'Everybody Loves A Coupon': Water, Energy Infrastructure Financing Expansion Could Be A Game-Changer

A policy change this month has unlocked low-cost, long-term financing for energy and water infrastructure at more commercial development sites in Texas. Yet its advocates say greater awareness around the option is needed to truly move the needle toward sustainability in the Lone Star State.

The state’s Property Assessed Clean Energy program, approved by the legislature in 2013 and voluntarily adopted by 80 local governments, allows cities and counties to work with private sector lenders and property owners to finance improvements that decrease water or energy consumption.

Since its inception, PACE projects across Texas have received more than $227M in infrastructure retrofits, translating to an annual energy savings of close to 58 million kilowatt-hours and nearly 87 million gallons of water. The program has also reduced carbon emissions by more than 32,000 metric tons per year, according to the Texas PACE Authority.

But before the recent change, which opens the door to PACE financing for mostly unimproved greenfield sites, the mechanism was only available for infrastructure upgrades to already-developed sites.

Members of Keeping PACE in Texas, the nonprofit that administers the program, said this discouraged developers from taking advantage of the financing since improvements are much more costly once a project has already been built.

Autumn Radle, program manager with the Texas PACE Authority, said she has been forced to turn away developers because their property is deemed a greenfield by the appraisal district. With so much new development happening in Texas, lowering the bar for PACE eligibility stands to make a big impact.

“We feel like we’re going to be able to say ‘yes’ a lot more than, ‘Sorry, that’s not what the statute allows,’” Radle said.

Unlike conventional financing, PACE requires little to no upfront cost, and payments are stretched across the useful life of the infrastructure, which typically amounts to about 20 years, Radle said. The improvements often result in utility savings that outweigh the cost of the financing, ultimately leaving money in the developer’s pocket.

This is especially useful now, when developers are feeling the pinch of rising interest rates and runaway inflation, Gensler Senior Associate Travis Albrecht said.

“With money getting more expensive, I think people will be looking for these lower-cost funding mechanisms,” he said. “The timing is perfect.”

The city of Dallas established a PACE program in 2016, and Dallas County’s iteration is expected to go live in early October. This will open up all properties to PACE financing, regardless of municipality, Radle said.

Since the city of Dallas’ adoption, 10 development projects have used the financing. The program supported $3.4M worth of HVAC, lighting and plumbing improvements at the RedBird Mall redevelopment, which is expected to cut the property’s annual utility costs by 16%, according to a PACE case study.

The $130M JW Marriott project, currently underway downtown, also tapped into the program. PACE equity in the amount of $5M was used to offset the higher cost of mezzanine equity in the developer’s capital stack, according to another PACE case study.

“During this COVID era, there are very few financing options, but we chose PACE Equity because the rates are very good, and the process is seamless,” Daniel Moon, The Sam Moon Group's vice president and general counsel, said in a statement. “They worked diligently with our senior lenders and despite the complications, PACE Equity kept things moving to hit our closing.”

Sharlene Leurig, CEO of Austin-based nonprofit Texas Water Trade, said opening PACE to greenfield sites is a game-changer for the state’s long-term water security. Some counties are experiencing their driest years on record, and with Texas’ population rapidly expanding, water reuse is an urgent need.

“If you drive over the Pedernales on [Highway] 71, you’ll see nothing but a dry riverbed with a bunch of docks sitting on limestone,” Leurig said. “So it’s coming at a really good time.” 

The change should encourage more developers to think about water-efficiency, Albrecht said. Because water is less expensive than electricity, developers often opt to invest in energy-efficiency, but that could change if water reuse systems are easier to install on the front end.

“In order to be very efficient with reclaiming or reusing water, it usually means added systems,” Albrecht said. “That’s been a big barrier on the water side of things ... just the big upfront cost.”

A rise in ESG investing should also support the broadening of PACE, said Mark Rudovic, principal and head of real assets at Hodes Weill & Associates. Investors eager to partner on sustainable projects can act as private capital providers for a developer’s PACE loan.

“There is a wall of private capital and dry powder that’s looking to invest in energy-efficiency and water-efficiency,” he said. “This will hopefully bring more and more private capital to the table and de-risk these projects going forward.”

Texas lawmakers, on the other hand, have been less accepting of the environmental, social and governance movement. Opposition toward ESG initiatives is one of the reasons why Keeping PACE in Texas pursued an operational tweak rather than a statutory change, Radle said.

“We just felt like now is not the right time to go to the legislature with something that has clean energy in it,” she said. 

Still, the state’s longstanding support of water conservation and its pro-business reputation should make it amenable to the PACE change, Leurig said.

“This is a tool that enables water conservation, and it saves developers money,” she said. “Everything about this tool is in line with what the political leadership of the state wants to support, and what their constituents want them to support.”

Despite the cost saving potential of PACE, the program has been widely underused across the state. Since its inception eight years ago, only 60 projects have tapped into the financing, and, as of late 2021, no buildings in Texas had used PACE to pay for water reuse projects, according to the San Antonio Express-News.  

Albrecht said the success of PACE will hinge on broader awareness among the development and finance community. Not enough people know that PACE is an option, he said, which is why it has been so slow to get off the ground.

“People need to be educated much more on this funding,” he said. “Just people knowing that there’s an offset to their upfront capital costs, that’s always encouraged. It’s like getting a coupon — everybody loves a coupon.”