San Francisco’s Buildings Getting Smarter
On January 20-21, Cleantech Group is hosting its second annual Buildings Get a Brain executive summit in San Francisco to explore the continued rise of the intelligent buildings market. In the lead-up to the event, we sat down with Rich Chien, GreenFinanceSF Program Manager at the San Francisco Department of the Environment, who has overseen the city’s leading edge PACE financing program for the commercial building sector, among other initiatives. Click here to learn more about Buildings Get a Brain and request an invite.
On how PACE is changing the game in San Francisco
San Francisco’s PACE program, “GreenFinanceSF,” is about three years old now and remains on the leading edge of commercial PACE. The city operates a model by which building owners work directly with investors and project managers on the retrofits. Our department plays a facilitating role by working with owners, contractors, capital providers, and other city agencies who all have very different perspectives, to try and close transactions that work for everyone. We have a great team of legal counsel, a fiscal agent, city staff, and others who provide specialized services. Ultimately, under our model, the City issues the debt, puts the lien on the property and collects the special property taxes to repay the PACE investor, but it’s really the market that must drive the program.
As is often the experience of early movers, we are learning where the program could use more support. One key area we’re getting more involved in is on the project origination side. We know the capital is there and the structure is secure. Having now completed a couple of bigger signature projects (Prologis in 2012, and a recently closed, soon-to-be-announced second project), the program has shown that the process works, and there’s always room to improve. Ultimately, though, the project and financing needs to make sense and offer value to the financial decision-maker. That’s one reason we’re partnering with Environmental Defense Fund’s “Investor Confidence Project” to promote consistent and transparent application of existing best practices in the development of energy efficiency projects, with a goal of reducing transaction costs and increasing deal flow. The ICP work flow covers baselining, auditing, scoping, procurement, construction, installation, commissioning, measurement and verification. It (ICP) helps to streamline these varied steps, each of which is complex unto itself, and will give the decision-makers confidence to make the investment. Since San Francisco has a benchmarking and energy audit law for commercial buildings, we’re working with ICP to educate and train energy service companies and contractors already in the field how to integrate the protocols into their existing work with customers, and potentially drive project demand and financing.
Another key takeaway is that we need to better explain to the building owner how PACE can fit in the capital stack. The long-term nature of PACE is very different than what is generally available, yet significantly more cost effective than the typical blend of debt and equity. By reducing operating costs, PACE increases net operating income and asset value and generates positive cash flow. PACE can help owners deliver projects they want to do in an economically advantageous way.
On which stakeholders are most important to the acceptance and scale of PACE
All of them. We’ve worked closely with building owners, capital providers, and are also seeing that mortgage lenders are growing more educated and comfortable with PACE financing. At the same time, this program has been up and running for years and we still encounter a lot of building owners and managers who haven’t heard of it at all. Ideally, contractors, developers, ESCOs, and technology solution companies will get the tools they need to be able to talk about PACE as a financing solution as they engage building owners and managers. ICP is intended to help in that regard. These are the parties who can look at data and run scenarios showing where operating costs can be reduced almost immediately. Emphasizing that PACE projects do not tap building owners’ capital and focusing on positive cash flows – as opposed to talking about payback period – has been an effective mindset shift that suits building owners, but contractors typically don’t sell with that language. We are working on some training modules to help them develop that vocabulary.
On the state of PACE nationally and how it’s spreading
Over the course of the last year, the number of states with PACE programs has grown, as have the overall number of projects. On the commercial side alone, over $100mm has been deployed across an estimated 300 projects. Many states that you might not consider to be clean energy leaders have embraced PACE programs, as the economic development and job creation arguments are very solid. There may be some variation in how the administrative process or exact capital structure works, but whether you’re Texas or Connecticut, PACE is basically PACE. A great clearinghouse for the state-of-play around the country is the PACE Now website.
On the freshly announced San Francisco 2030 District Initiative
We were pleased to announce on December 5th our participation in the 2030 District Initiative, making us the eighth city to commit to dramatic reductions in energy and water use in commercial buildings – 50% by 2030. San Francisco has actually been working behind the scenes for 2 years with an industry stakeholder group to put the plan together; it is a real private-public partnership. We now have 24 committed member buildings located in downtown San Francisco comprising about 9mm square feet, and growing. There is around 150mm square feet of potential space that can be annexed as the program expands.
Now that we’ve signed on, it is basically up to us to manage the nuts and bolts of the program. Fortunately, San Francisco already has a benchmarking and auditing ordinance requiring that buildings over 10k square feet report energy usage once every five years, so we can piggyback on that data. We have many active and interested stakeholders ready to help us tackle the aggressive performance goals of the initiative. There are also efforts to collaborate nationally with other 2030 District cities. One such effort is through an alliance to leverage the purchasing power of participating buildings across the many different districts. This may enable lower prices for technology solutions, such as LED lighting. The City is engaged and ready to provide educational, technical and financing resources, but it was compelling to me because 2030 Districts is a private sector-led initiative. The opportunities for the commercial real estate industry to lead and improve the performance of their buildings are massive, and we are happy to provide whatever support we can to help realize that potential.