2015 Robert Mattler Michigan Market Leader Detroit, MI [email protected] 248-762-4370 @bmattler0514 .

2015

Robert MattlerMichigan Market Leader

Detroit, MI [email protected]

248-762-4370@bmattler0514

www.pace-equity.com

A new way to fund real estate improvements….

Confidential - PACE Equity2

Redirecting

energy

expenditures

PACE Solution

3

What is PACE?

Property Assessed Clean Energy (PACE) is an innovative way for owners to pay for upgrades to buildings

PACE covers 100% of the improvement costs, up 20% of a buildings value, repaid through a tax assessment on the property for up to 20 years.

PACE is modeled after methods to fund public benefits such as roads, sidewalks, and fire departments.

PACE funding comes from private capital sources

350+ Commercial Projects Completed – $150m in funded projects

Confidential - PACE Equity

Eligible Improvement Measures


LED LightingCommercial Boiler VRF HVAC System

Chiller Fume Hood

Elevator Cool RoofWindows Solar PVControls

Escalator Refrigeration

Parking Lights

PACE Solution

5

Private market investors like PACE because assessment liens are a proven, strong credit.


Property owners see an opportunity to save money and make their buildings more valuable.

Existing mortgage lenders support projects that increase the value of their collateral.

Local governments like PACE because it creates jobs and helps meet conservation goals.

Contractors support PACE because it opens up new sales opportunities

Taxpayers like PACE because the city takes on no liability and gets a boost in the local economy.

PACE is a win/win for all stakeholders!

6

Where is PACE Available?

Pending Pending MarketsMarkets

Active Active ProgramsPrograms

PACE Equity Market Leader

Passed Passed LegislationLegislation

Benefits of PACE


PACE Benefit Barrier Considered Equity in development capital stack Long-term (up to 20 years) low cost capital Ability to pass on to tenants Differentiated tax & balance sheet treatment

ROI

Ease in passing costs to tenants in triple net lease (to match savings)

Split Incentive

Transfers upon sale as assessment remains with the property

Flexible options to pre-pay balance at sale of asset

Short Term View

100% financing requires no up-front cash investment Effective with complicated ownership structures No acceleration upon bank default No personal guarantees Funds available to fund construction costs

Access to Capital

PACE Equity SolutionEnabling building owners to take advantage

8

Project Governance Experience & Knowledge of PACE Stakeholder Engagement PACE District Formation

Energy Engineering Bundling of multiple measures Development of energy models Performance Assurance

Financing Project Development Funding Construction Financing PACE Financing


Common scenarios for PACE Financing


Complex Stakeholder Management Customer Contractors Program administrators Mortgage lender PACE financing sources Energy Engineering Project development funding Construction financing Incentives & rebates Performance assurance

Key Deliverables Preliminary analysis (business

case) Program approval Lender consent Final construction & savings

proposal Program Application PACE financing agreement

PACE Equity SolutionPACE Project Governance

PACE Equity SolutionEnergy Engineering


Preliminary Analysis Energy audit,

scoping, estimated cost & savings

Detailed Design Create baselines Create building

model to forecast savings

Performance Assurance Commissioning Quarterly reporting Update EPA Portfolio

Manager Enrollment in DOE

Better Buildings Challenge


Ongoing Performance AssuranceIncluded for 3 years

PACE Equity SolutionFinancing Solutions


Project Management Expenses

Energy Engineering

Surveys, reports, due diligence costs

Project DevelopmentExpenses

Customer authorizes budgets by phase: Phase 1 – Preliminary Analysis & Approvals

Phase 2 – Detailed Design

Development costs accrue and get rolled into closing proceeds.

Project Development Funding100% financing with no out-of-pocket costs*

*Note: Requires credit approval

PACE Equity SolutionFinancing Solutions


PACE Financing100% financing of installed equipment

PACE Equity / Finance Provider

Customer District

1. 100% Project funding

Contractor ContractorContractor Contractor

2. Customer authorizes disbursements to

contractors 3. Customer pays city/district annual

assessment

4. City remits payment to finance provider


Structured Process to manage transaction costs & execution risk…

Development ProcessTurnkey Project Development

Develop business case (scope, savings, cost),

program approval, lender consent & secure

financing

Detailed scope, cost, savings, & contractor selections. Ashrae II audit for projects >

$250KSubmission of full

application package. Administrative & technical review.Execute loan &

assessment agreements

Manage draw payments & post construction

performance assurance reporting

PACE Value PropositionScenario: Tool in the capital stack


Value Proposition: Cheaper capital than equity Enables projects that do not

meet internal project return requirements

Non Recourse Tax treatment as an operating

expense No required repayment upon

sale of the property Long tenor – 20 years

Debt: 4%-6%

Equity: 15% - 18%

PACE: 6%-7% (2% after tax)

Project Capital: 20%+

Scenario: PACE in the capital stack


Background $30m Investment to transform an old building Pre Valuation: $3m / Post valuation $30m Intended project capitalization: 30% equity / 70% debt

PACE investment determination: 20% of building value ($6m)

Assessment is applied and passed on to tenants as a property tax assessment.

