If you Build It, Will They Come? · If you Build It, Will They Come? Presentation at ACEEE’s...
Transcript of If you Build It, Will They Come? · If you Build It, Will They Come? Presentation at ACEEE’s...
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IfyouBuildIt,WillTheyCome?PresentationatACEEE’sEnergyEfficiencyFinanceForumMay23,2017
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OurmissionistopromotePropertyAssessedCleanEnergyfinancingby providingleadership, support,problem
solving,dataandnetworkingopportunitiesforagrowinguniverseofPACE marketparticipants.
• MonthlyNewsletters• QuarterlyMarketData• CaseStudies• IndustryWhitePapers• DownloadableGuidedPowerPointPresentations
• PACETalksInterviews• LibraryofPACELawsandMarketData• LegislativeBestPractices• YouTubeTutorials• RegularBlog
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PACEFinancingfortheCREMarket
ü TheCREMarketanditscharacteristics
ü WhyisEEatoughsellintheCREmarket?
ü WhatMakesPACEsoCompelling?
ü ExampleoftheFinancialImpactofPACE
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• Buyitorbuilditright– CREcompaniesbuildandpurchasethecorrectpropertyinthecorrectlocation• Leaseitright– CREcompaniesleasespacetotherightmixoftenantstomaximizethevalueoftheproperty• Financeitright– CREcompaniesutilizetheappropriateamountofdebtandequitytoreducetheiroverallcostofcapitalandmaximizetheirreturnoninvestmentgivenaconservativelevelofrisk.
HowdoCREcompaniesmakemoney?
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TheBasicObjectiveofCRECompanies
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“…thetwomostimportantthingsinthefuturearetop-linegrowthandminimizingcapexoutflows.”
- RealEstateForum July/August2015
PrioritiesofCRECompanies
DespiteBenFranklin’smaximthat“Apennysavedisapennyearned”,assetmanagementandexpenseminimizationadistant4th onthelistofCREpriorities
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Capitalexpendituresarededucteddirectlyfromcashflowü Lesscashavailablefordistributionü Lesscashfornewacquisitions/coreprojects
WhydoCRECompaniesMinimizeCAPEX?
NOI $1,000,000
LessCAPEX ($100,000)
CashAvailableforDistribution $900,000
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Capital expenditures aredeemed to come from “theequity pocket”, andinvestments not related tothe core business arefurther subjected toallocation of capital, andare burdened with riskallocation premiums
WhyareHurdleRatesforCAPEXsoHigh?
CapitalExpenditures
PropertyAcquisition
Equity(12-15%)
Debt(4-5%)
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OtherReasonsCREavoidEnergyProjectCAPEX
ü TimePressure:Peopleareoverworkedandhavelittletimeorinclinationtofocusonanythingnew
ü PoorCredit:CREpropertiesareoftenownedbyspecialpurposeentitieswithnoassetsbeyondthepropertyandparentcompaniesarereluctanttoprovideparentalguarantees.
ü HoldingPeriodBias:CREcompaniesarenotinclinedtoinvestinapropertyiftheydon’tknowhowmuchlongertheywillownit
ü PerceivedRisk:CREexecutivesdon’ttrustsavingsforecastsandaddsubstantialriskpremiumstohurdlerates.
ü SplitIncentive:Manyleaseformsprovidedis-incentivesforlandlordtoinvestinenergyprojects
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TheCaseforPACEforCRE
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TheCaseforPACE
CapitalExpenditures
PropertyAcquisition
Equity(12-15%)
Debt(4-5%)
PACE(5-6%)
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üCashFlowvsCAPEX• PACEfunds100%ofhardandsoftcostsandeliminatesdeductionsfromcashflowforCAPEX.• PACEisacheaperformoffinancingforCAPEX
WhatMakesPACE soCompelling?
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üPoorCredit• PACEisstrictlyproperty-basedfinancing• Goodrealestatetaxpaymenthistory,notcreditstrength,iskeytofinancing.• Reasonableloantovaluerequirements• Nonrecoursetobuildingowner
WhatMakesPACEsoCompelling?
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üHoldingPeriodBias• Automatictransfertothenewowneruponthesaleoftheproperty• Non-accelerating
WhatMakesPACEsoCompelling?
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üPerceivedRisks• 20-yrfundingavailablebasedontheaverageusefullifeofECMsreducesriskbymakingitpossibletogeneratemorepositivecashflow• Wellacceptedbymortgagees• Favorablebalancesheettreatment
WhatMakesPACEsoCompelling?
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üSplitIncentive• Dependingontheleasestructure,theannualPACEtaxassessmentburdenmaybesharedwithtenants,alongwiththebenefitsofanenergyefficiencyorrenewableenergyproject.• Thetenants’cashflowsavingsfromreducedenergycostsfromtheimprovementsarepartiallyoff-setbytheincreaseinpropertytaxpassthrough,resultinginanetsavingsfortenants• Thiseliminatesthesplitincentiveimbeddedinmanyleaseforms.
WhatMakesPACEsoCompelling?