Date post: | 20-Jan-2016 |
Category: |
Documents |
Upload: | james-norris |
View: | 212 times |
Download: | 0 times |
2015
Robert MattlerMichigan Market Leader
Detroit, MI [email protected]
248-762-4370@bmattler0514
www.pace-equity.com
A new way to fund real estate improvements….
Confidential - PACE Equity2
Redirecting
energy
expenditures
PACE Solution
3
What is PACE?
Property Assessed Clean Energy (PACE) is an innovative way for owners to pay for upgrades to buildings
PACE covers 100% of the improvement costs, up 20% of a buildings value, repaid through a tax assessment on the property for up to 20 years.
PACE is modeled after methods to fund public benefits such as roads, sidewalks, and fire departments.
PACE funding comes from private capital sources
350+ Commercial Projects Completed – $150m in funded projects
Confidential - PACE Equity
Eligible Improvement Measures
Confidential - PACE Equity4
LED LightingCommercial Boiler VRF HVAC System
Chiller Fume Hood
Elevator Cool RoofWindows Solar PVControls
Escalator Refrigeration
Parking Lights
PACE Solution
5
Private market investors like PACE because assessment liens are a proven, strong credit.
Confidential - PACE Equity
Property owners see an opportunity to save money and make their buildings more valuable.
Existing mortgage lenders support projects that increase the value of their collateral.
Local governments like PACE because it creates jobs and helps meet conservation goals.
Contractors support PACE because it opens up new sales opportunities
Taxpayers like PACE because the city takes on no liability and gets a boost in the local economy.
PACE is a win/win for all stakeholders!
6
Where is PACE Available?
Pending Pending MarketsMarkets
Active Active ProgramsPrograms
PACE Equity Market Leader
Passed Passed LegislationLegislation
Benefits of PACE
Confidential - PACE Equity7
PACE Benefit Barrier Considered Equity in development capital stack Long-term (up to 20 years) low cost capital Ability to pass on to tenants Differentiated tax & balance sheet treatment
ROI
Ease in passing costs to tenants in triple net lease (to match savings)
Split Incentive
Transfers upon sale as assessment remains with the property
Flexible options to pre-pay balance at sale of asset
Short Term View
100% financing requires no up-front cash investment Effective with complicated ownership structures No acceleration upon bank default No personal guarantees Funds available to fund construction costs
Access to Capital
PACE Equity SolutionEnabling building owners to take advantage
8
Project Governance Experience & Knowledge of PACE Stakeholder Engagement PACE District Formation
Energy Engineering Bundling of multiple measures Development of energy models Performance Assurance
Financing Project Development Funding Construction Financing PACE Financing
Confidential - PACE Equity
Common scenarios for PACE Financing
Confidential - PACE Equity9
Complex Stakeholder Management Customer Contractors Program administrators Mortgage lender PACE financing sources Energy Engineering Project development funding Construction financing Incentives & rebates Performance assurance
Key Deliverables Preliminary analysis (business
case) Program approval Lender consent Final construction & savings
proposal Program Application PACE financing agreement
PACE Equity SolutionPACE Project Governance
PACE Equity SolutionEnergy Engineering
Confidential - PACE Equity10
Preliminary Analysis Energy audit,
scoping, estimated cost & savings
Detailed Design Create baselines Create building
model to forecast savings
Performance Assurance Commissioning Quarterly reporting Update EPA Portfolio
Manager Enrollment in DOE
Better Buildings Challenge
Confidential - PACE Equity11
Ongoing Performance AssuranceIncluded for 3 years
PACE Equity SolutionFinancing Solutions
Confidential - PACE Equity12
Project Management Expenses
Energy Engineering
Surveys, reports, due diligence costs
Project DevelopmentExpenses
Customer authorizes budgets by phase: Phase 1 – Preliminary Analysis & Approvals
Phase 2 – Detailed Design
Development costs accrue and get rolled into closing proceeds.
