|Ari Kresch is smiling because he used PACE financing to install solar panels on his 1-800-LAW-FIRM buildings roof, cut his energy bills in half, and save money while paying off his loan. (Photo: Kresch)|
Ari Kresch, CEO of 1-800-LAW-FIRM, likes to brag that his Southfield company is the first in the country to use its phone number as its actual name.
Perhaps more significantly, though, he may be the first attorney in the country to use an innovative, new financing mechanism called PACE, which stands for property assessed clean energy, to make major, money-saving, clean-energy upgrades to his building.
The roof of Kresch’s 1-800-LAW-FIRM building, near the busy intersection of I-696 and the Lodge Freeway, is now covered with brand-new solar panels. Four small wind turbines are on their way, and his parking lot will soon boast a solarized carport and electric-vehicle charging stations along with newly installed high-efficiency lighting.
Yet Kresch did not front a dime of his own money on the $540,000 project, managed by Novi-based solar installer Srinergy, and likely never will: His financing is so favorable that when the panels and turbines finally spark up and cut his monthly $6,000 electric bills in half, those savings will more than cover his loan payments.
Michigan’s PACE law is what makes his loan so easy. It was enacted in 2010; Southfield adopted its own ordinance, based on the law, in July 2012. Since then, two other cities and seven counties have adopted the identical ordinance.
Dubbed Lean & Green Michigan by its author, the ordinance allows businesses to borrow from a private lender, but repay it via special assessments on their local property taxes.
Making the private loan into a property tax obligation greatly reduces the risk of default, motivating lenders to grant longer terms with smaller monthly notes. Kresch’s PACE loan is for 20 years, rather than the three to five years typical of commercial financing, so his savings more than cover loan payments.
PACE is now approved in 31 states and Washington, D.C., and depending on how ordinances are written, can use bonds or private financing. It aims to boost business’s profits without tying up their capital, put contractors to work on efficiency and renewable energy projects, and curb climate- and health-damaging emissions.
Kresch said he could do the project without PACE, but wants to spotlight the financial opportunity it offers Michigan.
“Really, what I am trying to do is to actually do this physically and encourage other businesses to say, ‘How cool is that?’ This is a real important thing,” he said. “I’ve received very positive reactions, but there are a lot of people waiting on the sidelines to see what this is ultimately going to do.”
Kresch even has a slightly fanciful plan to attract more attention to PACE: “I’m trying to get Tesla to donate a car for one of our charging stations. It would bring even more visibility.”
Free cars aside, experience both in Michigan and nationally suggests that, when a state or local government approves a PACE program, it takes some time to set it up, and then for businesses to discover, understand, and use it.
However, a national survey by PACENow, an advocacy organization based in Pleasantville, N.Y., found that PACE programs for businesses, first established in several states in 2011, are now gaining momentum.
It’s happening in Michigan, too.
|Srinergy, a Novi-based clean energy company, is installing solar panels, wind turbines, high-efficiency outdoor lighting, and electric vehicle recharging stations in the 1-800-LAW-FIRM building complex in Southfield, Mich. (Graphic courtesy Srinergy)|
Small Details, Big Market
Andy Levin, the president of Lean & Green Michigan, is a driving force behind privately financed PACE in Michigan. The language of the Lean & Green ordinance is his; he persuaded Southfield to adopt it, based on the state law, in 2012. Then it took another two years to arrange and launch Kresch’s project.
During that time Levin also convinced Grand Traverse, Huron, Ingham, Macomb, Saginaw, Washtenaw and Wayne counties, as well as the cities of Rochester Hills and, as of late last week, Royal Oak, to adopt identical ordinances.
Essentially, the former state economic development official has created a sprawling but unified Lean & Green “district” covering almost 3.8 million people, or 38 percent of Michiganders—a big market where lenders can make long-term, low-risk loans to businesses eyeing major efficiency or renewables projects.
“At this point, the growth of Lean & Green Michigan is on the verge of going viral,” Levin wrote in an email announcing Royal Oak’s decision.
“Now the bigger challenge is to create a system so that it is really super easy to do this,” Levin said in a phone interview. “We really sweated the details on the legal documents for this first project so it will work really smoothly for all future projects.”
Because PACE loans don’t close until projects are completed, inspected, and approved, he can’t reveal 1-800’s financier. But he said Comerica Bank, Kresch’s mortgage holder, consented to attaching the additional debt to the property and provided a bridge loan.
