Some Commercial Property Owners Can Go Green With ‘Propertyfit’

Originally published by the Daily Journal of Commerce on December 6, 2022.

With more and more corporate tenants and institutional owners looking to reduce their carbon footprints, clean energy improvements in initial project development as well as upgrades to existing projects have become more appealing. However, with interest rates and material costs on the rise, financing improvements that do not directly result in an increased return can be particularly challenging.

As a result, commercial property owners looking to include clean energy improvements in their projects or make seismic upgrades may want to consider using a relatively new program known as “PropertyFit”—Multnomah County’s Commercial Property Assessed Clean Energy (CPACE) financing program. PropertyFit provides an alternative to potentially more expensive sources of capital—all while allowing building owners in Multnomah County to potentially lower their operating expenses, increase their properties’ desirability, and decrease their carbon footprints.

According to the U.S. Department of Energy website: “CPACE is a financing structure in which building owners borrow money for energy efficiency, renewable energy, or other projects and make repayments via an assessment on their property tax bill. The financing arrangement then remains with the property even if it is sold, facilitating long-term investments in building performance. CPACE may be funded by private investors or government programs, but it is only available in states with enabling legislation and active programs.” According to PACENation, 30 U.S. states have active CPACE programs, through which $4.2 billion has been invested in 2,900 projects since 2009.

In 2015, Oregon enacted statutes enabling local governments to create CPACE programs that harness private capital for the purpose of energy efficiency upgrades and seismic rehabilitations. The CPACE statutes grant local governments the authority to place “benefit assessment liens” on the CPACE properties that have the same priority as liens created under the local improvement lien statute. The statutory lien authority lets the county collect project debt service payments in conjunction with property tax assessments to reimburse the project’s private capital investors. PropertyFit, founded in 2015 to support Multnomah County’s carbon reduction goals, is administered by Prosper Portland and serves as the public face of the joint CPACE program in partnership with Multnomah County and Energy Trust of Oregon.

So how does a commercial property owner in Multnomah County take advantage of the PropertyFit program?

• Contact PropertyFit and connect with a project advisor to review the program and its detailed requirements.
• Ask Energy Trust of Oregon, one of the PropertyFit program members, for a vetted list of potential construction vendors depending on the nature of the proposed improvements.
• Take note that while PropertyFit has a list of private lenders already enrolled in the CPACE program, a building owner can also bring its own lender, provided that the lender completes the PropertyFit enrollment process.
• Keep in mind that when the building owner selects a lender, and the lender is satisfied with its due diligence review of the prospective borrower, the parties complete the transaction documents and prepare for closing.
• Recognize that upon closing, the lender wires funds to the building owner to finance the projects, but instead of the lender recording a deed of trust as a monetary lien against the property, the county uses its lien authority created under the CPACE statute to place a benefit assessment lien on the property and collects the CPACE debt service payments simultaneously with the routine property tax assessment over the term of the loan.

PropertyFit offers several advantages for building owners, borrowers, and the Multnomah County community. With inflation roaring through the economy, the immediate cost savings from clean energy and efficiency upgrades can generate meaningful margins for building owners. PropertyFit borrowers can fully amortize their loan repayment over the weighted average life of the improvements to be installed (up to 30 years), and do not have to personally guarantee the loan. PropertyFit financing is not intended to replace traditional mortgage financing, but rather offer a potentially cheaper alternative to owner’s equity or mezzanine debt in the capital stack. From the lender’s perspective, PropertyFit provides it a pipeline of prospective borrowers and loans secured with a higher priority lien than a traditional recorded deed of trust. Lastly, from a public policy perspective, PropertyFit may benefit everyone in Multnomah County by incentivizing investment in cleaner and more resilient commercial properties.

However, as with any program that seems “too good to be true,” there are a few catches. First, the Oregon CPACE statutes apply only to “qualifying” properties in need of “utilities improvements” or “seismic upgrades” as determined by the local government. In Multnomah County, PropertyFit applies to existing buildings, new construction projects or “look back” projects that have been completed within the past 24 months that are multifamily (five or more units), commercial and industrial properties. Building owners should contact PropertyFit to confirm whether their buildings meet the established criteria.

Second, because the lien that secures the CPACE loan will have priority over the rest of the property owner’s financing, the property owner’s primary lender may not allow it and, if it does allow it, may include the payments on the CPACE loan in its evaluation of the property owner’s compliance with loan covenants (e.g., debt service coverage ratio tests).

Third, the building owner can borrow no more than 30 percent of the value of the property to finance the purchase of improvements that relate to the “utilities improvements” or “seismic upgrades” set forth in the CPACE statutes.

Fourth, in addition to the property owner’s obligation for a series of third-party closing costs (title reports, building energy audits, legal fees, appraisal costs, recording fees, etc.), PropertyFit charges a 1 percent “program administration fee” at closing and an annual “servicing fee,” which is 0.25 percent of the outstanding loan balance. However, such closing costs and fees are “eligible costs” that can be included in the PropertyFit financing, covered at closing, and paid back over the lifetime of the loan.

Utilizing the resources made available by PropertyFit, building owners in Multnomah County can invest in their properties with a focus on the long run. Building owners should consider engaging professionals experienced in commercial real estate finance transactions and local Multnomah County regulations to make the process go as smoothly, quickly, and painlessly as possible.