Mich. Apartments First in the US to Use PACE Financing with USDA Approval

Groundbreaking Michigan project aims at boosting energy efficiency in rental properties.

michigan-efficiencyGreenville, Mich.—Energy upgrades in rental housing is slowly picking up. PK Housing & Management Company’s 32-unit Cambridge Court apartment complex will be the first in the country to have Property Assessed Clean Energy (PACE) financing approved under the USDA Rural Development loan program for affordable housing. This is one of six planned projects proposed by PK.

“Here in Michigan we invest about a billion dollars annually in rural communities,” said James Turner, Michigan’s state director for the USDA’s Rural Development program. “The largest component is in housing. We support about 600 multifamily facilities in rural communities from one end of Michigan to the other. The vast majority of these were built in the late ’70s and early ’80s. A lot of them are going through this period in their life cycle where they need to be rehabilitated.”

The project includes upgrades to boilers and mechanical controls, LED lighting inside and outside, Energy Star appliances, low-flow water fixtures, and a 20Kw solar photovoltaic system. PK financed $117,580 through a PACE lien and received a $7,800 grant from the Rural Energy for America REAP grant program. The grant covered 25 percent of the cost of the photovoltaic system. PK estimates a 40 percent reduction in electricity and natural gas consumption and 29 percent reduction in water waste.

“The PACE program is an excellent partner to help finance some of the improvements in these buildings which not only save energy and water but extend the life of the building,” added Turner.

Peter Potterpin, the owner of PK Housing expects the remaining five Michigan projects to be implemented by the end of 2016 if they can demonstrate the expected return on investment to USDA. “Right now, USDA would like to see what kind of results are produced from this property before they go forward with anything else,” he said. “We’re trying to convince them that the energy audit that we’ve done will be a conservative estimate. We should do better than that.”

However, beyond the split incentive, challenges arise when multifamily housing doubles as subsidized affordable housing.

“The biggest challenge is that if you’re doing [multifamily] affordable housing, you’re under strict regulation in terms of what you can charge tenants,” said Mansoor Ghori, co-founder and managing director of Petros Partners, the Austin, Texas-based investment company financing the projects. “Owners are restricted in the amounts of capital that they can raise to make sure that they actually have cash flow and can make payments.”

PACE can help open the door for affordable, multifamily housing developments by solving the upfront cash problem.

“The PACE program is over a much longer term than they would get through a traditional bank,” added Ghori. “Additionally, they’re not coming with any money out of pocket, and the savings they generate from the energy improvement project is greater than the cost of the loan over the life of the loan, so it’s cash flow positive. That makes a big difference.”

Michigan adopted PACE financing for energy efficiency and renewable projects in 2010, but implementation was slow. Andy Levin, president & founder of Lean & Green Michigan, an entity that acts as matchmaker between businesses and financier, sees the partnership between USDA and PK Housing as a way to change this. “There have not been many affordable housing projects done in the whole country, in D.C. in particular,” he said.  “We think we’re going to do more than the whole rest of the country combined here in the next six months in Michigan, just with USDA.”

Levin believes that PACE works well with large-scale projects that require substantial up-front cash, whereas smaller businesses, individual homeowners, or very small family buildings can achieve a faster return-on-investment through retrofit financing options, such as Michigan Saves.

Lean & Green Michigan has been promoting PACE for several years in Michigan and facilitated the participation of 26 local governments into its statewide PACE district. Lean & Green provides administrative services to operate the district, so there is no cost for jurisdictions to join. Lean & Green also works to bring private capital into the deals, so municipalities are not required to issue bonds to finance projects.

“The reason we settled on PACE was because it had the longest term,” concluded Potterpin. “We were able to make it economically feasible to pay these improvements back out of the cost of the energy savings. Other options have anywhere from a five to seven year payback. We couldn’t pay it back out of savings, so it would be a deficit to the property operating budget.”

Image courtesy of Lean & Green