The U.S. multifamily industry, comprised of over 40 million apartments, numerous vendors, legislative committees and trade associations, is a particularly intriguing beneficiary of PACE financing. 40% of American households rent, and are subject to utility bills either paid to the property owner, third-part billing agent or directly to the resource provider.
PACE programs allow qualifying energy efficiency and water conservation projects to be financed through assessments on a multi-family or commercial property owner’s real estate tax bill.The assessments are then used to secure local government bonds issued to fund these improvements without requiring the borrower or the sponsoring local government to pledge its credit. By allowing property owners to pay for energy improvements to their properties via a bond issue tied to a special assessment on their property tax bill, PACE financing enables property owners to reduce water and energy costs with no upfront investment.
The overarching dilemma concerning PACE’s application to the multifamily industry is a matter of who is the beneficiary of the decreased utility expenses versus who is financing the PACE assessments. In multi-family property that is individually or “sub” metered, residents are billed directly for the amount of water, electric or gas consumed. In multi-family property lacking individual submeters, the ownership group incorporates utility expenses into monthly rent.
In both cases, the ownership group will be responsible for paying the utility provider for the apartment’s total consumption each billing period. However, in the case of a submetered apartment complex, such expenses will be recouped via direct billing of the residents versus an estimation included in monthly rent. Although PACE improvements will hypothetically reduce the amount collected, that amount will still be turned over to the utility provider by the owner.Therefore, any efficiency retrofit made to a submetered property will be beneficial to the resident, whereas in an “unsubmetered” property, the ownership group is the beneficiary.
While the benefits of using PACE to finance an energy or water efficiency project are clear to an owner of a non-submetered rental property, they are not so clear to an owner of a submetered property. Since the resident will be on the receiving end of the decreased utility bills, it does not make sense for the ownership group to finance the PACE assessments.
A financing scheme in unregulated markets known as “on-bill financing” allows owners to mitigate the split incentive by including the cost of an energy efficient retrofit made to a rental property on the tenant’s monthly utility bill. Under this scheme, the ownership group would partner with their billing provider who would then finance the retrofit install. The cost is then recouped over time through a charge on the customer’s monthly utility bill. If designed properly, the monthly loan payment is equal or less than the energy or cost reduction savings. By serving as a pass-through conduit for on-bill repayment, utility billing providers can offer investors and lenders a reliable repayment mechanism with low default rates.
In the multifamily industry, property that is not or cannot be submetered is the most intriguing candidate for PACE financing. It provides owners a great opportunity to build their bottom lines and conserve natural resources. However, many of the benefits of PACE financing have gone unnoticed by potential benefactors.
Financing Submeters via PACE:
- Cost of 1 submeter + Remote + Installation = $245.00
- Average Life of the Meter: 5 years (PACE Financing assessment period may not exceed lifetime of equipment)
- Average Monthly Water Cost: $40.00 for 1 unit
- Average Conservation Savings per submeter installed in 1 unit: 30 %
- 30% of $40.00 = $12.00 saved per month
- Bondholders loan $245.00 through PACE at a 10% interest rate, earning $24.50 per year
- A 5 Year Financing period: $245.00/60 months = $4.08/month tax assessment + $2.04/month interest paid to bondholders.
- Total tax assessment of $6.12/month compared with $12.00/month savings.
- Profit on one unit per month is $12.00 – $6.12 = $5.88 per month or $70.56 per year.