A non-descript office building in Cleveland is about to complete a big leap in operating efficiency, becoming the community’s first to finance a major energy retrofit through Commercial Property-Assessed Clean Energy (C-PACE).
“The energy efficiency upgrades at the Shaker West Professional Building are happening thanks to C-PACE, as well as green leasing provisions that are helping the owner, Man Holdings, solve the ‘split incentive’ problem common with energy projects involving tenant-occupied buildings,” Energy News Network reports. The combination of financing strategies “lets small business tenants reap benefits from energy efficiency through lower utility bills, while the longer-term and repayment arrangement help the landlord recoup its costs for the upgrades.”
PACE is more commonly applied to homes, allowing owners to spread out the up-front cost of an efficiency upgrade by attaching it to their mortgage. The approach has produced 17,000 U.S. jobs and US$2 billion in retrofits, and has been gradually emerging as an option for commercial building owners. “There’s many reasons that it makes sense, both for attracting tenants and from a business standpoint,” Man Holdings CEO Amanda Mayan told Energy News Network.
“We saw that the challenge of the split incentive was a barrier,” added Nicole Stika, vice president for energy services at the Greater Cleveland Partnership’s Council of Smaller Enterprises (COSE). Small business tenants “don’t necessarily want to invest in someone else’s building, even if they are paying their own utility bill,” she noted.
That typically creates a barrier to energy retrofits in commercial buildings that parallels a persistent problem in the residential sector. “Landlords often hesitate to make significant capital expenditures for energy efficiency unless they can quickly recoup their investment,” ENN explains. “When the landlord doesn’t pay utility bills, they also have less motivation.”
But while “companies that rent space could readily change light bulbs,” the publication adds, “other improvements might be beyond their control, or call for changes to fixtures that would become part of the property, and which the businesses couldn’t keep after their lease term ran out.”
To make the Shaker West project a reality, the local chamber of commerce in Cleveland teamed up with the Washington, DC-based Institute for Market Transformation (IMT), which had developed a model to address the split incentive through green leasing. A utility energy audit identified promising efficiency projects after Man Holdings acquired the 1960s-era building in 2018, and the new owner coordinated the work with other renovations it was planning to update the look and feel of the building.
“Working from IMT’s model lease provisions, Man Holdings’ lawyers tweaked terms to set clear expectations about tenants’ energy use, including details such as water use, periods for office air conditioning, and turning lights off at the end of the business day instead of leaving them on 24/7,” ENN states. “The lease terms, plus the upgrades, are expected to cut energy expenses by 42%.”
But it’s the 20-year term of the C-PACE financing that “makes it feasible for Man Holdings to make the loan repayments as it receives rent payments from tenants. Under the financing, building owners can borrow money for renewable energy or energy efficiency projects. They then repay the principal and interest as an assessment on the property tax bill. Payments stretch out over a longer term than they would for a standard business loan. If the borrower sells the property, the obligation to make payments remains with the property.”
Mayan says Man Holdings is pleased enough with the results that it’s already set out to repeat the experience. “We liked PACE so much the first time that we’ve doubled down and done it again with another commercial acquisition,” she told ENN.