Project Development Funding100% financing with no out-of-pocket costs*
*Note: Requires credit approval
PACE Equity SolutionFinancing Solutions
Confidential - PACE Equity13
PACE Financing100% financing of installed equipment
PACE Equity / Finance Provider
Customer District
1. 100% Project funding
Contractor ContractorContractor Contractor
2. Customer authorizes disbursements to
contractors 3. Customer pays city/district annual
assessment
4. City remits payment to finance provider
Confidential - PACE Equity14
Structured Process to manage transaction costs & execution risk…
Development ProcessTurnkey Project Development
Develop business case (scope, savings, cost),
program approval, lender consent & secure
financing
Detailed scope, cost, savings, & contractor selections. Ashrae II audit for projects >
$250KSubmission of full
application package. Administrative & technical review.Execute loan &
assessment agreements
Manage draw payments & post construction
performance assurance reporting
PACE Value PropositionScenario: Tool in the capital stack
Confidential - PACE Equity15
Value Proposition: Cheaper capital than equity Enables projects that do not
meet internal project return requirements
Non Recourse Tax treatment as an operating
expense No required repayment upon
sale of the property Long tenor – 20 years
Debt: 4%-6%
Equity: 15% - 18%
PACE: 6%-7% (2% after tax)
Project Capital: 20%+
Scenario: PACE in the capital stack
Confidential - PACE Equity16
Background $30m Investment to transform an old building Pre Valuation: $3m / Post valuation $30m Intended project capitalization: 30% equity / 70% debt
PACE investment determination: 20% of building value ($6m)
Assessment is applied and passed on to tenants as a property tax assessment.
Upon sale, assessment transfers to subsequent owner (does not have to get paid back)
Impact: 4x Improvement
to Investor Returns
Traditional Approach PACE
PACE Investment -$ 6$ Equity Required 9$ 3$ Debt 21$ 21$ Total Capitalization 30$ 30$ ROI (3yrs - sell @ $35m) 16% 67%
Scenario: Boosting NOI and building value
Confidential - PACE Equity17
Background Invest $2m in HVAC, Lighting, & Windows w/ 10 year payback PACE Financing term of 20 years @ 7% Effective Cost of Capital
PACE Benefit AnalysisAmount Financed 2,101,338$ Estimated savings over finance term: 4,862,887$ Estimated total assessment paid over term: 3,572,412$ Impact to operating income over term 1,290,475$ Savings to Investment Ratio (SIR to term) 2.3 Net present value (NPV @ 8%): $563,380Change in Asset Value @ 7.5% Cap Rate 955,907$
Impact: $1m immediate
improvement to building
value.
Case Study: Non-ProfitUniversity Club, Milwaukee WI
Confidential - PACE Equity18
Customer Objectives Replace makeup air units to
bring the building in balance Remediate steam traps Window Repairs LED Lighting Fund HVAC as part of
renovation to attract new members
Results $660K in funded building
improvements 30% Utility Savings – avg of
$75K/yr over term 35% Coverage of renovation
budget
Project DetailsFirst Milwaukee PACE closing (Summer 2014)Financing by Milwaukee Economic Development Council (MEDC)Rate 6.0%, 18 year termProject governance, energy engineering & savings guarantee by PACE Equity
Case Study: HospitalityHospitality Development – Change of Use
Confidential - PACE Equity19
Customer Objectives Maximize ROI in the property Reduce Equity requirements Minimize incremental
design/construction costs Evaluate building systems based
on lifecycle cost
Results $2.4M in funded building
improvements $8.9m in savings over 20 year
term (3.7x investment) No incremental costs to make it a
PACE project Measures funded by PACE Equity
include elevators, domestic hot water, HVAC, & windows
Project DetailsClosing in May 2015Rate 5.65%, 20 year term8.5% of value at completionProject governance, energy engineering, savings guarantee and financing provided by PACE Equity
Case Study: IndustrialCambridge Engineering, Chesterfield, MO
Confidential - PACE Equity20
Customer Objectives Reduce Energy Consumption Increase Real Estate Value Provide a Top Quality Facility
for Employees
Results $610K in funded building
improvements Installed new LED Lighting,
Roof, HVAC Mechanical Portion Cash Flow
Positive and Funded Large Cap-X
30% Utility Savings – avg of $52K/yr over term
Project DetailsFirst Missouri Show Me PACE closing (Summer 2015)Financing by PACE EquityRate 5.57%, 10 year termProject governance & financing by PACE Equity
