One of the ways to nibble away at the size of the housing shortage in Bloomington-Normal is to target dilapidated properties and bring that old stock up to snuff, making them places renters would find more attractive to live. There’s a new financing tool now available in McLean County that could help to do that: the Commercial Property Assessed Clean Energy Program or C-PACE.
There's sometimes tension between upkeep and revenue for commercial property owners. It can be expensive to rehab housing.
"If I have a house and I make a big expansion on my house, my tax bill is going to go up. So, what's the incentive to do anything to my property?" said Bloomington City Council member Mollie Ward.
C-PACE may have an answer to part of that question for some apartment complex owners. C-PACE operates in 32 states and is authorized to operate in 40. It has helped with more than $7 billion in financing on more than 3,300 completed projects. In Illinois, the program operates in 16 counties and as of last week Mclean County is one of them.
Anna Maria Kowalik is the senior vice president at the not-for-profit organization Illinois Energy Conservation Authority.
"It encourages bringing aging building infrastructure all to more modernized standards and more energy efficient improvements," said Kowalik.
Projects eligible for the program include everything from lighting systems and building controls, to automated systems, furnaces, boilers, chillers, heat pumps, electrical and plumbing, anything that will save a measurable amount of energy and utility expense. In Illinois it can also include adding electric vehicle charging infrastructure, though that is not covered in every state.
It's a loan like any other loan that goes through an underwriting process and offers fixed-rate, long-term financing with the duration based on the expected life span of the new equipment. The borrowing is market rate. So, why would property owners take on debt for this?
"When you consider the costs and the interest involved in mezzanine and bridge lending and also construction lending which is in the teens, it lowers the entire capital stack's cost," said Kowalik.
In some cases, the energy loan may be tax deductible.
Royse and Brinkmeyer Apartments in Champaign-Urbana is a big firm that has mostly older housing stock. CEO Collin Carlier said it can be tough to attract lenders because older apartments tend to have narrower profit margins. He said long-term amortization can increase the capital returns, but you also need to address risk.
"One of your goals is to make sure your lender is sleeping exceptionally well at night. When they are nervous about you, your life is bad," said Carlier.
Royse and Brinkmeyer has used C-PACE loans for a couple projects. They put two solar arrays on one building. They put in a rooftop deck on an another building that had been hard to rent to tenants because it was too hot. They added rooftop shade pergolas that lowered the heat load on the roof and energy costs for the building.
"As long a you're creating cash flow with that energy investment that exceeds the debt service payment then you have a potential there," said Carlier.
That's why the C-PACE loans also require an energy audit to make sure the savings can help pay for itself.
C-PACE loans can't exceed a quarter of the entire debt load. The Royse and Brinkmeyer projects totaled a few hundred thousand dollars. Kowalik said they've also done loans as big as one for $190 million in Clark County, Nevada.
Kowalik said commercial lenders are OK with C-PACE loans because C-PACE takes second position in case of a default. That lowers the bank's risk. Carlier said the improvements to the building increase the capital value of the asset, also a plus for banks.
"We just said, can we take an operating expense and turn it into a debt service payment? The answer to that is yes. And since it didn't change our debt service coverage ratios negatively, you would want to do that," said Carlier.
Which makes it a win for banks, owners, tenants, and the environment.
The program rolled out at the 3rd annual Bloomington-Normal Economic Development Council Real Estate Development Summit last week.
