough states and enough programs that are live — we’re starting to grow this market exponentially.”
The experts on the Urban Land Institute panel said they hope companies think bigger in terms of the potential for C-PACE, considering it for larger operations. Ghori pointed to his company’s $90 million C-PACE deal at the high-end office building 111 Wall Street in Lower Manhattan, calling it a “seminal moment for PACE.”
And the investments that C-PACE makes possible may be more helpful than ever given climate-related goals and the difficulty of attracting and retaining commercial tenants in the post-pandemic business landscape, with many people still working from home.
“The good news is we can have our cake and eat it too with commercial PACE financing,” Kellogg said. “Having properties that are energy efficient are desirable in attracting tenants, and also from the regulatory side, it’s a demand most of us are experiencing as a must-have. In other words, we are both getting pulled into this need for energy efficiency and we’re getting pushed into it at the same time, both as good business practice and regulatory requirement.”