What is Lean & Green Michigan’s role in the PACE market?
Lean & Green Michigan (LAGM) is the third-party administrator for our local governments’ Property Assessed Clean Energy (PACE) programs. LAGM is responsible for ensuring that all PACE projects meet the requirements of Michigan’s Property Assessed Clean Energy Act.
LAGM helps drive the Michigan PACE market by coordinating PACE projects on behalf of property owners and developers, carrying out PACE certification training for energy contractors, and introducing new stakeholders to the Michigan PACE market. LAGM helps make the connections for the Michigan PACE market’s public-private partnership.
What changes will SB 302 and SB 303 make to PACE in 2024?
Changes will bring common sense updates to Michigan’s Property Assessed Clean Energy statute, making C-PACE more accessible for Michigan’s property owners, and even more powerful for local jurisdictions. This legislation will:
- Empower property owners to determine what project is the right fit, and how much of a guarantee they need from their contractor – making the SIR and guarantee requirement waivable for Projects.
- Establish a common sense approach for new construction projects, requiring the building to be built above Michigan’s energy code.
- Expand C-PACE to allow for the financing of Environmental Hazard PACE, including the mitigation of harmful substances from our drinking water, help property owners to mitigate the effects of flood or drought, increase the resiliency of the property against severe weather, and mitigate lead paint contamination.
What property types are eligible for PACE financing?
The LAGM PACE program is currently available to privately-owned commercial property owners (e.g. office, retail, industrial, hospitality, agriculture, multifamily housing, nonprofits and houses of worship).
The Michigan PACE statute does not currently apply to residential property owners or governmental entities.
How does the PACE process work?
While every PACE project is different, here is a general breakdown of the PACE process:
Step 1: Determine eligibility — LAGM works with the property owner or with their contractor to determine if there is a potential project. PACE is currently only available to commercial property owners and developers, and is only limited in size by the value of the property, as this is the underlying security for the PACE loan.
Step 2: Determine viability — LAGM assists property owners to identify qualified PACE contractors, or will work with a property owner’s preferred contractor, to determine the viability and scope of a potential project. Contractors complete an energy audit or model of the property to determine the current energy baseline and the potential for energy savings from implementing energy conservation measures.
Step 3: Determine financing — Once the viability and scope of the PACE project is determined, it is the perfect time to loop in a PACE lender.
LAGM works with nationally recognized PACE lenders and is happy to work with property owners preferred lenders. LAGM can recommend multiple lenders, which allows property owners to secure a competitive rate.
Step 4: Finalize scope of work — The PACE contractor and the property owner must finalize the project scope of work. If the PACE project exceeds
$250,000, a contractor must provide a guarantee that the savings produced by the project will exceed the investment or, in more technical language, that the project will have a savings-to-investment ratio (SIR) greater than one.
Step 5: Final documentation — LAGM assists the parties to meet statutory and program requirements. LAGM drafts closing documents, including
the Special Assessment Agreement entered into by the property owner, lender and local government. This is the document which creates and controls the assessment.
Step 6: Local government approval — Once the PACE project is ready to close, LAGM will take the final closing documents to the PACE project’s
respective local government for final approval.
After the local government signs off on the PACE project, LAGM records the PACE assessment on the property and the property owner will begin paying off their PACE loan according to their property tax schedule.
Can PACE be used for new construction projects?
Yes, PACE can ABSOLUTELY be used in the capital stack for new construction projects.
PACE financing helps developers receive 100% upfront financing to pay for energy efficiency, water efficiency, and renewable energy improvements to a
property. New construction PACE projects help developers build beyond current energy code and incorporate renewable energy into their properties.
To utilize PACE for a new construction project, a developer or contractor must demonstrate that the property is being built to exceed energy code. To learn more about PACE for new construction projects, contact LAGM.
What are eligible energy conservation measures for PACE projects?
PACE can be used to pay for energy efficiency, water efficiency, and renewable energy improvements to any commercial building.
Overall, the qualifying energy conservation measures are very broad. If an energy conservation measure can demonstrate utility savings, that energy
conservation measure may be included in a PACE project. Contact us with questions.
Can PACE projects utilize utility rebates, tax incentives, and other funding sources?
Yes — we encourage property owners to utilize energy rebates, tax incentives, and other sources of funding. Since PACE often serves a portion of a property owner’s capital stack, coupling PACE financing with additional incentives and benefits is a great way to maximize financial savings and energy efficiency.
What is “PACE Express” and how does it differ from a standard PACE project?
PACE Express is a LAGM program for “smaller” PACE projects financing $250,000 or less. Unlike a standard PACE project, PACE Express projects have
fewer requirements to meet, a streamlined process, and reduced fees.
For more detailed information about PACE Express, please see the PACE Express portion of our website, or contact LAGM directly.
How is the amount of financing a property owner can receive in PACE financing determined?
PACE financing is limited by a few key factors. First is the assessment-to-value ratio. The amount of the assessment typically can not exceed 25% of the as-complete property value.
For example, if a property is worth about $2 million at the end of the project, a property owner can expect to receive PACE financing in an amount not to exceed $500,000 upfront to finance cost-saving energy-efficiency improvements to their property.
Second is the loan-to-value (LTV) ratio. This is the overall indebtedness of the property and looks at the PACE loan, plus any existing debt in comparison to the property value. Typically the LTV may not exceed more than 95% of the property value.
Third, for projects above $250,000, is the amount of savings generated from the project. The project must have a savings-to-investment ratio greater than one, so the energy conservation measures implemented must be cash-flow positive for the project to move forward.
Can I use PACE financing for energy conservation projects that have already been completed?
Yes, the LAGM PACE program allows for the refinancing of commercial energy projects. LAGM typically limits the lookback period to three years.
What if the property of a potential PACE project is located in a jurisdiction which is not currently participating in the LAGM program?
LAGM is happy to assist new local jurisdictions to start and implement a PACE program. If a potential PACE project is located outside one of LAGM’s currently participating member jurisdictions, please contact LAGM and we will reach out to the local government.
How does PACE financing differ from traditional bank financing?
PACE is nontraditional and is considered an addition to, not a replacement of, traditional capital loans. Banks are often reluctant to provide financing for capex needs, requiring the owner to go into their own pocket. Loans for PACE financing can go up to 25 years, where most banks are limited to 5-7 years. PACE financing is specifically used to finance energy-saving improvements to a commercial property.
Other significant features of PACE financing include:
- PACE loans are non-recourse, meaning they are tied to the property and not the property owner
- PACE loans can be considered an “off-balance” sheet
- PACE financing features fixed interest rates up to 25 years
- For PACE projects above $250,000 in financing, a savings guarantee and immediate positive cashflow
- PACE loans can be used to fill gaps of capital stacks
When is mortgage lender consent required?
In the case that there is a mortgage on a property, PACE projects will require written consent of the existing mortgage lender or other real property lienholder of record on the eligible property prior to closing on a PACE project.
How are payment schedules determined for a property owner’s PACE project?
Property owners pay off their PACE loans through a voluntary special assessment on their property taxes. The property owner receives their PACE tax assessment based on their regular property tax schedule.
The term of the PACE assessments are determined based on the useful life of the PACE project’s energy upgrades. PACE projects typically average around 20-25 years.
What are other benefits of PACE projects and energy efficiency financing, in general?
- Owning more energy efficient buildings increases property value and improves local building stock
- More comfortable buildings
- Local job creation
- Great sustainability/environmental PR opportunities
- Reduced environmental impacts and CO2 emissions
How can I learn more about PACE financing?
Contact Lean & Green Michigan by email at email@example.com or by phone at 313-444-1474.