Upon sale, assessment transfers to subsequent owner (does not have to get paid back)

Impact: 4x Improvement

to Investor Returns

Traditional Approach PACE

PACE Investment -$ 6$ Equity Required 9$ 3$ Debt 21$ 21$ Total Capitalization 30$ 30$ ROI (3yrs - sell @ $35m) 16% 67%

Scenario: Boosting NOI and building value


Background Invest $2m in HVAC, Lighting, & Windows w/ 10 year payback PACE Financing term of 20 years @ 7% Effective Cost of Capital

PACE Benefit AnalysisAmount Financed 2,101,338$ Estimated savings over finance term: 4,862,887$ Estimated total assessment paid over term: 3,572,412$ Impact to operating income over term 1,290,475$ Savings to Investment Ratio (SIR to term) 2.3 Net present value (NPV @ 8%): $563,380Change in Asset Value @ 7.5% Cap Rate 955,907$

Impact: $1m immediate

improvement to building

value.

Case Study: Non-ProfitUniversity Club, Milwaukee WI


Customer Objectives Replace makeup air units to

bring the building in balance Remediate steam traps Window Repairs LED Lighting Fund HVAC as part of

renovation to attract new members

Results $660K in funded building

improvements 30% Utility Savings – avg of

$75K/yr over term 35% Coverage of renovation

budget

Project DetailsFirst Milwaukee PACE closing (Summer 2014)Financing by Milwaukee Economic Development Council (MEDC)Rate 6.0%, 18 year termProject governance, energy engineering & savings guarantee by PACE Equity

Case Study: HospitalityHospitality Development – Change of Use


Customer Objectives Maximize ROI in the property Reduce Equity requirements Minimize incremental

design/construction costs Evaluate building systems based

on lifecycle cost

Results $2.4M in funded building

improvements $8.9m in savings over 20 year

term (3.7x investment) No incremental costs to make it a

PACE project Measures funded by PACE Equity

include elevators, domestic hot water, HVAC, & windows

Project DetailsClosing in May 2015Rate 5.65%, 20 year term8.5% of value at completionProject governance, energy engineering, savings guarantee and financing provided by PACE Equity

Case Study: IndustrialCambridge Engineering, Chesterfield, MO


Customer Objectives Reduce Energy Consumption Increase Real Estate Value Provide a Top Quality Facility

for Employees

Results $610K in funded building

improvements Installed new LED Lighting,

Roof, HVAC Mechanical Portion Cash Flow

Positive and Funded Large Cap-X

30% Utility Savings – avg of $52K/yr over term

Project DetailsFirst Missouri Show Me PACE closing (Summer 2015)Financing by PACE EquityRate 5.57%, 10 year termProject governance & financing by PACE Equity

Case Study: RetailSimon Properties Mall, Santa Rosa, CA


Customer Objectives Install a “Cool Roof” Increase tenant comfort &

satisfaction Improve overall building

performance Reduce energy costs

Results Implementation of “Cool Roof”

that stays up to 60 degrees cooler

Project DetailsPACE Program: Sonoma SCEIP ProgramPACE Assessment: $463k, 10 years @ 7%Building: 699k sf, Built in 1971, $240m valueImprovements:

Reflective Cool Roof

Source: PACE Now

Case Study: CommercialPrologis Headquarters, San Francisco, CA


Customer Objectives Improve building performance

& comfort Reduce energy by at least

30% Allocate savings to 5 tenants Improve cashflow on day 1

Results Purchased energy reduced by

32% Annual estimated cost savings

of $98,000 PACE made it possible to

allocate costs to 5 tenants Projected annual PV production:

245,520 kWh No increase in operating

expenses

Project DetailsPACE Program: Greenfinance SFPACE Assessment: $1.4M, 20 years @ 6.93%Building: 131k sf, Built in 1918, $30m valueImprovements:

1,500 new light fixtures 200 kW Rooftop solar HVAC Overhaul

Source: PACE Now

A new way to fund real estate improvements….


Our premise is that it takes a lot of effort to get deals across the finish line. Everything from A to Z.

Who is going to do that work?•Customer?•Contractor?•PACE Administrator?•PACE Finance Provider?

Our business is intended to fill this gap by enabling building owners and contractors to execute PACE Projects.

“What Makes a Good Project?”


Project min. size of $250K+ Strategically important investment in building Building age 15 years+ Mechanical & electrical equipment end of life

issues Building comfort & people productivity issues High energy usage, people occupancy, hours

of operation Non-profit or Complicated ownership structure Existing difficulty passing costs to tenants Desire to improve property with multiple

measures with simple payback < 14 years. Mortgage lender not a CMBS If no active PACE program, then project size of

$1m+ to justify effort to put district in place.

