Kristina Klimovich of PACENow talking to Erick Shambarger, Deputy Director of Environmental Sustainability at City of Milwaukee, and Beau Engman, CEO of PACE Equity.
Kristina Klimovich: Erick, Congratulations on completing your first commercial PACE project in Milwaukee! Tell us about the role that the City played in this project?
Erick Shambarger: Thanks, Kristina. The City has long been an advocate of PACE financing, and so we are excited to complete a project at the University Club. PACE financing is a policy tool that supports our Refresh Milwaukee Sustainability Plan, our energy reduction goals in the Department of Energy Better Building Challenge, and our general economic development goals of creating local jobs and improving our buildings stock. So the City passed a local PACE ordinance, created program policies, developed application and review processes, and promoted the program to building owners and contractors. Credit on the political side goes to Mayor Tom Barrett and Common Council President Michael Murphy for spearheading the program. They understood the value proposition of PACE and how it mobilizes private capital to serve the public interest. The US Department of Energy has more on our implementation model here.
KK: In the past, I’ve heard you characterize the ME2 program as “collection agent” for PACE assessments. Can you explain what this means and why the City found this role to be most effective?
ES: We wanted to create a system that truly mobilizes private capital for the program, without the City having to issue bonds. So we have a tri-party agreement between the building owner, City, and PACE lender. Through this arrangement, the lender provides the capital to the building owner and the building owner repays the loan via the City as a Special Charge on the property tax bill. The City then remits the payments it receives to the PACE lender and has the power to foreclose on the property if the building owner fails to make payments. That simple step of having the City collect the PACE charges can radically improve the business case for energy efficiency and renewable energy projects for the building owner.
KK: Beau, tell us a little bit more about this recent project. Specifically, why was PACE an effective mechanism for this building owner?
Beau Engman: From the Club’s perspective, there was both a large opportunity to reduce costs, as well as to provide needed capital toward an important renovation. The energy savings aspect of a PACE project development process, and the long term low cost nature of the financing, were both important elements of making this an effective mechanism. The results in the end were significantly reduced operating costs and achievement of their capital improvement goals – making PACE a very compelling source of capital.
KK: Erick, A number of municipal sustainability officers are reading our newsletter. What would you say are three benefits of having a PACE program to a municipality?
ES: Local Jobs. Better buildings. Improved environment.
KK: Looking forward, are you seeing any particular building types interested in taking advantage of PACE financing in Milwaukee?
ES: I think commercial buildings generally, including offices, large multi-family apartments (but not condos), and even not-for profit buildings.
KK: Beau, as a private PACE project originator and developer, which asset classes are in your opinion best candidates for PACE financing?
BE: PACE is still so new, I am still trying to determine that myself. I see non-profits, industrials, and hospitality as being the best so far. For PACE to be compelling to a building owner, there has to be an edge over traditional debt. PACE offers owners of these three building types differentiated advantages over traditional debt financing.
KK: Let’s step back, and, broadly speaking, call PACE financing a tool that empowers building owners to finance certain EE/RE upgrades. We are seeing a variety of PACE implementation models across the country. What makes the Milwaukee’s program effective?
BE: Milwaukee’s program is excellent in that it’s a very low cost program AND its an “open market” that allows building owner’s to choose their own finance provider. As a project developer, this creates an efficient environment to develop PACE projects where we, the developer, do not duplicate efforts with the program administrator. We can also bring in a finance provider of our choosing to match the needs of the transaction – this in my view results in a lower cost of capital. The mortgage lenders and PACE finance providers require a set of due diligence with any project, I like the fact Milwaukee does not place duplicative governance and the associated overhead on the projects.
KK: Thank you very much for taking the time to speak to me! I’m happy to announce that a detailed case study of University Club project is live on our website.