So, your 100,000 square foot office building needs a new HVAC system and your tenants are howling about comfort, the poor lighting, and their expensive utility bills. You call the bank, and they offer to loan you 80% of the cost of the building improvements, requiring a personal guarantee on the accelerating loan over a 4-year term. This “generous offer” eats up $120k of your capital and reduces your NOI by $140k a year, which is why you haven’t replaced the HVAC.
Luckily, there is another way. C-PACE is Colorado’s Commercial Property Assessed Clean Energy finance program, which uses private dollars to provide long-term, fixed-rate capital to building owners to improve the energy efficiency of their buildings.
A C-PACE loan lets you use the energy savings from new energy efficient equipment to actually pay for the equipment, and the loan is collected through a property tax assessment.
Here’s how it works: Let’s assume your tenants are paying $4.00/sf for the annual property tax, and at $150k per year, the utility bill is passed through at $1.50/sf for a total tenant pass-through of $5.50/sf.
But here’s the magic of long-term capital collected through a property tax assessment. A 20-year, fixed-rate, non-accelerating, non-recourse C-PACE loan for that new HVAC and lighting adds $50k per year to the property tax assessment, which you can pass-through to your tenants at a 50¢ per square foot annual uplift, raising the total pass-through cost to $6.00/sf.
It gets better! The new HVAC system and LED lighting reduces energy costs by 40% from $150,000 to $90,000 per year. This reduces the total pass-through from $6.00/sf to $5.40/sf — below the original amount of $5.50/sf. Plus, the building improvements enable you to increase rent for new tenants or when an existing lease comes up for renewal.
A C-PACE loan is simply private finance turned into a property assessment, which beats borrowing directly from the bank hands down. The cash-flow advantages are huge, it leaves your balance sheet intact, and preserves your NOI. We are C-PACE project developers that expertly guide building owners to finance capital expenditure through energy savings. To learn more, contact us for an overview.