Developers grappling with the cost of new laws enacted to combat climate change are taking advantage a little-known finance tool to help pay for green-building requirements.

The model for the loans, known as Property Assessed Clean Energy, was created in 2008 to fund improvements that create environmentally sustainable and resilient properties. Now, developers are turning to PACE loans to help create more energy-efficient buildings and meet tougher environmental standards.

In Omaha, Nebraska, for instance, the Capitol District, a $205 million mixed-use entertainment development, has become the latest milestone in a long-running effort to revitalize the downtown area. The project’s developer, Shamrock Development, tapped a PACE program to pay for LED lighting, heat pumps, low-flow water fixtures, and other building materials and equipment to enhance energy and water efficiency.

Promoters say a PACE loan is better than conventional debt used for similar upgrades because it is typically cheaper, it has a fixed interest rate and terms are 20 to 30 years instead of three to five. Shamrock Development’s $24.9 million PACE loan, for example, has an interest rate a little below 6% and a 22-year term.

What’s more, unlike conventional loans, PACE financing becomes an assessment on the property. It is paid annually along with the real estate tax bill, and it transfers to new owners.

“Developers are always on the lookout for new tools to make their projects better,” said Michael T. Moylan, president of Shamrock Development. “We saw that PACE was going to be good for us — it made our buildings more energy efficient, and long-term fixed-rate financing is always attractive.”

Emerging from years of relative obscurity, the PACE model was used to finance $660 million of sustainable building improvements from 2016 through 2018 after funding only $208 million in the six previous years, according to PACENation, a nonprofit organization in Pleasantville, New York.

In addition, institutional investors such as Starwood Capital, Vulcan Capital and CarVal Investors are pouring hundreds of millions of dollars into PACE lenders. Petros PACE Finance, a loan provider in Austin, Texas, with a national platform, announced last year that it had received billions of dollars in commitments, including a $10 million round led by the retired baseball star Alex Rodriguez.

“It’s like we’re holding the tiger by the tail,” said Mansoor Ghori, chief executive and co-founder of Petros PACE, which originated the Capitol District loan. “Market awareness is taking hold, and volume could grow exponentially very quickly.”

The PACE model originated in Berkeley, California, when the city was looking for ways to help residents pay for solar panels and other energy modifications. Financing programs for commercial properties soon followed. So far, 36 states and the District of Columbia have passed legislation to allow the use of PACE financing for commercial properties.

Laws fighting climate change in California, New York and elsewhere are expected to accelerate demand for PACE. “States and cities are putting a heavy burden on commercial real estate owners, who see these ambitious climate targets as unfunded mandates,” said Jessica Bailey, chief executive and co-founder of Greenworks Lending, a PACE lender in Darien, Connecticut. “So PACE is a carrot to the stick that gives property owners a way to finance more energy-efficient systems.”

Better yet, PACE will help developers meet the requirements of green policies without using subsidies, said Jake Baker, managing director of Starwood Sustainable Credit, an affiliate of Starwood Capital that has committed $500 million to CleanFund, a PACE loan platform.

“It allows market mechanisms to work,” he said, “and has the best chance for success.”

PACE’s original mission was to finance green upgrades in existing buildings. But developers are increasingly using the programs to fund new construction and the gutting and renovation of old buildings. Lenders expect this activity to accelerate in the coming months, especially in light of PACE’s flexibility and affordability.

Developers can borrow up to 20% of a project’s cost in PACE funds, for example. Banks generally finance only around 60% of a project’s cost, and a PACE loan can help bridge the gap. Additionally, PACE is replacing more costly financing, such as mezzanine debt. Mezzanine interest rates are around 12% or more, while PACE rates are generally 6% to 8%.

“The financial industry recognizes that as a form of commercial real estate finance, PACE is here to stay,” said Lain Gutierrez, chief executive of CleanFund, which is based in Sausalito, California. “Apart from the public policy benefits, it has intrinsic value.”

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