Figure 1: Nationwide breakdown of incentives available for existing building upgrades.
Texas’ private sector, commercial real estate footprint is massive, and shows signs of continuing to expand. More than ten percent of the nation’s energy is consumed in Texas (1) and Texas is also the second highest state for water withdrawn.(2) In the US, commercial buildings constructed before 2012 can use about 20 gallons per square foot(3), and the average total energy used per square foot is 80.0 thousand Btu.(4)
Buildings are expensive to construct, demanding to maintain, and continually aging. Whether it is a single building or multi-site portfolio, property owners have upgrades on their minds because equipment, technology, materials and envelope are constantly approaching end-of-life, all at various points in time. Managing and maintaining buildings can become an organization’s top expense so; capital must be maintained and protected. Property owners seek new strategies to deliver the demand for high performing buildings, because they know these buildings produce measurable financial value (increased asset value, reduced risk of depreciation, higher tenant attraction and retention). Simply said, capital planning is a critical process. So, what tools are available to owners to help bring efficiency and effectiveness to this process?
Fortunately, one tool available to property owners for their capital planning process is the Texas Property-Assessed Clean Energy (TX-PACE) program. TX-PACE helps property owners pay for clean and efficient technology upgrades (those that produce energy efficiency, water conservation, distributed generation, and resiliency). Across the country, PACE is growing in popularity with commercial (retail, hospitality, non-profit, healthcare, office, mixed-use), multi-family, and industrial (warehouse, manufacturing, agricultural) properties because it is a simple way of paying for capital projects with no money out of pocket.
TX-PACE programs cover upgrades for water conservation, energy efficiency and distributed generation. TX-PACE covers over 40% of the population in 17 counties and cities across the state, and thanks to Keeping PACE in Texas and the Texas PACE Authority it continues to expand across Texas. With the help of input from over 100 stakeholders across the state (ranging from public to private to nonprofit) a PACE toolkit was created to uniquely respond to Texas’ economy, challenges, growth, and therefore, need for PACE as a finance solution. This toolkit is known as PACE-in-a-Box. It contains not only the standard documents for transactions in local PACE programs, but it supports property owners to select their own lenders, professional service providers, and other team members. Across the state this uniform program is administered by a local nonprofit, Texas PACE Authority, on behalf of local governments.
Figure 2: Capital Stack Comparison for a Texas PACE mixed-use project.
Other tools available to property owners for their capital planning process are incentives. Property owners aren’t faced with just a lighting need, or just a solar need, etc. Rather, they are faced with an aging building and all of its systems type-of-need. So, property owners must look at their capital projects (their buildings) in a holistic manner. Taking advantage of incentive programs is another way property owners can add to a project capital stack and can often turn a project that can’t get off the ground into one that is well-funded. From federal tax incentives that typically focus on equipment to state government agency grants and loans to utility programs funded by rate payers, property owners have additional opportunities to add to their capital stack – if they know where to look. In Texas alone, there are over 234 (and counting) incentives available to property owners that incorporate energy efficient and water conserving equipment, technology, materials and/or envelope upgrades to an existing building.
So, how do these tools work together? First, it’s important for property owners to understand TX-PACE as a valuable component to the capital stack, and not just another source of financing. Second, it’s equally important for property owners to understand that incentives are a separate yet, beneficial addition to the capital stack.
A property owner looks at their building portfolio, assesses existing physical conditions of their facilities, and creates prioritization of facility investments. With the prioritized building list, the property owner then engages professional service providers to bid the cost of the work. At this point the property owner should engage a capital provider. In the TX-PACE process, the capital provider can streamline the project eligibility, application, and financing processes on behalf of the property owner. When the capital provider and property owner arrive at the term-sheet phase in the TX-PACE financing process, incentives should be considered as part of the process. Whether in-house or through engagement of an industry consultant by either the PACE lender or property owner to provide valuable insight and market expertise, often a variety of incentives can be leveraged based on the scope of work. The incentives add not only to the capital stack, but also increases the rate towards positive cash flow.
A recently completed commercial hospitality project is an example of one such project where TX-PACE and incentives were successfully integrated into the capital stack. The property owner evaluated options for both energy efficiency upgrades as well as renewables for an existing building, and opted to only move forward with a 44 kW roof top solar array installation. The property owner identified a local PACE lender to assist with determining eligibility, application, and financing amount. At the term-sheet phase, the PACE capital provider brought in IncentiFind, which quickly filtered and visualized incentive data, so that the property owner could make an informed decision before executing the project. The results are detailed in the image below:
Figure 3: Texas Hospitality Project.
Buildings become more expensive and demanding as they age, and as property owners seek new strategies to address their existing building capital planning needs, a variety of tools are available to address access to capital.
Planning that includes both TX-PACE and incentives is a dual-pronged strategy that provides property owners across Texas with an effective approach to making their buildings more efficient.
Sources:
1 https://www.texasmonthly.com/energy/texas-uses-energy-state/, https://www.eia.gov/state/?sid=TX#tabs-2
2 https://water.usgs.gov/watuse/wuto.html
3 https://www.eia.gov/consumption/commercial/reports/2012/water/
4 https://www.eia.gov/consumption/commercial/reports/2012/energyusage/
Natalie Goodman is the Founder of IncentiFind http://incentifind.com, a national database that connects commercial and residential projects to incentives when they go green.