“The PACE lender will certainly go public and get the credit when the project is done,” Levin promised. “They are very aggressive about wanting to be in the Michigan market.”
In last week’s email, Levin also said that, without doing any advertising, his company now has “over 30 significant proposals for PACE projects totaling north of $40 million.”
Education, Patience, Entrepreneurism
If that is a realistic number, then, based on national trends, Levin’s Lean & Green project is doing exceptionally well.
PACENow’s Kristina Klimovich said her group typically sees “that in most places, it takes some time between the launch of a PACE program in a community and the actual funding of a project”—as Levin saw.
“Many of these are complex projects, involving many improvements, and they may take a really long time to sell and then to develop,” she said, because the typical PACE project involves complicated building-efficiency retrofits.
“We are learning that marketing and outreach are very important,” she added. “We are trying on a national level to do that, but we have also found that, on the local level, programs work best when they team up with business chambers, business development organizations, and real estate owners to spread the word. Education is quite an important part of development.”
Klimovich sees progress.
“Two years ago a panel at an efficiency conference asked the audience, ‘Do you know what PACE is?’ Only a few hands went up. This year we asked the same question and 99 percent of the hands went up,” she said.
PACENow has numbers to back that up. According to its July 8 report, cumulative PACE investments have tripled since 2012, from $27 million to nearly $83 million.
But there’s plenty of room for growth: Although 31 states allow PACE programs, they are operating or taking shape in only 15. Stated another way, more than 800 municipalities have PACE ordinances on their books, but fewer than 300 projects have been funded.
But the report estimates more than $250 million in additional PACE projects are in the pipeline.
Klimovich said some states, like Connecticut, devote significant resources to promoting and expediting PACE loans and projects; others, including Michigan, leave that to municipalities, nonprofit advocacy groups, or, more recently, for-profit companies.
“We have seen the emergence of private, entrepreneurial entities whose business model is to source and develop commercial projects and then hand them over to a local PACE program, which in turn handles administrative, legal, and financing paperwork.”
Levin uses a unique, entrepreneurial approach that he says may also show up soon in Texas.
His firm, Levin Energy Partners LLC, helps local governments create their PACE programs and then administers them, connecting lenders to building owners, and owners to contractors. Under Michigan’s PACE, Levin can only approve projects over $250,000 if, like Kresch’s, they immediately and consistently produce positive cash flows.
The LLC also makes sure there is an energy-saving contract in place between the contractor and property owner guaranteeing cash-flow-positive energy savings for the entire term.
Saving Commercial Real Estate?
As PACE’s popularity grows, another business model is emerging that is aimed at commercial real estate companies.
Chuck McGinnis, who handles governmental and higher education markets for Johnson Controls—among the country’s largest providers of efficiency services for institutional and government buildings—is bullish about it.
“We really believe we can create jobs and also help turn around the commercial real estate market with PACE,” he said.
McGinnis helped design several state PACE laws, including Michigan’s. He explained that, because it’s legal to pass along tax increases to building tenants without re-negotiating leases, building owners can use tenants to finance efficiency or renewable work and, if they’re smart, pass along the savings to them.
The result is tenants actually pay less overall, and buildings that are more attractive to new tenants and potential buyers.
“Without PACE, a [non-occupying] building owner’s perspective on any investment in it is three years or less, since he’s always ready to sell, which means he will do nothing,” he said. “But with PACE, which transfers the loan to the new owner, he can make investments that cost him nothing, and improve the building’s attractiveness, which translates to a higher sale price. That is why PACE is so valuable.”
Levin said he’s already seeing that happen. He pointed to a building a major state agency will soon begin renting. The agency wants to make it a model of renewables and efficiency, but has no way, nor economic incentive, to finance the work.
“So there was this big conference call with the owners, who are out-of-state investors,” Levin recalled. “The lead investor said in a wonderful Texas accent, ‘So, you mean I can make all these improvements to my building, somebody will lend me the money, it will be paid back through property taxes I can bill to the tenant (the state), through their lease, and they will save money on energy, too?’
“I said, ‘Yup!’ and he said, ‘OK!’ So we had a handshake by phone with 20 people on the call, and we are off to the races.
“That shows just how well this thing can work,” Levin said. Although he was hundreds of miles away, speaking on a cell phone, it was hard to miss the smile in his voice.
Jim Dulzo is the Michigan Land Use Institute’s senior energy policy specialist. Reach him at email@example.com.
Jim Dulzo is the Michigan Land Use Institute’s senior energy policy adviser. Reach him firstname.lastname@example.org.