Jon Powers:

Welcome to Experts Only podcast, sponsored by CleanCapital. You can learn more at cleancapital.com. I’m your host, Jon Powers. Each week, we explore the intersection of energy, innovation, and finance with leaders across the industry. Thank you so much for joining us.

Jon Powers:

Welcome back and thank you so much for joining us today. This isn’t our traditional episode structure. We’re going to actually dive deep into an issue here that many folks in the industry are interested in: PACE financing. You hear a lot about it. Not everyone fully understands how it works. And today, we’re joined by PACENation’s David Gabrielson. David serves as the executive director and founded PACENation in 2010 when it was little more than an idea on a napkin.

Jon Powers:

So what is PACE? PACE is property assessed clean energy. It’s a financing mechanism that enables long-term, low-cost funding for energy efficiency, renewable energy, water conservation, and other projects. PACE financing is repaid as an assessment on the property’s regular tax bill and is processed the same way as other local public benefits like sidewalks or sewers that have been repaid over decades. Depending on local legislation, PACE can be used for commercial, nonprofit, and even residential properties. You’re going to learn a lot more about PACE at PACENation’s summit in Denver from March 19th to the 21st. We’re actually going to be doing a live podcast at that summit, talking with policymakers and others about what’s happening in the industry today.

Jon Powers:

David, thank you so much for joining us here at Experts Only podcast. We’re going to be exploring PACE 101 and help our listeners really understand the power of PACE and what it’s doing around the country. But I wanted to first start off with your PACE story. What got you interested in PACE and to launching PACENation?

David Gabrielson:

Sure. And thanks, Jon. Thanks so much for asking me to do this. My introduction to PACE was really serendipitous. I was after working or even while I was still working in municipal finance as a public finance banker based in New York. I was persuaded to run for political office in my town at Bedford, New York, and had never, ever thought of doing anything like that. And instead of saying no, I said yes, and then I won and got elected to the town board. Bedford is a very sustainability-minded community. We’re one of the few towns in New York that has a climate action plan that’s part of our formal town master plan. And our energy advisory panel came to us one day and said, “Let’s start a PACE program.” And I got the finance side of it pretty quickly because it’s based on a tool that local governments have used for a long time to finance things.

David Gabrielson:

And I got the government side of it because my clients had all been government folks, public finance, and I was working in government. And I’ve always been, I think, an armchair environmentalist. And so those three things clicked. And I didn’t really know. I became the board member that really dug into it as we sought grant money and tried to begin developing a program. And then I just got absolutely… I think this is true of a lot of people. I actually would say I used to do something else, and now I do PACE. And so it was really an idea that captivated and galvanized me.

Jon Powers:

And that drove you to launching PACENation, which has been very influential in helping to galvanize, I think others around the country to help move PACE forward at a policy level. Can you talk for a second about PACENation and what you do for your members?

David Gabrielson:

Yeah. Well, PACENation was utterly coincidentally was founded by a guy who lives in the same town, at Bedford, New York. And he had, I think, gone to a conference and heard one of the fathers of PACE, the guy who really came up with the idea, a guy named Cisco DeVries out in California, and Jeff Tannenbaum, who was at the conference or heard Cisco talking about it, sought him out. And actually, Jeff coined the acronym PACE. I guess there was some earlier acronym that wasn’t so good. So property assessed clean energy of course is what the acronym is. And Jeff began evangelizing around PACE and talking to people about it and set up a website that everyone went to. Originally, it was called PACE Now. We’re just going to refer to it as PACENation, but we used to call ourselves PACE Now.

David Gabrielson:

And the website was where everybody went to get a copy of the California enabling legislation or some study that had been written about PACE or something PACE-related. It was really a link site. In late 2010 after I’d been trying to get PACE going in Bedford, we came up with some grant funding, and PACE Now hired me. I became the first full-time staffer at PACE Now, PACENation. Let me say who we are. We’re really advocates for PACE. And we have a pretty simple vision, and that is that PACE financing would be available to every building owner in America. And we envision a day where every building owner in America would know what PACE was and understand it and be able to make a decision about whether it was the right tool to use to make the building more energy-efficient or to do renewable energy.

David Gabrielson:

And so as advocates for that, we provide through our website a newsletter, webinars, information and resources, further that vision, further that goal. We do a lot of one-on-one talking with people. We’ve always been networkers. We’re like the hub in a wheel with spokes that go out to lots of different stakeholders that include state and local governments and other nonprofits that are similarly mission-oriented, at least in terms of environmental goals and economic development goals. And then a growing number of private sector stakeholders that have seen an opportunity to provide services or finance to make PACE really work. And then we’ve been conveners. We pull people together. And the best example of that now is planning for our third national PACENation summit, which will be in Denver, March 19th to 21st. It’s been, I think, a bigger success than we imagined when we first started planning, my little team who knew nothing about how to put on a conference. But it’s been a big success.

