A Property Assessed Clean Energy (PACE) Financing A Primer for Commercial Real Estate Companies

W HAT I S PACE? 2 PACE is a tax-assessment based financing mechanism for energy efficiency, renewable energy, and water conservation projects.

PACE: O LD C ONCEPT – N EW A PPLICATION – First Assessment District in Philadelphia Today – 37,000 Assessment Districts nationwide Water & Sewer Service Parks Sidewalks Lighting Downtown renewal Energy Efficiency (PACE)

PACE B ASICS Assessment-based financing Enabled by Statewide legislation Sponsored by a “local” government – a taxing jurisdiction PACE assessment collected with and like any other property tax and assessment PACE assessment survives sales, including foreclosures PACE assessment in arrears is senior to mortgages - but only the past due assessment Future PACE assessments are paid by future building owners 4

H OW PACE W ORKS 5 Energy project construction proceeds exactly as it typically would. Rather than using equity and/or debt for project financing, property owner uses a PACE provider. PACE provider directs the local taxing authority to add a line item to the property’s regular tax bill, in annual repayment amounts for duration of the financing. PACE repayment is collected with the property tax payment, with no additional paperwork for the property owner. Municipality remits the PACE assessment payment to the PACE provider.

W HO CAN USE PACE? Most Buildings, Even Non-Profits 6

W HAT CAN BE F INANCED THROUGH PACE? 7 Projects that Save or Generate Energy

PACE L EGISLATIVE M AP 8 32 States + DC, 80+% of US Population HI Existing Authority 2016 legislative initiatives PACE enabled 2015

9 C-PACE P ROGRAMS T ODAY 730+ Projects – $230+ million 9 PACE programs with funded projects Early stage PACE program development Launched PACE programs PACE enabled RI DC

W HY PACE F INANCING ?  The secure nature of PACE enables up to 20-yr funding: projects with simple paybacks as long as 12 years can be implemented on a positive cash flow basis Increases NOI. Increases Property Value. Allows comprehensive projects 10  No payoff on sale – PACE automatically transfers to the new owner, like any other real estate tax No residual encumbrance and easy exit. Takes the risk away from investing in needed CAPEX.  PACE funds 100% of hard and soft development costs Recovery of overhead expenses and development fees. No money down

W HY PACE F INANCING ?  The benefits AND the cost of projects can be shared with tenants Aligns landlord and tenant interests (eliminates the split incentive issue) 11  Provides one or more benefits under all lease types Increases NOI Increases property value Improves aging infrastructure with no residual encumbrances Increases cost recovery by aligning landlord and tenant interests Increases sustainable development

S IMON P ROPERTY G ROUP – G REAT L AKES M ALL, OH “We hope to serve as pioneers in this arena, encouraging others to explore the many ways to reduce energy use now, rather than delaying sound financial and environmental decisions.” George Caraghiaur, former SVP for Sustainability at Simon Property Group 12 $3.4M PACE Energy Efficiency Project

P ROLOGIS, I NC. H EADQUARTERS – S AN F RANCISCO, CA “Prologis is participating in the PACE program in order to promote new, innovative solutions for financing sustainable building improvements. It provides the flexibility to drive more energy improvement programs and that’s something everyone should embrace.” Jack Rizzo, Managing Director, Global Construction and Renewable Energy, Prologis 13 $1.4M PACE Energy & Solar Upgrade

M OUNTAIN V ILLAGE – S ONOMA C OUNTY, CA 14 Sonoma Mountain Village used PACE to finance a 1 MW solar electric system in Rohnert Park (CA) that allowed SMV to cover 100% of its electric needs from on-site renewable power.

