Friday, March 9, 2012

Opportunity for Banks in PACE Lending

PACE programs are growing because they facilitate long-term financing at commercially-attractive rates for energy efficiency loans in the commercial property market. A PACE loan is secured by a lien on the owner’s property which is repaid via an assessment on the property tax bill. This financial structure allows the energy savings generated through energy efficiency investments to more than offset the additional charge on the monthly property tax bill. PACE loans represent a unique “win-win-win” scenario as the benefits flow to all the parties associated with the loan: the bank making the loan, the building owner who can upgrade the property and improve cash flow, and the community which enjoys a more competitive business climate, as well as local jobs associated with installation of the energy improvements.

Since the lien associated with a PACE loan occupies a priority position, the mortgage holder’s consent is required before PACE applications can be approved and the assessment placed. Much has been said in the development of these programs about potential bank resistance to the priority position of the PACE loan. In my view, there are a number of reasons why lenders should seriously consider the benefits that will accrue to the bank via participation in PACE lending programs.

1. With existing customers, who own property that can readily be made more energy efficient, it is an opportunity for banks to increase their business. Such customers will see particular value in the increased cash flow, increased building valuation and improved competitive position of the building in the market. For the bank, it is also an opportunity to identify and solicit new customers from other institutions that do not participate in PACE programs.
2. Much of the energy efficiency work will likely be associated with replacing energy-consuming systems that have exceeded their useful life and that has been delayed due to the recession. By providing loans to these customers, banks will be protecting their collateral and helping the property avoid obsolescence.
3. Non-acceleration clauses in typical PACE programs require only the low monthly payments be paid by the foreclosing bank, a fact that significantly reduces the financial impact of the PACE’s priority lien on the lender.
4. A secondary market (securitization) for PACE loans is already being discussed. The ability to package loans and sell them on the secondary market would be attractive to banks and add to the bank’s profitability.
5. Federal energy efficiency loan guarantees and/or state energy efficiency loan loss reserves (associated with the PACE program) may be available that will provide credit enhancement.
6. Emerging energy savings insurance which will guarantee the energy savings (from which the lender is recovering both capital and interest) will also provide a credit enhancement.
7. PACE programs support the bank’s commitment to sustainability, creating an opportunity for excellent PR in the community and within their customer base.

Does anyone have any other reasons?

Thursday, March 8, 2012

CBECS Funding Restored

In my September 27, 2011 blog, I stressed that the commercial real estate industry urgently needs the Commercial Buildings Energy Consumption Survey (CBECS) to be funded. If you recall, on April 28, 2011, DOE announced that due to budget cuts, work on the 2011 CBECS was suspended. They also announced that they would not be releasing the 2007 CBECS results. This meant that the industry had no choice but to rely on the last published survey in 2003, an information baseline that is almost ten years old. There is no question that much has happened with building energy use since the 2003 survey. To use data this old in benchmarking can only call into question any conclusions drawn. The industry not only needs CBECS, but needs it to be expanded to include many more buildings.

I am happy to report that in late December, Congress restored $10 million of the funds trimmed in April of last year from the Energy Information Administration (EIA), the analysis arm of the Department of Energy and responsible for the CBECS. The result was that in January, EIA resumed the CBECS program. EIA plans to sample more than 8,400 buildings in the next CBECS, more than double the number sampled in 2003. Although they are increasing the sample size, it is still well below the size needed to produce statistically sound data with the highest level of confidence for all types of buildings encountered in the commercial real estate industry. But at least it is a step in the right direction! EIA plans to publish the results in 2014. Unfortunately, until then, the industry must continue to rely on the outdated results published in 2003.

We as an industry need CBECS to continue and be expanded to include many more properties in each commercial real estate property type category. Too much is at stake in this highly competitive marketplace to rely on anything but absolutely unassailable data for benchmarking.