A lot more than financing


Sales Assistance. Engage with the customer to help sell a PACE funded multi-measure bundle

Collaboration Platform. Provide an online project development platform to drive tasks, manage project data, milestones, risk management, and communication

Energy Modeling. Drive the energy engineering necessary for financial underwriting and program eligibility

Lender Consent. We will get the mortgage lender consents

Performance Reporting. Provide quarterly utility performance reporting

PACE District Formation. We can install PACE districts where they do not currently exist

Construction Mgmt. Option to leverage PACE Equity to manage the bid process and retain bonded construction managers that can guarantee outcomes.

National ReachMarket Leader Strategy


Objective is to setup a local market leader in local PACE markets – 20 in 2 years.

Sales Collateral & Marketing Campaigns

IT Infrastructure – CRM, Project Mgmt,

Collaboration

Template Agreements

Line of CreditFor Project

Development Costs

Access to long term project financing &

securitization

Benefit from existing relationships that generate leads &

knowledge

Energy EngineeringResources

Scenario:New Construction


Customer ObjectivesReduce EquityNon-recourse financingBoost ROI“Max out the PACE Program”

ApproachDefine PACE Equity funding goalEarly engagement with Mortgage lendersProject development & energy modeling to define scope, cost, and savings of PACE Equity Investment Theoretical energy baseline derived from ASHRAE 90.1Benefit of lifecycle cost analysis of different systemsPre-payment structured to support hold term100% of PACE Equity funds available at closing (pre-construction)Improvements:

HVAC, Elevators, Windows, Lighting, Domestic Hot Water, Roof, Solar, etc

Source: PACE Now

ROI AnalysisTraditional Equity With PACE Equity

Total Investment 30,000,000$ 30,000,000$ Debt/Other Sources 24,000,000$ 24,000,000$ PACE Equity -$ 3,306,223$ Owner Equity 6,000,000$ 2,693,777$

Value @ Sale 40,000,000$ 36,543,961$ Time Period (yrs) 5 5Proceeds at Sale 16,000,000$ 12,543,961$ ROI 22% 36%Assumes prepayment of assessment at sale.

Approach ComparisonPACE vs. Traditional ESCO


Financing Comparison: PACE vs Traditional ESCOPACE Equity ESCO

Financing Term 20 years 20 yearsFinancing Rate 5.5% - 7% 3% - 8%Accounting Treatment Expense Debt or Off CreditDirect Costs 1,900,000$ 2,000,000$ Energy Engineering 40,000$ 40,000$ Construction Mgmt 70,000$ 70,000$ PACE Governance/PM 20,000$ ESCO Markup -$ 800,000$ Indirect/Closing Costs 150,000$ 70,000$ Total Amount Financed 2,180,000$ 2,980,000$

Benefits of PACE Equity development process Customer can run open

procurement process with vendors of their choice

Expected 100 bps reduced financing costs by leveraging tax lien of PACE

Performance Guarantee is much less expensive and only required for PACE to meet state guidelines. Guarantee requirement for PACE is roughly 50% of savings as compared to 90% for ESCOs.

Annual M&V is not required for PACE projects.

ESCO margin of 24%-35% can be drastically reduced.

PACE has favorable accounting treatment that does not impact debt capacity.

Preliminary Analysis & Approvals


Scope of work: Prepare energy savings report (compare specs to code

requirements/existing conditions) Submit interest form to city and confirm eligibility Work with client to obtain mortgage lender consent Obtain non-binding financing commitment from 1 or more sources of long

term PACE capital to support this project through 2 closings. Prepare Project Development Agreement

Not to exceed budget: $10k Terms:

Accrue costs up to the budget. To be paid out of closing proceeds. If client does not enter into Project Development Agreement within 3

months, then client will be invoiced for costs incurred up to the budgeted amount.

Detailed Design


Scope of work: Create building model (eQuest) to define savings of the selected

improvement measures. Deliver energy report defining baseline conditions and energy savings. Collaboration with Focus on Energy to obtain custom incentives/rebates Preparation of application and closing materials

Not to exceed budget: TBD as a result of Prelim Terms:

Accrue costs up to the budget. To be paid out of closing proceeds. If closing does not occur, for any reason, within 12 months then client will

be invoiced for costs incurred up to the budgeted amount.

Long Term Market Imbalance

The ESCO Industry (Energy Service Companies) is a $5B Industry. 91% comes from

Federal and MUSH Markets….