Case Study: RetailSimon Properties Mall, Santa Rosa, CA
Confidential - PACE Equity21
Customer Objectives Install a “Cool Roof” Increase tenant comfort &
satisfaction Improve overall building
performance Reduce energy costs
Results Implementation of “Cool Roof”
that stays up to 60 degrees cooler
Project DetailsPACE Program: Sonoma SCEIP ProgramPACE Assessment: $463k, 10 years @ 7%Building: 699k sf, Built in 1971, $240m valueImprovements:
Reflective Cool Roof
Source: PACE Now
Case Study: CommercialPrologis Headquarters, San Francisco, CA
Confidential - PACE Equity22
Customer Objectives Improve building performance
& comfort Reduce energy by at least
30% Allocate savings to 5 tenants Improve cashflow on day 1
Results Purchased energy reduced by
32% Annual estimated cost savings
of $98,000 PACE made it possible to
allocate costs to 5 tenants Projected annual PV production:
245,520 kWh No increase in operating
expenses
Project DetailsPACE Program: Greenfinance SFPACE Assessment: $1.4M, 20 years @ 6.93%Building: 131k sf, Built in 1918, $30m valueImprovements:
1,500 new light fixtures 200 kW Rooftop solar HVAC Overhaul
Source: PACE Now
A new way to fund real estate improvements….
Confidential - PACE Equity23
Our premise is that it takes a lot of effort to get deals across the finish line. Everything from A to Z.
Who is going to do that work?•Customer?•Contractor?•PACE Administrator?•PACE Finance Provider?
Our business is intended to fill this gap by enabling building owners and contractors to execute PACE Projects.
“What Makes a Good Project?”
Confidential - PACE Equity24
Project min. size of $250K+ Strategically important investment in building Building age 15 years+ Mechanical & electrical equipment end of life
issues Building comfort & people productivity issues High energy usage, people occupancy, hours
of operation Non-profit or Complicated ownership structure Existing difficulty passing costs to tenants Desire to improve property with multiple
measures with simple payback < 14 years. Mortgage lender not a CMBS If no active PACE program, then project size of
$1m+ to justify effort to put district in place.
A lot more than financing
Confidential - PACE Equity25
Sales Assistance. Engage with the customer to help sell a PACE funded multi-measure bundle
Collaboration Platform. Provide an online project development platform to drive tasks, manage project data, milestones, risk management, and communication
Energy Modeling. Drive the energy engineering necessary for financial underwriting and program eligibility
Lender Consent. We will get the mortgage lender consents
Performance Reporting. Provide quarterly utility performance reporting
PACE District Formation. We can install PACE districts where they do not currently exist
Construction Mgmt. Option to leverage PACE Equity to manage the bid process and retain bonded construction managers that can guarantee outcomes.
National ReachMarket Leader Strategy
Confidential - PACE Equity26
Objective is to setup a local market leader in local PACE markets – 20 in 2 years.
Sales Collateral & Marketing Campaigns
IT Infrastructure – CRM, Project Mgmt,
Collaboration
Template Agreements
Line of CreditFor Project
Development Costs
Access to long term project financing &
securitization
Benefit from existing relationships that generate leads &
knowledge
Energy EngineeringResources
Scenario:New Construction
Confidential - PACE Equity27
Customer ObjectivesReduce EquityNon-recourse financingBoost ROI“Max out the PACE Program”
ApproachDefine PACE Equity funding goalEarly engagement with Mortgage lendersProject development & energy modeling to define scope, cost, and savings of PACE Equity Investment Theoretical energy baseline derived from ASHRAE 90.1Benefit of lifecycle cost analysis of different systemsPre-payment structured to support hold term100% of PACE Equity funds available at closing (pre-construction)Improvements:
HVAC, Elevators, Windows, Lighting, Domestic Hot Water, Roof, Solar, etc
Source: PACE Now
ROI AnalysisTraditional Equity With PACE Equity
Total Investment 30,000,000$ 30,000,000$ Debt/Other Sources 24,000,000$ 24,000,000$ PACE Equity -$ 3,306,223$ Owner Equity 6,000,000$ 2,693,777$
Value @ Sale 40,000,000$ 36,543,961$ Time Period (yrs) 5 5Proceeds at Sale 16,000,000$ 12,543,961$ ROI 22% 36%Assumes prepayment of assessment at sale.
