By DENNIS GRUBAUGH
Fairview Heights has an edge on PACE financing, one of the newest efforts by the state to ignite commercial economic development.
The city is the first to establish the program in Southern Illinois, with other government bodies showing interest, said Paul Ellis, director of economic development.
Ellis was part of a recent panel discussion to share details of the project statewide. Panelists also featured Brad Fletcher, vice president of the Illinois Finance Authority; Christopher Kane, executive director of business development and origination with Hannon Armstrong Sustainable Real Estate in Chicago; and Todd Rusk, associate director at Smart Energy Design Assistance Center at the University of Illinois Urbana-Champaign.
Rusk’s agency, called SEDAC, presented the forum to a group that were mainly contractors and community officials interested in using PACE financing to advance their own projects.
The financing program is more commonly known as Commercial Property Assessed Clean Energy, or C-PACE. It is a unique funding model used to finance energy efficiency, renewable energy and water use improvement projects, which are often among the costliest components of commercial development projects.
With PACE, property owners have the opportunity to encourage sustainable development by leveraging 100 percent fixed-rate financing for commercial structures.
SEDAC started in 2004, initially to help small businesses become more globally competitive by reducing energy costs. Since then, it’s increasingly worked with larger businesses and organizations, multifamily projects of five or more units, and nonprofit organizations.
SEDAC’s work is done through a private sector partnership with a Chicago concern, the 360 Energy Group.
“Our goal is to reduce the energy footprint in Illinois,” Rusk said.
PACE financing provides a mechanism for repayment of a loan where the repayment goes on the property tax assessment instead of a company balance sheet. It allows long-term repayment that can be really attractive for organizations, Rusk said.
His firm helps companies identify the types of energy savings projects that might be eligible for financing.
“If you’re an organization that’s very cash-flow sensitive, I would recommend you seek guidance through an independent, third-party expert. It’s really important to have confidence” in the estimates, Rusk said.
Many of the projects are also eligible for utility incentives, he said, such as those from Ameren Illinois. Such incentives should be sought out early in commercial development planning so all those numbers can be considered in the overall costs, Rusk said.
Fletcher said the Illinois Finance Authority offers tax exempt bonds on eligible projects — at no cost to taxpayers. The agency works with bond underwriters on a host of projects, many involving municipalities.
Currently in Illinois there is no provision for residential PACE financing (neighboring Missouri is one of three states that does have it.)
The lender is in most cases a bond purchaser, and the bond issue is not the obligation of any city or county. The obligation is solely that of the property owner.
The ultimate property assessment lien is then senior in importance to any outstanding mortgage on the commercial property, Fletcher said.
The repayment responsibility can be transferred to a new owner upon sale of the property, which also makes the method popular in the right situations.
The energy efficiency savings that are enjoyed after completion of the work are also transferred to the new owner, Fletcher said.
“This transferability allows for us to exceed otherwise standard lending terms. Banks will lend to corporate clients anywhere from five to seven years.” Routinely, to really realize economies of scale and make the economics work, most energy efficiency improvements get financing of over 20, 25, or 30 years.
By statute, the aggregate amount of improvements cannot exceed more than 25 percent of the value of the property. Further, an evaluation of any savings must be conducted for any property improvement before the property owner executes the special assessment.
How PACE came to be
The current iteration of C-PACE began as legislation in summer 2017, but the Illinois Finance Authority was not a party to the original legislation. The way the original act was designed, it contemplated little or no state support. The bill proponents assumed that most of the PACE financing would be locally driven, which meant there would likely be a high upfront cost for communities wanting to participate.
Various stakeholders reached out to the Finance Authority for help, Fletcher said.
“We looked into Department of Energy recommendations and came up with what we felt would be a better fit for the Illinois landscape,” Fletcher said.
IFA has been a conduit for public financing of projects for health-care systems, higher education institutions, small manufacturers and a host of other big-ticket projects.
On Feb. 18, 2018, roughly six months after the original measure was signed into law, the IFA board adopted a resolution encouraging options for municipalities. A trailer bill was introduced in the legislature and eventually was signed and in affect in early 2019.
