A

Property Assessed Clean Energy (PACE) FinancingA Primer for Commercial Real Estate Companies

2

WHAT IS PACE?

PACE is a tax-assessment based financing mechanism for energy

efficiency, renewable energy, and water conservation projects.

3

PACE: OLD CONCEPT – NEW APPLICATION

1736 – First Assessment District in Philadelphia

Today – 37,000 Assessment Districts nationwide Water & Sewer Service Parks Sidewalks Lighting Downtown renewal Energy Efficiency (PACE)

4

PACE BASICS

Assessment-based financing

Enabled by Statewide legislation

Sponsored by a “local” government – a taxing jurisdiction

PACE assessment collected with and like any other property tax and assessment

PACE assessment survives sales, including foreclosures

PACE assessment in arrears is senior to mortgages - but only the past due assessment

Future PACE assessments are paid by future building owners

HOW PACE WORKS

5

• Energy project construction proceeds exactly as it typically would.

• Rather than using equity and/or debt for project financing, property owner uses a PACE provider.

• PACE provider directs the local taxing authority to add a line item to the property’s regular tax bill, in annual repayment amounts for duration of the financing.

• PACE repayment is collected with the property tax payment, with no additional paperwork for the property owner.

• Municipality remits the PACE assessment payment to the PACE provider.

WHO CAN USE PACE?

Most Buildings, Even Non-Profits

6

7

WHAT CAN BE FINANCED THROUGH PACE?

Projects that Save or Generate Energy

PACE LEGISLATIVE MAP

8

32 States + DC, 80+% of US Population

2009

2009

2009

2013

2009

2009

2009

2009

2009

2009

20152008 20132013

2013

2011

2010

2010

2010

2010

2010

2010

2012

20102009

2009

HI Existing Authority

2016 legislative initiatives

2013

8

2014

20152015

PACE enabled

2015

9

C-PACE PROGRAMS TODAY

730+ Projects – $230+ million

9

PACE programs with funded projects

Early stage PACE program developmentLaunched PACE programs

PACE enabled

RI

DC

10

WHY PACE FINANCING?

The secure nature of PACE enables up to 20-yr funding: projects with simple paybacks as long as 12 years can be implemented on a positive cash flow basis Increases NOI. Increases Property Value. Allows comprehensive projects

No payoff on sale – PACE automatically transfers to the new owner, like any other real estate tax No residual encumbrance and easy exit. Takes the risk away from investing in needed CAPEX.

PACE funds 100% of hard and soft development costs Recovery of overhead expenses and development fees. No money down

11

WHY PACE FINANCING?

The benefits AND the cost of projects can be shared with tenants Aligns landlord and tenant interests (eliminates the split

incentive issue)

Provides one or more benefits under all lease types Increases NOI Increases property value Improves aging infrastructure with no residual encumbrances Increases cost recovery by aligning landlord and tenant

interests Increases sustainable development

SIMON PROPERTY GROUP – GREAT LAKES MALL, OH

“We hope to serve as pioneers in this arena, encouraging others to explore the many ways to reduce energy use now, rather than delaying sound financial and environmental decisions.”

George Caraghiaur, former SVP for Sustainability at Simon Property Group

12

$3.4M PACE Energy Efficiency Project

PROLOGIS, INC. HEADQUARTERS – SAN FRANCISCO, CA

“Prologis is participating in the PACE program in order to promote new, innovative solutions for financing sustainable building improvements. It provides the flexibility to drive more energy improvement programs and that’s something everyone should embrace.”

Jack Rizzo, Managing Director, Global Construction and Renewable Energy, Prologis

13

$1.4M PACE Energy & Solar Upgrade

14

MOUNTAIN VILLAGE – SONOMA COUNTY, CA

Sonoma Mountain Village used PACE to finance a 1 MW solar electric system in Rohnert Park (CA) that allowed SMV to cover 100% of its electric needs from on-site renewable power.

THE FINANCIAL IMPACT OF PACE - AN EXAMPLE

Property where the Landlord provides common area cooling and lighting

Project involves a $200,000 energy efficiency retrofit Annual energy and maintenance savings of $33,000 (6.1

years simple payback) PACE funding available for up to 20 years

15

16

SCENARIO 1 – OWNER-OCCUPIED BUILDINGKey Attributes of owner-occupied buildings

• The owner is responsible for the payment of real estate taxes, building insurance, and common area repair and maintenance expenses

• Recovery of these expenses is through base rent

Similar to owner-occupied buildings: Gross leases; Hotels; multi-family.

