October 5, 2015Client Alert

Property Assessed Clean Energy Financing

Property Assessed Clean Energy Financing (PACE) has been available in Wisconsin since 2009. The program allows property owners to pay back the costs of installing certain energy and water related building components over time through annual charges that will appear on the owner’s tax bill. PACE Financing is sometimes referred to as “tax lien financing.” Sometimes characterized as “low cost equity,” it requires little to no upfront cash outlay and, because of its non-recourse nature, owners view it as off-balance sheet debt. For landlords, the program is particularly attractive to the extent it allows them to pass through building retrofit expenses to existing tenants. All PACE projects are designed with the ultimate goal of producing energy savings that exceed the costs of the improvements.

The state law authorizing PACE Financing can be found at Section 66.0627(8) of the Wisconsin Statutes. It allows local municipalities to place a special charge on the tax roll for the costs of making or installing certain energy efficiency improvements, water efficiency improvements, or renewable resource applications that are performed in connection with a PACE program. The list of eligible projects is broad and includes items such as high efficiency lighting, HVAC upgrades, high efficiency hot water heating systems, and building envelope improvements. The state law, however, only authorizes local municipalities to implement PACE Financing – it does not mandate that they do so. To date, only the City of Milwaukee has implemented a PACE Financing program. Although only a few PACE deals have closed in Milwaukee, the visibility of the product does appear to be improving.

Under state law, municipalities are authorized to use the program for improvements made to residential, commercial or industrial premises. In Milwaukee, however, the program is limited to commercial or industrial properties, including properties that are non-governmental and tax exempt. PACE Financing can be used both in connection with new construction and with building retrofit projects. PACE transaction documents will typically include a Loan Agreement, a Supplemental Loan Agreement, a Non-Recourse Note, a Disbursing Agreement and a Lender Consent. By law, PACE loans can be originated by any lender.

Although PACE Financing presents an attractive financing option to property owners, lenders may not find it so attractive in every circumstance. The entire cost of the PACE improvements will be levied against the property as a special charge, which will receive “super priority” status under Wisconsin law. For this reason, when evaluating a PACE Financing project, lenders must be careful not to unknowingly waive priority lien status. The PACE Financing program does, however, present an opportunity for lenders to improve the value of the asset and, if designed correctly, to improve the cash flow position of the borrower, so it should not be automatically rejected as a possible financing option. The advisability of using (or permitting) PACE Financing will depend on the facts of each particular project.

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