8.5

11.2

10.1

5.1

4.1

3.8

2.6

1.7

1.7

1.3

3.7

9.9

3.9

3.2

1.1

0 2 4 6 8 10 12 14

Office

Mercantile

Warehouse and Storage

Education

Lodging

Service

Public Assembly

Religious Worship

Health Care

Vacant

Other

Food Service

Food Sales

Public Order and Safety

Private 50 Bsqft (70%)

Public 22 Bsqft (30%)

US Building Stock(Estimated 2003)

Billion Sq Ft

Source: Commercial Buildings Energy Consumption Survey 2003 (DOE); Team Analysis

INDICATIVE

…. Yet the private sector represents 70% of the

building stock.


Long Term Market Imbalance

32

Buildings owners have not been willing to make these

investments. Why?

ROI is not competitive.Split Incentive. Tenants pay utilities and get benefit of investments yielding utility savings.Short Term View. Owners need flexibility to sell property.Access to Capital. Difficulty getting low cost capital due to credit quality or ownership structure.

Top barriers to pursuing energy efficiency for your company?

Source: Johnson Controls and International Facility Management Association , “2012 Energy Efficiency Indicator – Global Results”


70% of the private building stock is over 15 years old

and has never been upgraded.

PACE Equity SolutionEnabling building owners to take advantage

33

Project Governance Experience & Knowledge of PACE Expertise on rebates and

incentives Construction Management

Energy Engineering Bundling of multiple measures Development of energy models Guarantee of energy savings M&V / Performance Assurance

Financing Project Development Funding Construction Financing PACE Financing


Energy Engineering

Project Governance

Financing

Sampling of Value Propositions


Sampling of value proposition across 5 projects:

Scenario Value Proposition to ownersConversion of an old mostly vacant office building to a branded hotel. Requires total investment of $30m

• Considered low cost equity.• $2.5m represents 1/3 of the total

equity requirement at an attractive cost of capital

Non-profit building where bylaws prevent debt and there is considerable deferred maintenance.

• Long term low cost capital that is not considered debt.

• Improvements paid through savings

Industrial building (120k sq ft – built in 1978)

• Replace aging equipment & addition of solar paid through savings

70 year old resort with deferred maintenance and not able to meet capex demands. PACE is 50% of total improvement budget of $15m.

• Non-recourse to owner• Long term low cost capital

New Construction: Grocery Store • $1.5m of low cost equity to boost ROI of the owners.


PACE Benefit Analysis

PreliminaryAnalysis & Approvals

Detailed Design

Structured Process to manage transaction costs & execution risk…

Development Process

Application & Closing

2 Types of PACE Projects


Improvements to existing old buildings PACE value up to 20% LTV w PACE < 80-95% SIR > 1.0 based on actual energy

consumption Value based on recent valuation

New Construction/Major Renovation Value is based on appraised value at

completion Savings based on computed

baseline @ code standards vs actual design.

Requires 20% savings over code requirements

Common PACE Scenarios


Common PACE ScenariosAdaptive re-use


Example:•Investment: $2.5m•% of value: 15%•Energy baseline: existing building condition or code•Measures: Windows, HVAC, Elevator, domestic hot water•Value Proposition:

• Reduction of Equity• Passing of costs to tenants• Sustainable design

Common PACE ScenariosNew Construction


Example:•New Grocery Store•Investment: $1.5m•% of value: 10%•Energy baseline: code – ASHRAE 90.1•Measures: Lighting, Refrigeration, Controls, Solar•Value Proposition:

• Reduction of Equity• Funding of incremental

investment for Energy Efficient equipment

Common PACE ScenariosAging Infrastructure


Example:•100+ year old building•Investment: $500K•% of value: 20%•Energy baseline: existing building•Measures: Elevators, Lighting, HVAC, steam retrofit•Value Proposition:

• Accelerated capex investment

• Better able to attract & retain tenants

Example:•100+ year old building•Investment: $500K•% of value: 20%•Energy baseline: existing building•Measures: Elevators, Lighting, HVAC, steam retrofit•Value Proposition:

• Accelerated capex investment

• Better able to attract & retain tenants

Common PACE ScenariosNon-profit


Example:•University Club•Investment: $660K•% of Value: 20%•Energy baseline: existing building•Measures: Windows, make up air, Lighting, HVAC, steam retrofit•Value Proposition

• Utility savings• Funding of renovation costs

Common PACE ScenariosDistributed Generation


Example:•Solar in California•Investment: $275K•% of Value: 20%•Energy baseline: existing energy consumption•Measures: solar•Value Proposition:

• Immediate boost in NOI

Robert MattlerMichigan Market Leader

Detroit, MI [email protected]

248-762-4370@bmattler0514

www.pace-equity.com

2015 Robert Mattler Michigan Market Leader Detroit, MI [email protected] 248-762-4370 @bmattler0514 .

Documents

pace available

pace funding

clean energy pace

pace equitya new way

tax assessment

private market investors

fund construction costsaccess

assessment liens