Jon Powers:

Yeah. And for our listeners, we’re going to be at PACENation Summit. You can find it at pacenationsummit.us/summit18. And we’re actually going to do a podcast interview there talking with some leaders in the industry about what’s going on in the space. And we’ll be rolling that out here in a few episodes. So please listen.

Jon Powers:

So David, that’s really helpful. I think PACE is not really a new concept, but it’s really caught fire in the last few years. And for folks, just to give a little simple 101, as David said, property assessed clean energy is a financing mechanism that enables low-cost, long-term funding for energy efficiency, renewable energy, water conservation. But it’s repaid through the assessment of the property’s regular tax bill. So one, where did that idea come from? And then two, more importantly, why has it just really begun to catch fire and we’re seeing it pop up all over the country now?

David Gabrielson:

Yeah. And first of all, let me say, Jon, we’re really excited that you’re going to be at the summit and doing that podcast. We’ve not done anything like that before. And I think that the hopefully 500 or so people that come are really going to enjoy that. The state and local governments for decades, if not centuries, have used property tax assessments, an additional line item added to the property tax bill, to pay for improvements that benefit property owners, obviously, and meet a public purpose. And for most people, they’re familiar with sometimes a water or sewer assessment or a park district assessment or lighting district assessment, sidewalk assessment. The leap to PACE came… I think I mentioned Cisco DeVries earlier, who was working for the mayor of Berkeley, California and had a background in energy, and saw, I guess, a neighborhood… this is the story as I heard it… a neighbor in Berkeley that came together and said, “Look. We’d really like to put these utility lines that are above ground underground for a couple of reasons, for safety and just to get unsightly power lines out of sight.”

David Gabrielson:

And so they voluntarily went city of Berkeley and said, “Could we pay for this with an assessment on our tax bill?” And at the same time, Berkeley had a policy of encouraging people to put solar on their roofs. And so Cisco’s leap was to say, “Well, how about if we came up with the money and people could put solar on the roofs and then pay back that investment over time with the property tax assessment?” In a perfect world, that has all sorts of advantages. One is that it’s not a direct impact on an individual person’s credit. It’s based on the value of the property and the equity in the property, though we want to make sure that every building owner has the means to pay this back. It is voluntary, so assume they do. But the second thing is that property taxes and assessments don’t get paid off when you sell your property. The improvement that you put in place transfers to the buyer of the property, and in this instance with PACE, so are the obligations.

David Gabrielson:

So people don’t know how long they’re going to own a building. Sometimes, what keeps them from doing something they might like to do is because they’re thinking, “Boy, I’m just going to benefit from this for two or three years, then I’m going to have to pay it off.” So the transferability is big. And property taxes and assessments that have been unpaid, that are in arrears, are at the top of the stack for repayment. And that makes it a very strong credit to those who might want to invest in these projects. They can be pretty sure that they’re going to get paid back. Now, that’s also been a problem because quite frankly, the mortgage lenders don’t like that. So it’s one of the things we had to work on in the world of PACE. There are a couple of other reasons why the PACE mechanism is really an attractive one, but those are the primary ones.

Jon Powers:

Yeah. That’s really interesting and I think really good feedback on especially the transferability. I want to get into the legislative piece and the financing in one second, but there’s R-PACE, residential PACE, and C-PACE, commercial PACE. Just quickly, what is the major difference? And are you seeing one grow more rapidly than the other?

David Gabrielson:

Yeah. Well, it’s exactly the same mechanism. The difference is two completely different markets. And the commercial PACE marketplace is relatively uncontroversial, totally uncontroversial. All this starts with state enabling legislation. To date, 34 states have adopted legislation that would allow building owners, in some instances, just commercial building owners, in some, resi and commercial, to… 34 states have allowed their local governments to offer PACE. And we see commercial PACE programs now operating successfully completing projects in, I’m going to say 19 states in the District of Columbia. You can check all of this whenever you want on our website, www.pacenation.org.

David Gabrielson:

One of the reasons that commercial PACE has been uncontroversial is that building owners almost always receive the permission or the consent… we call it lender consent… of their existing mortgage lender if they have a mortgage lender. And so those mortgage lenders and consent has been granted by over 150 different lending institutions, close to 1,000 projects, because the lenders understand that the projects improve the value of their collateral. There’s a commercial arena. Business people don’t generally do things frivolously. They weigh the pros and cons, the payoffs, the financial impact to their business or their operation or their property. And so that’s an important part of it.

