Value-added commercial real estate investments have the promise of significant upside with the right amount of TLC and market repositioning.
But the prospect of shelling out money to fix or upgrade things tenants often don’t see can be a tough sell.
Now a Marin County-based investor is finding help from a relatively new layer of a property’s “capital stack”: property-assessed clean energy, or PACE, loans.
San Rafael-based Seagate Properties just inked 30-year PACE loans through Sausalito-based CleanFund for upgrades to two Marin office buildings. Seagate’s portfolio currently includes 2,500 apartments in the Denver area and about 2 million square feet of commercial, office, retail and industrial space in the San Francisco Bay and Sacramento areas.
On its 32,000-square-foot 3030 Bridgeway Building in Sausalito, Seagate installed a 76,000-kilowatt solar electricity array. And at its 11,300-square-foot headquarters building at 980 Fifth Ave. in San Rafael, Seagate put a 49,600-kilowatt photovoltaic array plus a new roof and more-energy-efficient boilers, chillers and mechanical systems.
“It makes economic sense, because you can upgrade buildings and lower the cost of operations,” said Mark Polite, one of three partners at Seagate. “Through PACE, you’re paying for the time you own the building, versus forever.”
As “clean energy” in the name suggests, PACE financing focuses on energy-efficiency projects. It is tied to the property, not the current owner. The loans actually are tax assessments, paid back via the local property-tax authority. The Bay Area helped pioneer PACE financing, and the first voluntary-assessment districts were set up in California in 2008. The Sonoma County Energy Independence Program was launched in early 2009.
The two main varieties of PACE financing are residential (R-PACE) and commercial (C-PACE). Currently, 33 states and the District of Columbia have allowed for PACE financing by law, according to booster PACEnation, which has a board that includes funders such as CleanFund and Petaluma’s Ygrene Energy Fund. C-PACE programs are active in 20 states and D.C., and four more states are developing them. Only three states have R-PACE programs: California, Florida and Missouri.
“Most of these improvements have a 20- to 30-year life,” Polite said. “If you buy a building and own it for 10 years, you’re paying only for the 10 years you own it, then the next owner pays for the next 10 years.”
Pricing for PACE financing often comes in above what’s available from traditional lenders, such as banks, but below equity or “mezzanine” funding often used for property acquisition.
Polite said PACE financing makes it more feasible for a building owner to pursue LEED certification or higher Energy Star ratings. Such loans also can fund geothermal heating and cooling systems, dual- or triple-pane windows, and additional rigid insulation.
“All those flow directly to the bottom line as an owner in saving on expenses,” Polite said. “Also, as agents go out to talk to tenants, that’s another box to check for what tenants are looking for. Every real estate investor and operator sees benefit in putting money into cosmetics and the interiors, but it’s hard to put money into the guts of a building. This makes it an easier decision.”
Energy-efficiency is high on the list of priorities for a growing number of Bay Area tenants, because they want to promote their actions to reduce climate change, Polite said.
Seagate is exploring other properties where PACE-funded upgrades may make sense.
Tracking the PACE
Volume of property-assessed clean energy lending for 2017 and cumulative through April 2018.
Commercial PACE (C-PACE)
2017: $240 million (up 70% from 2016)
2010–YTD 2018: $588 million
Residential PACE (R-PACE)
2017: $1.26 billion (up 37% from 2016)
2010–YTD 2018: $4.89 billion