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Sunday, 19 March 2017 16:04

Energy efficiency financing mechanism ‘outpaced’ by current market trends

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A West Michigan investment group believes the little-used PACE financing tool could prove beneficial in its renovation of the long-vacant Keeler Building in Grand Rapids. While the mechanism assists with energy-efficiency upgrades, many say the tool can’t compete with current market dynamics. A West Michigan investment group believes the little-used PACE financing tool could prove beneficial in its renovation of the long-vacant Keeler Building in Grand Rapids. While the mechanism assists with energy-efficiency upgrades, many say the tool can’t compete with current market dynamics. MiBiz File Photo

GRAND RAPIDS — A group of investors hoping to redevelop one of downtown’s last vacant buildings believes energy-efficient infrastructure could serve as one method to achieve greater affordability. 

Jeffrey Dombrowski, the registered agent of investment group Keeler Flats LLC, views the Property Assessed Clean Energy (PACE) initiative as a potential silver bullet in hitting the energy-efficiency benchmarks he hopes to achieve at the Keeler Building. His company has proposed a $45.6 million redevelopment of the 107-year structure, located at 56 N. Division Ave. in downtown Grand Rapids. 

“It’s a tool we are considering deploying at this point,” Dombrowski said. “And it looks more and more likely with the advent of some new due diligence. I’m very positive on PACE.”

The statewide PACE program — dubbed “Lean and Green Michigan” — must be adopted by a county, city or township governing body, but all financing for PACE projects comes from the private sector, meaning taxpayers aren’t left on the hook, according to proponents. The initiative acts as a financing mechanism for commercial building owners to upgrade energy-using equipment, anything from HVAC systems to solar panels to lighting, as MiBiz previously reported.

For all the good that Dombrowski and other proponents of PACE believe it can achieve, developers have shown little interest in the program in West Michigan, particularly given the availability of cheap capital compared to PACE lending rates, which tend to be a percentage point higher, and sometimes more. 

That’s according to Kevin McCurren, who teaches entrepreneurship at Grand Valley State University’s Seidman College of Business. 

In the fall of 2016, a group of McCurren’s students worked in conjunction with the Grand Rapids-based West Michigan Environmental Action Council (WMEAC) to explore a PACE district in the Grand Rapids area. 

“Given the fact that the market has changed and it adds complication, they found very little interest,” McCurren said, adding that the perceived complexity embedded within the program as well as the challenges in getting an assessment district off the ground proved to be a turnoff for would-be users of the financing mechanism. 

“Based on the lack of customer interest, and variable interest rates on commercial loans in comparison to PACE, it is our recommendation to put PACE on hold for the time being,” according to a research paper students compiled. “PACE is a complicated project to tackle, and we don’t believe it would return on the investment required.”

Still, proponents of PACE take the concerns about the initiative in stride.

Curt Monhart, vice president of sales and marketing for Ann Arbor-based Energy Alliance Group of Michigan LLC, an organization that provides energy audits for businesses, believes much of the skepticism is overblown. 

“The building owner doesn’t have to do a lot of work,” Monhart said. “The PACE administrator and the financing company do the bulk of the work. The building owner mostly just provides utility bills and financial statements. … It really should be a homerun for building owners.” 

Likewise, Keeler Flat’s Dombrowski believes the program will be key as he pursues Low Income Housing Tax Credits (LIHTC) in his proposed affordable housing project. 

“In a tax credit deal, the tax credit buyers or the syndicators are not jeopardized or exposed,” Dombrowski said. “It’s truly like an assessment. … It’s not a lien position. It actually strengthens some of the financing strategies that I’ve considered.”

The developer added that he hopes to pursue conversations with policymakers in the city of Grand Rapids and Kent County in the coming weeks. 

But it’s unclear how far the real estate developer will get with those conversations. 

A spokesperson for the city of Grand Rapids said only that policymakers are reviewing the program at the present time. Meanwhile, Kent County executives gave a lukewarm analysis of PACE. 

“The Right Place (economic development organization) and the County both have questioned the economic value of the program to property owners … when all the fees and additional requirements are factored in,” Mary Swanson, Kent County assistant administrator, wrote in an email to MiBiz. She added that a handful of potential “pilot” projects hoping to make use of PACE have popped up. However, those projects have either “not continued or have found other financing.”

Executives with Grand Rapids-based The Right Place Inc. declined to comment on the record regarding PACE. 

Dombrowski added that if he’s unable to get a PACE district off the ground for Keeler Flats, he’s exploring some additional federal grants that could help him to meet his energy goals. However, those grants don’t offer the same benefits, he said. 

Despite PACE’s cool reception from many sources contacted for this report, GVSU’s McCurren did say that as the broader economy faces an inevitable slowdown in the near future and interest rates continue rising, it might then make sense for owners to explore its use. 

Moreover, he noted that PACE would likely get a warmer reception if the required assessment districts were already in place. 

“I think if it was in existence, if you had the (district) there and you used it as a tool for the one or two people. … I think it makes a lot more sense if you had it going,” McCurren said. “You don’t have to go to the community. It’s just another financing tool.” 

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