David Gabrielson:

And commercial projects too, if you think about it, a house is a house, and houses are big or small. But generally, the things that you would do to a house to make it more energy-efficient involve in some of its envelope and upgrading the heating or cooling system, improving its insulation. Commercial buildings, vastly greater universe of architecture and size and use and building material. So commercial projects tend to be vastly bigger. We’ve seen commercial PACE projects up to $20 million, $25 million, and they’re much more engineering-driven systems, related pumps and motors. They have a long sales cycle, long time to get to yes. So that’s the commercial landscape.

David Gabrielson:

And we’ve seen consistent entry. Our team is always working with groups in at least one or more states that would like to get PACE legislation passed. Just last year, made a couple of trips to Alaska to work with people from the state and Anchorage and Fairbanks and Juno who got commercial PACE legislation passed and now are using our resources and others to try to get a program started. So we see constant entry on the commercial side. Resi PACE, because it has been a bone of contention for the mortgage industry and for Fannie Mae and Freddie Mac, the two mortgage giants, and for their regulator, the Federal Housing Finance Agency, it’s been much harder to get Resi PACE dispersed throughout the United States. It got a toehold in California-

Jon Powers:

Because of that consent.

David Gabrielson:

Yeah. Back in 2010, Fannie Mae and Freddie Mac basically said that they would not buy a mortgage with a PACE assessment on it. So if your local bank added a PACE project to your home and your local mortgage lender tried to then sell that mortgage to Fannie and Freddie, Fannie and Freddie say they won’t buy it. They won’t consent to a PACE assessment on a property that’s in their portfolio. And there’s been a lot of concern about what impact that could have on homeowners. That’s made a lot of states and local governments reluctant to move down the path of offering resi PACE.

David Gabrielson:

In California, where it started and where it got a toehold that never got dislodged, PACE is now available to probably, I’m going to guess and say 80% of the population, all of the major metropolitan centers and populated counties in the state. There are a number of PACE programs operating, some operated by local governments, Placer County, for example, Sonoma County. They operate their own program, provide their own program administration, come up with their own funding for projects in most jurisdictions, and outside private third-party program administrator is authorized to offer funding to homeowners. And to date in California, I’m going to say 180, 190, close to 200,000 homes and bumping up on $5 billion of financing over the last two or three years.

Jon Powers:

Let’s talk about those program administrators because I think for folks, we talked about the 34 states that have the legislation. Really what happens is each locality develops their own program and there are some differences across the programs. Can you talk about the role of that third-party or maybe the municipality role in administering the program?

David Gabrielson:

Yeah. So let me start with the municipality role. I mean, Sonoma County, California was a real pioneer. Berkeley did a pilot, but then discontinued it for a while, and Sonoma County developed their own program. So they used county treasury funds to finance projects. They devoted staff. So what does a program administrator do? Well, program administrator sets up all the paperwork and all of the procedures and make sure that I’s are dotted and T’s are crossed to complete the project. And that involves making sure that the homeowner qualifies and that the amount of financing is appropriate, and that’s often defined in state law, and that the project qualifies. So the program administrator basically completes the project. And in the case of Sonoma County, they come up with the funding for it.

David Gabrielson:

At the other end of the spectrum, you could have a local government this is what we want to offer this to our residents, but we don’t really have the bandwidth to do all of that stuff that I described that Sonoma County does. So we will authorize a third party to provide all of that program administration and the funding, and we’ll put the assessment on our tax bill when everything’s done correctly. And when we collect that money from the homeowner, we’ll forward it to the appropriate party that’s receiving the money for the private party.

David Gabrielson:

So the way things have evolved in California, at least, most of the financing is provided by private sector third-party program administrators authorized by local governments to provide this service in their jurisdiction.

Jon Powers:

Yeah. Let’s talk about that a little bit. So I think what’s really interesting about this space is it grows in the finance side. PACE financing terms can extend out to 30 years. It’s possible to really undertake deep, comprehensive retrofits, real energy savings, and even renewable energy for customers affecting their bottom lines. It can cover 100% of project hard and soft costs. And you’ve got now companies like Greenworks taking these PACE financing programs and then bundling them them. And actually, if I’m correct, Greenworks did about a $300 million securitization this year on some PACE loans, which is very, very forward-leaning for the market. Talk about in that space, who are some of the folks that you see really leading, and where do you see that third-party financing piece go?

David Gabrielson:

Okay. So on the resi PACE side in California and Florida and trying to get a toehold in Missouri, there are a number of third-party program administrators. Renovate America been operating the longest and has done most, has the largest share of all of the projects that everyone done because they’ve been operating the longest. They’re the ones that probably recently did a $300 million securitization. They’ve done, as they have built a portfolio themselves of, I don’t know exactly what it is, but it’s well over $1 billion, is they’ve built up that portfolio of completed homes. They’ve gone the way of all assets that build to a substantial amount, and they get bundled together just as mortgages do or any other kind of receivable, and they get securitized. So the investment world, institutional investors, insurance companies and whatnot, which have long-term obligations and therefore long-term assets, good match for their portfolio. So-

Jon Powers:

Importance for that just for our listeners that don’t understand, what that really means is it’s bringing long-term, but often cheaper capital. So cheaper capital to go into these projects, cheaper capital to help bring down the cost for both the transactions and the actual deal. So it says a lot about the industry that it’s getting to securitization.

