Step lively. There’s a new PACE in town.
Say what? It’s not just the speed of things, it’s the financing of things. Energy improvements, to be exact. Called PACE, a roll-off-your-tongue acronym for Property-Assessed Clean Energy, it’s a municipally sponsored financing program to help your building pay for renovation projects that reduce carbon emissions and lower your energy usage. It is setting up shop now and expects to be open for business in early 2020. Given the city’s new set of Climate Mobilization laws (including fines if you don’t meet specified goals), this could be your ticket to affording energy projects in your building.
The context. Let’s say you are a 60-unit co-op valued at $30 million, with an underlying mortgage of $10 million. Let’s say the average unit's monthly maintenance payment is $1,500, with $1,000 of that going for mortgage and property-tax payments and the remaining $500 for operating expenses – utilities, staff, and so on. And let’s say your co-op has already invested in energy projects, but you need one or two more to get you across the carbon emissions goal line for your building – and avoid fines that start in 2030.
The financial backdrop. Let’s say installing co-gen – a natural-gas-fueled power plant to co-generate electricity and heat – will carry your building over the 2030 emissions finish line and makes sense for your operations. The project will cost $500,000 but is projected to reduce your building’s energy bills by 30 percent. Your co-op doesn’t have half a million dollars in its coffers and your underlying mortgage is not up for a refinance for another five years.
Be smart. The question before your board: what’s the best way to pay for the project?
• Line of credit. If your co-op has one, this is an option. You get the cash and pay interest-only for its term. Depending on your lender, the line of credit may have been provided with your underlying mortgage. You could pay for your energy project using the cash from your credit line, and when you refinance, roll what you have used into your new underlying mortgage. Or if you have the funds, you could pay some or all of this loan back before the refinance.
• PACE. While a line of credit is interest-only, a PACE loan includes interest and principal. What is unique about PACE, however, is that the term of the loan is tied to the useful life of the improvement, up to 30 years. The PACE concept is that the energy savings realized from the improvements will cover the repayment costs of the loan. So if you financed the co-gen project through a 20-year PACE loan, the monthly payment could be as low as $3,000, depending on the prevailing interest rate. It is paid back semiannually, along with your property taxes. Depending on your energy savings, your co-op could conceivably finance the co-gen system with no increase to residents’ maintenance charges.
• NYCEEC. This is a non-profit finance company that has been around since 2012 and makes loans for projects that reduce a building’s energy usage. It may finance up to 100 percent of a project’s cost, including eligible soft costs such as energy surveys and building operations training. Loan terms can be as long as 10 years but more typically range from five to seven years. Unlike a primary lender who will secure your loan using your property as collateral, NYCEEC secures its financing against the equipment.
• Refinance your underlying mortgage. It’s all about timing and prepayment penalties. Depending on where your building is in it’s financial cycle, this, the big kahuna of all loans, could be the most cost-effective.
• Do nothing – and pay fines. Seriously, if your building doesn’t meet its emissions target, you should include the cost of the annual fines your building will face in 2030 in all your financial calculations. They can mount up to tens of thousands of dollars each year, and they should be weighed against the cost of actually paying for energy improvements.
Take note. If you are considering secondary financing, be sure to check with your underlying mortgage lender to get its okay. Many don’t allow it, although PACE loans might be considered a “tax” charge, since it’s being repaid via your property tax bill.