Approach ComparisonPACE vs. Traditional ESCO
Confidential - PACE Equity28
Financing Comparison: PACE vs Traditional ESCOPACE Equity ESCO
Financing Term 20 years 20 yearsFinancing Rate 5.5% - 7% 3% - 8%Accounting Treatment Expense Debt or Off CreditDirect Costs 1,900,000$ 2,000,000$ Energy Engineering 40,000$ 40,000$ Construction Mgmt 70,000$ 70,000$ PACE Governance/PM 20,000$ ESCO Markup -$ 800,000$ Indirect/Closing Costs 150,000$ 70,000$ Total Amount Financed 2,180,000$ 2,980,000$
Benefits of PACE Equity development process Customer can run open
procurement process with vendors of their choice
Expected 100 bps reduced financing costs by leveraging tax lien of PACE
Performance Guarantee is much less expensive and only required for PACE to meet state guidelines. Guarantee requirement for PACE is roughly 50% of savings as compared to 90% for ESCOs.
Annual M&V is not required for PACE projects.
ESCO margin of 24%-35% can be drastically reduced.
PACE has favorable accounting treatment that does not impact debt capacity.
Preliminary Analysis & Approvals
Confidential - PACE Equity29
Scope of work: Prepare energy savings report (compare specs to code
requirements/existing conditions) Submit interest form to city and confirm eligibility Work with client to obtain mortgage lender consent Obtain non-binding financing commitment from 1 or more sources of long
term PACE capital to support this project through 2 closings. Prepare Project Development Agreement
Not to exceed budget: $10k Terms:
Accrue costs up to the budget. To be paid out of closing proceeds. If client does not enter into Project Development Agreement within 3
months, then client will be invoiced for costs incurred up to the budgeted amount.
Detailed Design
Confidential - PACE Equity30
Scope of work: Create building model (eQuest) to define savings of the selected
improvement measures. Deliver energy report defining baseline conditions and energy savings. Collaboration with Focus on Energy to obtain custom incentives/rebates Preparation of application and closing materials
Not to exceed budget: TBD as a result of Prelim Terms:
Accrue costs up to the budget. To be paid out of closing proceeds. If closing does not occur, for any reason, within 12 months then client will
be invoiced for costs incurred up to the budgeted amount.
Long Term Market Imbalance
The ESCO Industry (Energy Service Companies) is a $5B Industry. 91% comes from
Federal and MUSH Markets….
8.5
11.2
10.1
5.1
4.1
3.8
2.6
1.7
1.7
1.3
3.7
9.9
3.9
3.2
1.1
0 2 4 6 8 10 12 14
Office
Mercantile
Warehouse and Storage
Education
Lodging
Service
Public Assembly
Religious Worship
Health Care
Vacant
Other
Food Service
Food Sales
Public Order and Safety
Private 50 Bsqft (70%)
Public 22 Bsqft (30%)
US Building Stock(Estimated 2003)
Billion Sq Ft
Source: Commercial Buildings Energy Consumption Survey 2003 (DOE); Team Analysis
INDICATIVE
…. Yet the private sector represents 70% of the
building stock.
Confidential - PACE Equity31
Long Term Market Imbalance
32
Buildings owners have not been willing to make these
investments. Why?
ROI is not competitive.Split Incentive. Tenants pay utilities and get benefit of investments yielding utility savings.Short Term View. Owners need flexibility to sell property.Access to Capital. Difficulty getting low cost capital due to credit quality or ownership structure.
