At the former Port City Press building in Pikesville, Garver Development Group has leveraged a novel financing tool, CPACE, to both improve the financials of a renovation project and the energy performance of the redesigned facility.
Garver acquired the 177,000-square-foot building last year and began redeveloping it to support a self-storage business, vehicle storage and light industrial/manufacturing operations. Working with MD Energy Advisors, Garver acquired a $3 million commercial property-assessed clean energy (CPACE) loan to help finance the redevelopment.
CPACE both lightened the equity requirements for the project and improved the financing costs, said Peter Garver, President of Garver Development Group. “To a developer, the CPACE money looks like debt but the bank treats it as equity, so that was the main advantage.”
“The value proposition for an owner who is using outside equity, is that CPACE can significantly lower their cost of borrowing,” said Jason Schwartzberg, President of MD Energy Advisors. “Traditionally preferred equity is 8 to 9 percent. CPACE is regularly transacting in the mid-fives if not lower so you are dropping your cost of borrowing by 250 basis points. Also, CPACE is fixed rate, long-term, non-dilutive and non-recourse financing so you are not giving away an ownership stake in the property.”
CPACE can be used to finance portions of ground-up or renovation projects that improve energy or water use, such as building envelope, HVAC equipment and controls, lighting, insulation, cool roofs, solar installations, high-efficiency plumbing fixtures and drought-tolerant landscaping. CPACE applies to all commercial real estate product types and can cover up to 20 percent of the stabilized value of a property.
At Port City Press, Garver opted to include a series of efficiency measures in its renovation, including improved plumbing, lighting and insulation as well as an electric heat pump and HVAC equipment. The developer also opted to install a $300,000, 174 kW solar system. The self-storage operation will be “Net Zero Energy” as the solar array will create as much power as is required for the lights and HVAC on an annual basis.
Furthermore, the energy-efficiency improvements, Garver explained, enabled him to reduce the size of the solar array by roughly half and he will qualify to claim tax credits for one-fifth of the array’s cost in the first year “so it all made financial sense.”
“With CPACE, you really get that triple bottom line benefit of a more sustainable project, reduced operating expenses and a reduced weighted average cost of capital,” Schwartzberg said.
Adding CPACE to a project’s financing does add some complications. Although the Maryland General Assembly passed enabling legislation for CPACE, each local jurisdiction implements it somewhat differently.
“Some jurisdictions are more prescriptive in nature so you have to show an improvement above base building code for qualifying energy measures,” Schwartzberg said. “Other counties have savings-to-investment ratio requirements where you have to show a positive savings over the term of the transaction for the energy measures you are financing.”
The variety and price of energy efficient products, however, makes meeting either of those standards “very achievable,” Schwartzberg said. “We are actively originating and closing projects in both scenarios… If you are a developer and you are doing ground-up construction or a reposition and you are typically using other people’s money to fund your equity contribution, you undoubtedly should look at this program.”
Copyright 2021, NAIOP Maryland. Reprinted with permission from NAIOP-MD 360. www.naiopmd.org.