A short time later, a new model was introduced by the IFA in which the authority would pay for the forms and documents to reduce legal costs for applicants and make the capital market more accessible to them. The move was seen as helpful to the entire process, including for lenders.
However, a technical rewrite was needed to improve the efficiencies, and that measure was approved this year. Gov. Pritzker signed it into law in July, and last month the Illinois Finance Authority closed on its first PACE funding transaction, a $21 million deal with the city of Chicago.
Statutorily, there is a $2 billion limit on bond issuances for the authority, Fletcher said. But, if things go well, the authority will return to Springfield to seek an increase in that limit.
“No one is in this alone,” Fletcher said, inviting commercial property owners and energy efficiency engineers to contact the authority.
Municipalities can also contact the IFA to get started, but their first step is to adopt a local PACE ordinance.
Fairview Heights did that earlier this year, although Ellis said the community worked toward that end for many months. The community is the only jurisdiction in downstate to have joined the program, but others, including Madison County, are working toward that end.
Fairview has been adding many tools to its belt in order to address the 4.5 million square feet of commercial space in its boundaries, about two thirds of which is retail. Incentives include six TIFs, an enterprise zone, ongoing streetscape projects and a business assistance program.
“I’ve been on a pilgrimage since January 2018, a little while after the state of Illinois adopted the initial enabling legislation for PACE financing,” Ellis said. “I heard about it at a conference and wasn’t familiar with it. I got up to speed, and way before it was able to be implemented in our area, we got busy on it.”
Ellis said the city had two anticipated “entertainment projects,” one of which is still in play and both of which had energy efficiency intensive aspects to them. PACE seems a possible option for such development, he said.
“I thought this would be a way to provide an additional incentive to the ones we already have,” he said.
In October 2018, Ellis got acquainted with Tom Applebaum, who has a St. Louis company, Sustainable Solutions Funding. Applebaum has a number of PACE projects to his credit.
By September 2019, the Fairview Heights City Council adopted two ordinances, one setting up a PACE program and the other designating Applebaum’s company as the program administrator.
Under Fairview’s program, Sustainable Solutions will package the applications, which will then be approved first by Ellis’ office, then the City Council.
The application fee is $150, and the program fee is 1.75 percent of the financed amount.
The city is also considering attaching a bond placement fee, an administration maintenance fee and a servicing fee.
Ellis said he is also exploring the possibility of a “warehouse fund” to be able to finance some smaller projects.
“I will tell you that what attracted me the most — there are a lot of things you can do with PACE,” he said. “In my 35 years of economic development experience — a lot of it in the revitalization area — I can’t tell you how many deals I had founder because we couldn’t figure out how to finance an HVAC system. And in many buildings, that’s an expensive proposition. Immediately, I saw the potential to help fill that financing gap. Since then, I’ve come to appreciate some of the other advantages of PACE financing.”
Kane, of Hannon Armstrong, assists developers of real estate by providing capital financing. The group is based out of Chicago but working nationally.
In PACE, he believes Illinois has written one of the best programs to make it easier to obtain related financing.
“It’s a voluntary assessment on property. What that really means is we as capital providers have a very safe investment because people pay their taxes. Most banks look at capitol development and new construction as very risky.”
Because PACE lending is “off balance sheet,” (not showing up under a company’s liabilities and assets), borrowers’ look more creditworthy to other lenders as a result.
“There is a pretty thriving eco system in Chicago. Our group is right now the exclusive capital provider, but to the rest of the state it’s an open program. There are about eight or 10 quality people in the PACE planning area right now who are very bullish on Illinois and would be very happy to bid on your projects,” Kane said.
Based on the strategic state support model developed by the Illinois Finance Authority, the following Illinois counties and municipalities have taken steps necessary to launch and operate PACE programs in their communities:
· City of Chicago
· City of Beardstown
· DuPage County
· City of Fairview Heights
· Kane County
· Village of Rosemont
· Cook County
· Peoria County
· Madison County
This story appears in the December print edition of the Illinois Business Journal. Read the edition at ibjonline.com