Top barriers to pursuing energy efficiency for your company?
Source: Johnson Controls and International Facility Management Association , “2012 Energy Efficiency Indicator – Global Results”
Confidential - PACE Equity
70% of the private building stock is over 15 years old
and has never been upgraded.
PACE Equity SolutionEnabling building owners to take advantage
33
Project Governance Experience & Knowledge of PACE Expertise on rebates and
incentives Construction Management
Energy Engineering Bundling of multiple measures Development of energy models Guarantee of energy savings M&V / Performance Assurance
Financing Project Development Funding Construction Financing PACE Financing
Confidential - PACE Equity
Energy Engineering
Project Governance
Financing
Sampling of Value Propositions
Confidential - PACE Equity34
Sampling of value proposition across 5 projects:
Scenario Value Proposition to ownersConversion of an old mostly vacant office building to a branded hotel. Requires total investment of $30m
• Considered low cost equity.• $2.5m represents 1/3 of the total
equity requirement at an attractive cost of capital
Non-profit building where bylaws prevent debt and there is considerable deferred maintenance.
• Long term low cost capital that is not considered debt.
• Improvements paid through savings
Industrial building (120k sq ft – built in 1978)
• Replace aging equipment & addition of solar paid through savings
70 year old resort with deferred maintenance and not able to meet capex demands. PACE is 50% of total improvement budget of $15m.
• Non-recourse to owner• Long term low cost capital
New Construction: Grocery Store • $1.5m of low cost equity to boost ROI of the owners.
Confidential - PACE Equity35
PACE Benefit Analysis
PreliminaryAnalysis & Approvals
Detailed Design
Structured Process to manage transaction costs & execution risk…
Development Process
Application & Closing
2 Types of PACE Projects
Confidential - PACE Equity36
Improvements to existing old buildings PACE value up to 20% LTV w PACE < 80-95% SIR > 1.0 based on actual energy
consumption Value based on recent valuation
New Construction/Major Renovation Value is based on appraised value at
completion Savings based on computed
baseline @ code standards vs actual design.
Requires 20% savings over code requirements
Common PACE Scenarios
Confidential - PACE Equity38
Common PACE ScenariosAdaptive re-use
Confidential - PACE Equity39
Example:•Investment: $2.5m•% of value: 15%•Energy baseline: existing building condition or code•Measures: Windows, HVAC, Elevator, domestic hot water•Value Proposition:
• Reduction of Equity• Passing of costs to tenants• Sustainable design
Common PACE ScenariosNew Construction
Confidential - PACE Equity40
Example:•New Grocery Store•Investment: $1.5m•% of value: 10%•Energy baseline: code – ASHRAE 90.1•Measures: Lighting, Refrigeration, Controls, Solar•Value Proposition:
• Reduction of Equity• Funding of incremental
investment for Energy Efficient equipment
Common PACE ScenariosAging Infrastructure
Confidential - PACE Equity41
Example:•100+ year old building•Investment: $500K•% of value: 20%•Energy baseline: existing building•Measures: Elevators, Lighting, HVAC, steam retrofit•Value Proposition:
• Accelerated capex investment
• Better able to attract & retain tenants
Example:•100+ year old building•Investment: $500K•% of value: 20%•Energy baseline: existing building•Measures: Elevators, Lighting, HVAC, steam retrofit•Value Proposition:
• Accelerated capex investment
• Better able to attract & retain tenants
Common PACE ScenariosNon-profit
Confidential - PACE Equity42
Example:•University Club•Investment: $660K•% of Value: 20%•Energy baseline: existing building•Measures: Windows, make up air, Lighting, HVAC, steam retrofit•Value Proposition
• Utility savings• Funding of renovation costs
Common PACE ScenariosDistributed Generation
Confidential - PACE Equity43
Example:•Solar in California•Investment: $275K•% of Value: 20%•Energy baseline: existing energy consumption•Measures: solar•Value Proposition:
• Immediate boost in NOI
Robert MattlerMichigan Market Leader
Detroit, MI [email protected]
248-762-4370@bmattler0514
www.pace-equity.com