PACE Project Analysis
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The Business Case for Proposed Upgrades to Commercial Real Estate.
Commercial real estate owners and professionals must consider multiple factors, beyond the upfront cost of the project, in analyzing the financial impact of their investment into buildings. For investors, the typical hold period can be three to seven years, hindering the desire to expend capital for multiple projects.
C-PACE overcomes this barrier by making most projects net cash flow positive starting the day that the equipment is installed. There is mounting evidence that efficiency and resiliency upgrades can increase rents and property value, essentially advancing the economic benefits of social responsibility. The outline for an initial business analysis for C-PACE is outlined below. We would be pleased to discuss more in depth.
1. Determine Utility Costs
For the professional, an understanding of the utility rate schedule of demand-delivery charges, fixed charges and the complete utility rate schedule is the first step towards a successful potential retrofit. Financial savings can be realized from the reduction of both a building’s energy use as well as its water use as water utility bill rates continue to escalate.
2. Determine Who Owns and Occupies the Building-and Who Pays the Bills
In many lease structures, the tenants pay the utility and property tax bills, meaning that financing through C-PACE results in no additional cost to the landlord. In owner-occupied buildings, there are multiple potential accounting benefits to C-PACE financing that factor into the cost benefit analysis. Additional factors include the opportunity costs, capital costs, and if there are credit or green leases in place. Providing information on owner and tenants helps assist the energy professional with analysis of proposed projects.
3. Determine Proposed Measures
Measures generally fall into these categories:
- Equipment that needs to be replaced, e.g. at end of EUL.
- Measures that may have an effect on revenue production, such as improving aesthetics of the building, adding amenity space via green roofing, adding rental units, and repositioning the building as a sustainable habitat, which allows for increased tenant rents and retention.
- Measures that will increase resiliency, which also has impact on income through increased tenant rents/retention and reduced insurance premiums. Examples include a generator to maintain power during outages, and flood mitigation measures.
- Equipment that will significantly reduce energy use, generate additional energy, reduce water use through efficiency and recycling technology.
Please contact CounterpointeSRE for guidance on which measures are eligible for financing as eligibility can vary based on location and shifting criteria set by the local governing authority.
4. Determine the Estimated Useful Life of Each Measure
EUL determines the maximum term of the financing and is mandatory information in C-PACE financing. Often, more expensive, efficient equipment with longer EUL will result in increased first year net positive cash flow which allows longer amortization schedule and lower annual payment. EUL may be determined from manufacturer cut sheets or industry standards including non-ASHRAE, which often estimate longer EUL than engineering industry. Please contact CounterpointeSRE for assistance as EUL is critical to optimizing projects for owners.
5. Estimate the Annual Savings for Each Proposed Measure
Annual savings should be itemized for each measure by annual kWh, therms, saved O&M, and other avoided costs.
6. Estimate Lifetime Savings
Estimating the first year savings is the most helpful with lifetime savings as a second step that may be calculated per each measure or in aggregate. Increased operational expenses may often be financed through C-PACE with prepaid maintenance contracts and may be included in project costs.
7. Estimate the Financing Cost for Each Proposed Measure
Financial modeling is performed by CounterpointeSRE to provide the estimated C-PACE annual payment attributed pro rata across the measures in this analysis. It is helpful for multiple options (e.g. chiller option #1, chiller option #2) for each measure to be identified.
| Measure | Annual Utility Bill Savings | Annual Avoided Costs | EUL | Other Annual Cost Benefit | Project Cost | Increased O & M Cost | C-PACE Annual Payment | Interest Deduction | Net Cash Flow |
Conclusion
As a general rule, industry standards guide the assumptions for the C-PACE analysis. A 3 % average annual utility cost escalation and 0.5% average annual performance degradation is typical with other assumptions considered with supporting evidence. Savings to investment ratio calculations may be required in a few states with varying guidelines depending upon location.