The Commercial Property Assessed Clean Energy and Resiliency program launched by Fairfax County in February 2020 provides commercial property owners, both for-profit and non-profit, the opportunity to make substantial improvements to their buildings with little or no money down. On top of that, C-PACE projects can be net-positive in their first year as owners turn what would usually be considered capital investments into operational expenses. Does it sound too good to be true? Read on as we illustrate why C-PACE makes perfect sense using three different scenarios with the same initial parameters provided by the Virginia PACE Authority, the C-PACE administrator for Fairfax County.
Take a $2 million energy efficiency improvement project that is expected to yield $320,000 in savings annually, starting in year one. In the first scenario, the project is paid for with cash. In the second scenario, a traditional bank loan is used to finance the project. In the final scenario, the project is financed using C-PACE.
|Down Payment||($2,000,000)||15% ($300,000)||$0|
|Loan Term||NA||5 Years||20 Years|
|Annual Energy Cost Savings||$320,000||$320,000||$320,000|
|Net Annual Cash Flow||$320,000||($62,295)||$139,022|
|5-Year Net Cash Flow||($400,000)||($611,475)||$695,110|
|5-Year NPV at 6%||($258,430)||($530,574)||$585,611|
|5-Year Internal Rate of Return||-7%||NA||Infinite|
In the first, cash-only, scenario there is no annual payment or interest to contend with and you start to see energy cost savings right away, but your net cash flow is still in the negative after five years. In the second scenario with the traditional bank loan, you need to have $300,000 on hand for a down payment just to get started. Thereafter, you’ll pay about $380,000 each year on the loan, which outpaces your annual energy cost savings, leaving you in the negative at the five-year mark.
Finally, in the C-PACE scenario, there is no down payment and the full cost of the project is financed over 20 years. C-PACE financing is unique in that it allows for the loan to be repaid over the lifetime of the improvement. Though this may lead to a higher interest rate than a traditional construction loan would carry, the lack of a down payment and the lengthy term of the loan make it worthwhile. In the first year, the annual payment in this scenario is just under $181,000, meaning you see net-positive cash flow right out of the gate. At five years, you will still be net positive, a sharp contrast to the other two scenarios.
Looking for more information on C-PACE in Fairfax County? Visit our landing page here, or go straight to the Virginia PACE Authority site. You can also view a series of videos from a webinar held in April 2020 describing the Fairfax County C-PACE program and how PACE financing works in general.