Commercial PACE in San Francisco: Prologis funds energy upgrades with PACE
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In October 15, 2012, San Francisco’s GreenFinanceSF program closed $1.4 million in financing for energy efficiency and renewable energy upgrades at the historic Pier 1 building, headquarters of Prologis Inc., the world’s leading owner, operator & developer of industrial real estate. Located along San Francisco’s waterfront and adjacent to the iconic Ferry Building, Pier 1 is owned by the Port of San Francisco and leased on a long-term basis to Prologis. Built in 1918 and long used for maritime purposes, Pier 1 was converted to commercial office use in 2001 by Prologis, which continues to manage the property and sublets space to five office and retail tenants.
Prologis engaged Johnson Controls, an international energy service company based in Milwaukee, to identify cost effective energy measures. The resulting list included retrocommissioning of heating and cooling systems, comprehensive interior lighting upgrades, and a 200kW rooftop solar electric array.
When work is completed in 2013, overall grid demand for electricity is expected to fall by more than 30% from a 2011 baseline, taking into account efficiency measures and on-site generation. The project is expected to create nearly 30 jobs and should generate close to $4 million of economic benefit in the San Francisco economy and beyond.
“We are excited to have completed our first PACE transaction, and could not have hoped for a better customer and project. This whole-building retrofit is a great example of combining energy efficiency with renewables, and PACE is perfectly suited to support this kind of comprehensive approach to improving building performance.”
PACE financing builds on a property based assessment mechanism long used by municipalities to fund improvements to real property that meet a public purpose such as lighting districts, parks, and water and wastewater systems; PACE just adds energy efficiency to the list. For most PACE financings, the value of the building serves as collateral and secures payment of the assessment. The tax lien structure of PACE provides capital providers with extremely strong loan collateral, thereby enabling long term, affordable financing. It’s the long term nature of PACE finance that transforms energy improvements with long benefit streams into cash generators for property owners.
Clean Fund LLC, based in San Rafael, California, financed the project by purchasing the $1.4 million PACE bond from the City. Derek Brown of Clean Fund notes:
“Showing up at the end of the day and buying a PACE bond is only a very small part of the work a PACE capital provider may need to do to get a project over the finish line. For the Prologis project Clean Fund did upfront project qualification and analysis that let Johnson Controls include PACE finance in their initial project proposal, we worked extensively with the City to ensure that a leasehold interest could support a PACE bond that would be attractive to investors, and finally we negotiated the bond terms with Prologis.”
Prologis, a leading owner, operator and developer of industrial real estate, has made a substantial commitment to implementing energy efficiency and renewable energy projects among its portfolio of more than 565 million square feet of industrial and commercial properties in 21 countries.
The Pier 1 project has special significance for Prologis, since it involves its headquarters, and it is hoped that Pier 1 will set an example for other property owners in San Francisco. Prologis recognizes the clear advantages of low-cost long-term PACE financing. Aaron Binkley, director of sustainability programs at Prologis is optimistic about the future of PACE and notes that there are “a number of opportunities over a long term in other property sectors too.”
GreenFinanceSF is accepting applications from commercial property owners in the City and County of San Francisco. The current program launched in late 2011 and offers PACE financing for a wide range of energy efficiency, renewable energy, and water conservation improvements. GreenFinanceSF uses the open market PACE model, which allows building owners to obtain financing from capital providers of their choice. Program staff can also facilitate introductions between building owners and capital providers. The program requires lien holder consent/affirmative acknowledgement. There is no application fee.
The program is operating under the Mello-Roos Community Facilities Act of 1982, which authorizes the creation of community facilities districts and gives local governments the ability to levy special taxes to finance a variety of privately-owned improvements. Mello-Roos Act is similar to AB 811 (commonly known as the PACE bill in California) as it allows for the creation of special tax districts.
To contact project partners:
Owners of larger commercial properties interested in learning how the combination of energy improvements and PACE finance can make compelling financial sense should visit Johnson Controls’ PACE webpage or contact Russell Garcia at [email protected]. Energy equipment vendors andcommercial property owners with PACE finance questions can visit the Clean Fund website or contact Derek Brown at [email protected]