Property owners faced with the burdensome cost having to complete seismic retrofits in California are turning to a new type of financing called Property Assessed Clean Energy (PACE) as a solution. One of the newest and fasted growing types of financing in the country, PACE has carried the growing trend of renewable energy and environmental sustainability to the real estate market by helping owners make energy efficient and renewable energy improvements more affordable. Since the first PACE transaction in 2008, more than $4 billion dollars worth of projects have been financed through PACE programs to both residential and commercial properties.
California already the largest market for PACE financing, foresaw the opportunity to broaden the uses for PACE and included seismic strengthening as part of its PACE legislation passed in 2008. In 2014, San Francisco brought that legislation to the forefront with their choice of Counterpointe Sustainable Real Estate as the exclusive financing provider for their soft story retrofit program. Now, other cities such as Los Angeles and Santa Monica are quickly establishing their own PACE programs for seismic retrofits.
PACE Financing is not a loan. It is a non-ad valorem tax assessment added to your property tax bill and backed by a municipal bond, similar to those issued by your city to fund school improvements and infrastructure work. The assessment is collected as an additional line item on your regular property tax bill to the tax collector, simplifying the repayment process for owners. Property owners can not only get PACE financing for seismic retrofits, but can also include thousands of energy efficiency, renewable energy, and water conservation improvements such as HVAC, roofing, solar panels, low-flow plumbing fixtures, LED light fixtures and more. Letting owners take advantage of PACE to simultaneously make additional improvements to the property enhances the property’s value while also promoting a more sustainable and safer environment for tenants.
Are You Eligible?
Many properties, including multifamily, are eligible for PACE financing. As the PACE industry continues to grow at a blistering pace (pun intended), it has evolved to include ground up construction and even some previously completed construction as new sectors that may be eligible for financing as well. A property is approved for financing by evaluating its financial position, not the owner’s personal credit or finances, through what’s known as the property’s debt service coverage ratio (DSCR). This ratio calculates the ability of a property’s income to cover the debt and expenses on the property. Using DSCR simplifies the documentation necessary for property owners to get financially approved.
Property owners can take advantage of a myriad of benefits in using PACE. Financing can include 100% of the related costs to the retrofit, including all permits, inspections, design fees, and engineering costs. In addition, property owners can defer their first PACE payment for up to 18 months depending on when their assessment is closed because the financing is repaid at the same time as the rest of their property taxes. These features allow property owners to reduce the upfront costs of doing their retrofit and keep more funds available for other necessary expenses. As an assessment tied to the property, property owners are not required to provide a personal guarantee nor are they required to prepay the assessment when they sell or refinance the property. Unlike traditional mortgages, there are no acceleration clauses if the property owner is late making payments.
In addition, using PACE financing offers benefits specific to seismic retrofits. To help property owners with the costs of completing seismic retrofits, San Francisco and Los Angeles allow owners to pass-through the property’s PACE assessment – up to 100% in San Francisco and 50% in Los Angeles – to tenants through their monthly rents. The owner must get their seismic pass-through approved by the San Francisco Rent Control Board (SFRDB) or the Housing and Community Investment Department of Los Angeles (HCIDLA) by submitting the appropriate forms and documentation. Forms and documentation are available on the SFRDB and HCIDLA websites for property owners to view. In addition, other capital improvements may be passed through depending on the type of improvement and city. Below is an overview of rules on rent pass-through in San Francisco and Los Angeles.
How it Works
In Los Angeles, the Seismic Retrofit Work Program permits the landlord a maximum 50% pass-through of total seismic retrofit costs, capped at $38 per month for 120 months. If the monthly amount approved exceeds $38, the timeframe for collection is extended until full cost recovery is obtained.
The work may begin no sooner than sixty (6) days after the landlord has served the tenant with: (1) a copy of the Plan; (2) a Notice of Primary Renovation Work; (3) a summary of the provisions of the Tenant Habitability Plan; and (4) a permanent relocation form if the work will last thirty (3) days or more. Tenants have fifteen days from receipt of the Notice to file an appeal.
Within twelve months after finishing construction, the landlord may file an application for rent increase with the HCIDLA. Source: www.hcidla.lacity.org
For seismic work that is required by law in San Francisco (and other work required by laws enacted after November 14, 2002), 100% of the capital improvement cost may be passed through to the tenants, regardless of the number of units in the property. Such increases are subject to an annual limitation of $30.00 or 10% of the tenant’s petition base rent, whichever is greater. The amortization period for this work is 20 years. Landlords must provide sixty day notice of any rent increase to tenants. Units rented during or after construction, or within 6 months of the commencement of the work, are not eligible for pass-through of the cost.
If the improvement was funded, in whole or in part, with borrowed money, the landlord is entitled to use the actual rate of interest incurred, up to 10% for fixed rate loans. Variable rate loans will be calculated at the imputed interest rates published by the Rent Board. Source: www.sfrb.org
Property owners can learn more about how to take advantage of rent pass-through by speaking with their rent control board.
One of the newest benefits of PACE to owners completing seismic retrofits is the ability to combine their retrofit project with installing new accessory dwelling units (ADU). The first-ever PACE financing for multifamily seismic retrofit to include the addition of ADUs was closed in July by Counterpointe Sustainable Real Estate. The financing included 100% of the seismic retrofit costs and the property owner projects a positive cash flow in year one with the annual PACE installment only 85% of the anticipated rental income without the inclusion of allowable rent pass-through and tax deductions. Adding new units also meant the building’s appraised value is expected to double with the additional income and reduced expenses from lower energy and water bills.
One of the newest developments in sustainable construction, green roofs, is also attracting the interest of California city planners as well as green building industry. San Francisco has joined other North American cities promoting living roofs with its new Living Roof Ordinance. Recently, Counterpointe Sustainable Real Estate announced the launch of the first nationwide financing PACE program for the installation, service, and maintenance of Green Roofs and Living Roofs. The financing provided by Counterpointe Sustainable Real Estate provides financing for 100% of the costs of green roof installation, including all related soft costs such as egress code compliance measures, prepaid service contracts, or warranties for maintenance or the green roofs. Green roofs provide enormous benefits to community, property owners and tenants. Whole building energy savings vary by many factors such as climate, building size and green roof properties, but a City of San Francisco commissioned study estimates utility savings in cooling costs at 18%.
The ability for property owners to combine their seismic retrofits with energy efficient, renewable energy, and water conservation improvements such as ADUs, solar panels, and green roofs has turned retrofits from a necessary and expensive collective mandate for improved safety into a value-added chance for property owners and tenants that can reap benefits for years. And the PACE industry has only begun to tap into the opportunities available for property owners.
E.Brandon Alini is with Commercial & Seismic Retrofit Division, Counterpointe Sustainable Real Estate. For more information, visit www.CounterpointeSRE.com or call (855) 431-4400.