• Any energy efficiency savings flow directly to the owner's bottom line

• Energy efficiency projects – versus required infrastructure improvement projects - are evaluated on the basis of cash-on-cash return on investment

17

FINANCIAL IMPACT OF PACE – OWNER-OCCUPIED BUILDING

Simplifying Assumptions

Annual Energy Cost Increase: 0%Annual Maintenance Cost Increase: 0%

PACE financing interest rate: 6%10-yr horizon for NPV and IRR calculations

18

FINANCIAL IMPACT OF PACE – OWNER-OCCUPIED BUILDING

PACE increases property value with no capital investment by the owner

Self Funded PACE 20 years PACE 8 years

Investment by owner ($200,000) $0 $0Decrease in energy cost $33,000 $33,000 $33,000Increase in real estate tax $0 ($17,440) ($32,200)EBITDA impact $33,000 $15,560 $800

Cash flow year 1 ($167,000) $15,560 $800Cash flow year 2 thru PACE term $33,000 $15,560 $800Cash-on-cash IRR 13.4% N/A N/ANPV of cash flow (8% discount rate) $36,000 $104,000 $5,300Property value increase at 6% cap rate (during financing term) $550,000 $225,000 $11,000

19

SCENARIO 2 – TRIPLE NET LEASESKey Attributes of Triple Net Leases

• Real estate taxes, building insurance, and common area repair and maintenance expenses are "passed through" to tenants on a pro-rata basis based on the relative size (square footage) of the area occupied by each tenant

• The tenants are typically directly metered and responsible for utilities in their own space

• All energy efficiency savings in the common area generated from investments by the landlord go directly to the tenants' bottom line

• Any increase in real estate taxes can be passed through to the tenants

20

FINANCIAL IMPACT OF PACE – TRIPLE NET LEASES

Simplifying Assumptions

Annual Energy Cost Increase: 0%Annual Maintenance Cost Increase: 0%

CAM Expense Recovery Rate: 100%

Real Estate Tax Recovery Rate: 100%

Green Lease Clause for CAPEX Recovery: Not applicable

PACE financing interest rate: 6%

10-yr horizon for NPV and IRR calculations

21

IMPACT OF PACE – TRIPLE NET LEASES

Financing energy efficiency through PACE improves the asset and can lower costs for tenants with no capital investment by the landlord

Self Funded PACE 20 years PACE 8 years

Investment by landlord ($200,000) $0 $0Decrease in energy cost for LL $33,000 $33,000 $33,000

Increase in real estate tax for LL $0 ($17,440) ($32,200)

EBITDA impact $0 $0 $0

Cash flow year 1 ($200,000) $0 $0Cash flow year 2 thru PACE term $0 $0 $0NPV of cash flow (8% discount rate) ($200,000) $0 $0

RET recovery from tenants $0 ($17,440) ($32,200)

Energy savings shared w/tenants ($33,000) ($33,000) ($33,000)

Tenant annual net savings $33,000 $15,560 $800

22

PACE FINANCING – IN SUMMARY

Proven: Assessment districts have been use in the US since 1736, and PACE assessment districts are underpinned by the principle that energy efficiency and renewable energy projects on private property have a public purpose

Voluntary: interested owners opt-in a PACE District to receive private market financing for improvements

Senior: PACE has the same senior standing as non ad valorem taxes. As with taxes, there is no acceleration upon default. Well accepted by mortgagors.

Tax Assessed: property owners who use PACE to finance retrofits pay for the improvements through annual assessment payments on their property taxes

Availability: 32 States with PACE law. 15 States/DC with PACE programs in place.

Transferability: Assessments are linked to the property and transfer to a new owner upon sale. No residual encumbrances and easy exit

Beneficial: Covers 100% of costs, increases NOI and property value, improves aging infrastructure, and aligns landlord and tenant interests

23

PACENATION

Supporting the PACE Marketplace

PACENation is a non-profit with a mission to promote PACE financing by providing leadership, support, resources, advice,

networking and problem solving for a growing universe of PACE market participants.

We’re here to help! Please reach out to us at www.PACENation.us or info@pacenow.org