TechSmart Blog

When builders fund a project for commercial development they often have to scramble to find quick financing at a reasonable rate.  Most construction loans are not like typical mortgages that can have fixed-rate repayment terms up to 30 years.   

Commercial lenders want to loan money on a short term basis (less than eight or so years) with a clear exit plan where they can exit a project with minimal risk to their investment dollars.   

Lenders also want guarantees that they will recoup their money if a project goes sour; they do not want to stand in line with other lenders that have priority on the capital lender stack (that may leave them recouping only pennies on the dollar).  Often, these lenders insist on personal recourse loans on commercial projects where the property owner is personally liable for repayment of a project in the event the commercial project does not produce the anticipated cash flow.   

Typical commercial loans also have much shorter loan lengths: usually 2 years for a bridge loan and again 8 years on a commercial loan with a balloon payment at the end. 

There is an alternative source of funding that bypasses these encumbrances.  

 It is called PACE financing and can prove to be an elegant solution to builders and commercial property owners who are constructing energy efficient buildings or upgrading existing properties. 

PACE was originally known as a "Special Energy Financing District" or "on-tax bill solar and efficiency financing."   It was used to replace “Solar Bonds” which were used in 2001 in the California Bay Region to help with the significant up-front costs of solar panels on residential as well as commercial buildings. 

Since then, PACE financing has morphed into its present form that has significant advantages over conventional commercial lending. 

PACE is a long term, non-recourse loan (no personal guarantees), allowing for up to 95% financing - as opposed to 65%-75% Loan-To-Value (LTV) on commercial loans.  

PACE can also fund the costs of installing energy efficient cost-savings technologies that a project would typically leave out in order to lower costs. 

PACE transfers as an assessment on the property, when the property is sold. 

Most importantly, PACE is structured so that its costs of both interest and principle are amortized over the length of the loan as a tax assessment so the owner gets a full tax deduction without any further effort such as itemization, depreciation of assets etc. 

(Special thanks to Tamalyn Martens of TechSmart Energy for providing material for this article.) 

Steven Turner, MD, MBA, Midwest Technology Journal