To Meet Demand for Green Buildings, Developers Get a Leg Up

The PACE model originated in Berkeley, Calif., when the city was looking for ways to help residents pay for solar panels and other energy modifications. Financing programs for commercial properties soon followed. So far, 36 states and the District of Columbia have passed legislation to allow the use of PACE financing for commercial properties.

Laws fighting climate change in California, New York and elsewhere are expected to accelerate demand for PACE. New York City approved a PACE ordinance to help landlords comply with its Climate Mobilization Act, which, among other measures, requires owners of buildings of more than 25,000 square feet to curb their greenhouse gas emissions. The city’s PACE program should be up and running early next year, said Fred Lee, co-chief executive of the New York City Energy Efficiency Corporation, a nonprofit green building lender and the city’s PACE program administrator.

“States and cities are putting a heavy burden on commercial real estate owners, who see these ambitious climate targets as unfunded mandates,” said Jessica Bailey, chief executive and co-founder of Greenworks Lending, a PACE lender in Darien, Conn. “So PACE is a carrot to the stick that gives property owners a way to finance more energy-efficient systems.”

Better yet, PACE will help developers meet the requirements of green policies without using subsidies, said Jake Baker, managing director of Starwood Sustainable Credit, an affiliate of Starwood Capital that has committed $500 million to CleanFund, a PACE loan platform.

“It allows market mechanisms to work,” he said, “and has the best chance for success.”

PACE’s original mission was to finance green upgrades in existing buildings. But developers are increasingly using the programs to fund new construction and the gutting and renovation of old buildings. Lenders expect this activity to accelerate in the coming months, especially in light of PACE’s flexibility and affordability.

Developers can borrow up to 20 percent of a project’s cost in PACE funds, for example. Banks generally finance only around 60 percent of a project’s cost, and a PACE loan can help bridge the gap. Additionally, PACE is replacing more costly financing, such as mezzanine debt. Mezzanine interest rates are around 12 percent or more, while PACE rates are generally 6 percent to 8 percent.