PACE Financing – Energy Efficiency Comes to Triple-Net Tenants

A recent piece by Jon Guerster of Groom Energy (Salem, MA), reprinted in Greentech Media, reports on the rapid uptake of the C-PACE program in Connecticut, and addresses the “The owner-tenant split incentive problem” head-on.

Guerster writes:

This week I attended a USGBC hosted discussion on PACE financing held in downtown Boston. Based just on Massachusetts Senator Brian Joyce’s opening remarks attendees got the clear impression that PACE is on a roll again…

If Brian Joyce has his way Massachusetts will become the 32nd PACE state next month. His team is busy studying neighbor Connecticut, who also joined late (state #28) but whose C-PACE program has quickly implemented projects. Meantime only six other states have live programs underway post-legislation. With so many constituents needed to sign off (municipals, state agencies, bankers, etc.) the new program design and implementation process has proven to be challenging…

For those of us who have been cheerleaders in energy efficiency finance for the last several years, PACE now looks to have some ingredients that overcome obstacles faced by alternative financing approaches like ESCOs, capital leasing, operating leasing and on-bill finance. In the past, building owners have pointed to three reasons why they haven’t already pursued energy efficiency upgrades for their buildings:

Lack of capital
The energy savings aren’t certain
The owner-tenant split-incentive problem…

…in the end, it’s number three that is most curious and potentially the biggest opportunity.

As a flow-through tax to triple-net tenants, an energy efficiency upgrade can finally be considered, regardless of where the tenant is in their lease cycle and with less landlord tension about who pays for the upgrade. The tenant decides how to accrue the benefits, absorb costs over time, and, using up to twenty-year PACE financing, understands how cash-flow-positive it is from day one.

Compared to the recent announcement that the federal government is bringing back cleantech loan guarantees, this sounds like a much more compelling loan program.

For the complete article, which includes some astute observations on the evolution of PACE, click here.

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