T HE F INANCIAL I MPACT OF PACE - A N E XAMPLE ✓ Property where the Landlord provides common area cooling and lighting ✓ Project involves a $200,000 energy efficiency retrofit ✓ Annual energy and maintenance savings of $33,000 (6.1 years simple payback) ✓ PACE funding available for up to 20 years 15

S CENARIO 1 – O WNER - OCCUPIED BUILDING 16 Key Attributes of owner-occupied buildings The owner is responsible for the payment of real estate taxes, building insurance, and common area repair and maintenance expenses Recovery of these expenses is through base rent Similar to owner-occupied buildings: Gross leases; Hotels; multi-family. Any energy efficiency savings flow directly to the owner's bottom line Energy efficiency projects – versus required infrastructure improvement projects - are evaluated on the basis of cash-on- cash return on investment

F INANCIAL I MPACT OF PACE – O WNER - OCCUPIED B UILDING 17 Simplifying Assumptions Annual Energy Cost Increase: 0% Annual Maintenance Cost Increase: 0% PACE financing interest rate: 6% 10-yr horizon for NPV and IRR calculations

F INANCIAL I MPACT OF PACE – O WNER - OCCUPIED B UILDING 18 PACE increases property value with no capital investment by the owner Self FundedPACE 20 yearsPACE 8 years Investment by owner ($200,000)$0 Decrease in energy cost $33,000 Increase in real estate tax $0($17,440)($32,200) EBITDA impact $33,000$15,560$800 Cash flow year 1 ($167,000)$15,560$800 Cash flow year 2 thru PACE term $33,000$15,560$800 Cash-on-cash IRR 13.4%N/A NPV of cash flow (8% discount rate) $36,000$104,000$5,300 Property value increase at 6% cap rate (during financing term) $550,000$225,000$11,000

S CENARIO 2 – T RIPLE N ET L EASES 19 Key Attributes of Triple Net Leases Real estate taxes, building insurance, and common area repair and maintenance expenses are "passed through" to tenants on a pro-rata basis based on the relative size (square footage) of the area occupied by each tenant The tenants are typically directly metered and responsible for utilities in their own space All energy efficiency savings in the common area generated from investments by the landlord go directly to the tenants' bottom line Any increase in real estate taxes can be passed through to the tenants

F INANCIAL I MPACT OF PACE – T RIPLE N ET L EASES 20 Simplifying Assumptions Annual Energy Cost Increase: 0% Annual Maintenance Cost Increase: 0% CAM Expense Recovery Rate: 100% Real Estate Tax Recovery Rate: 100% Green Lease Clause for CAPEX Recovery: Not applicable PACE financing interest rate: 6% 10-yr horizon for NPV and IRR calculations

I MPACT OF PACE – T RIPLE N ET L EASES 21 Financing energy efficiency through PACE improves the asset and can lower costs for tenants with no capital investment by the landlord Self FundedPACE 20 yearsPACE 8 years Investment by landlord ($200,000)$0 Decrease in energy cost for LL $33,000 Increase in real estate tax for LL $0($17,440)($32,200) EBITDA impact $0 Cash flow year 1 ($200,000)$0 Cash flow year 2 thru PACE term $0 NPV of cash flow (8% discount rate) ($200,000)$0 RET recovery from tenants $0($17,440)($32,200) Energy savings shared w/tenants ($33,000) Tenant annual net savings $33,000$15,560$800

PACE F INANCING – I N S UMMARY 22 Proven: Assessment districts have been use in the US since 1736, and PACE assessment districts are underpinned by the principle that energy efficiency and renewable energy projects on private property have a public purpose Voluntary: interested owners opt-in a PACE District to receive private market financing for improvements Senior: PACE has the same senior standing as non ad valorem taxes. As with taxes, there is no acceleration upon default. Well accepted by mortgagors. Tax Assessed: property owners who use PACE to finance retrofits pay for the improvements through annual assessment payments on their property taxes Availability: 32 States with PACE law. 15 States/DC with PACE programs in place. Transferability: Assessments are linked to the property and transfer to a new owner upon sale. No residual encumbrances and easy exit Beneficial: Covers 100% of costs, increases NOI and property value, improves aging infrastructure, and aligns landlord and tenant interests

PACEN ATION 23 Supporting the PACE Marketplace PACENation is a non-profit with a mission to promote PACE financing by providing leadership, support, resources, advice, networking and problem solving for a growing universe of PACE market participants. We’re here to help! Please reach out to us at or