David Gabrielson:

Right. That’s right. They’re providing liquidity, just like your local bank. I have a mortgage from my local bank here in Massachusetts, the Florence Bank. And they’re a small bank and they lent me money. They don’t have to hold my mortgage forever. They can take my mortgage and sell it to Fannie Mae or Freddie Mac, who will then bundle it up in a big package and sell it off to investors all over the world. And that provides liquidity. It brings money into the local market. Your local government wouldn’t have the resources or the ability to do that, by and large. So it’s another thing that private sector program administrators are bringing. And these securities are now being rated strong, AA, I think, and by Kroll rating service and by DBRS. And so we’re beginning to build a market now. $4 billion, $5 billion sounds like a lot of money, and it is, but in the scheme of things on the financial markets, it’s still very small.

David Gabrielson:

Jon, you alluded to this. We’ve seen interest rates begin to come down because the market is getting bigger and more liquid. And what does liquid mean? That means that if you buy one of these, you’re an insurance company, you buy one of these PACE assets, you want to be able to go out and sell it tomorrow just as you go out, buy a share of Apple stock today and sell it tomorrow at exactly what the market will bear. An investment that you might make that you can’t necessarily get rid of tomorrow because the market is so small but won’t attract as high a price. So that’s what I mean by the market is more liquid and transparent. And so as the market grows, we’ll continue to see interest rates decline. Yeah.

Jon Powers:

No. That’s great. And I think first off, David, we’re limited on time. I appreciate the full view of this. So I think it shows the growth of the industry, the way it’s matured, that it can get to securitization. Just briefly, I think one, you’ll hear a lot about this at PACENation Summit in Denver, the 19th to 21st. So please make sure to sign up and attend if you can. Just last, where do you see the landscape look like in the next five years?

David Gabrielson:

Yeah. Well, let me do this because I didn’t want to full stop at renovators. There’s several other parties that I want to give some shout-outs to. Cisco DeVries, the father of PACE, if you will, leads a company called Renew Financial, and Ygrene Energy Fund is another, and PACE funding and Dividend. And so there are a number of companies and if you’re out in California and you Google PACE, you can come to our website and look them all up if you’re interested. You also mentioned Greenworks. They’re on the commercial side. I want to give them a little shout-out for a couple of reasons. The co-founder of that company was once my program grant provider at the Rockefeller Brothers Fund. And I went down and pitched her on funding PACENation. We are still very largely foundation-funded. And she liked what she heard.

David Gabrielson:

And a year later, she called me up and said, “David, you’re not going to believe this, but I am going to run the Connecticut PACE program with the Connecticut Green Bank.” And then a couple of years after building what was the most successful, I think one of the most successful commercial PACE programs in the country, she went out and became an entrepreneur. They just completed their own securitization. It wasn’t 300 million. I think it was 75 million. And it was rated. And so another first in the commercial marketplace. And there are a bunch of companies like hers, CleanFund at California and PACE Equity and Petros Capital. And I’m sure I’m going to leave someone out and they’re going to call me up and yell at me. But they are in many different states working with local program administrators or setting up program administration. They are developing projects and funding them. And it’s very exciting to see.

Jon Powers:

Well, David, really appreciate it. We look forward to seeing you in Denver here in a few short weeks, and we appreciate you taking the time. And for folks who want to continue to learn more, you can always go to pacenation.org, and just thank you for your time.

David Gabrielson:

Jon, I really enjoyed it. Thank you so much.

Jon Powers:

Thank you David, for joining us. As we talked about, you can learn more about pace at pacenation.us and learn about how you can take part in the summit with over 450 attendees in Denver, Colorado, March 19th to the 21st. We’re actually going to be doing a live podcast there and talking to policymakers about the state of the art and what’s happening today across PACE. Please go to our website, cleancapital.com. Leave us your thoughts and ideas and what we should be talking about here at Experts Only. I’d like to put a special thank out to our producers, Warren Glickman and Emily Connor for their hard work. Till next time. I look forward to continuing the conversation.

Jon Powers:

Thanks for listening in today’s conversation. Find more episodes on cleancapital.com, iTunes, or wherever you get your podcasts. If you like what you hear, be sure to subscribe and leave us a five-star review. We look forward to continuing our conversation on energy, innovation, and finance with you.