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PACE Financing Allows Aldersgate Apartments To Put Costs on Tax Bill

7 min read

Pulaski County has given green building projects a lucrative green light, and developers of a west Little Rock apartment project have hit the accelerator.

The 50-unit complex, set to rise soon on Aldersgate Road, will be the first project in the county to use a financing option that pays 100 percent of the upfront costs of energy-saving upgrades — an option that lets the capital be repaid over many years as an addition to property tax bills. Energy savings over the payoff period are calculated to cover the cost.

The $6.6 million complex, known for now as the Preserve at Aldersgate, is also the first new construction multifamily project in the nation to adopt PACE financing. The method uses a special improvement district to pay for features that significantly save water and electricity or make other use of sustainable energy.

Developers are getting nearly $650,000 from the Pulaski County Commercial PACE program, funded through Pace Equity LLC of Milwaukee, and because of efficiencies, the financing won’t cost them a dime, officials say. That amount will come back, along with 6.5 percent in interest costs, through long-term energy- and water-bill savings over 20 years.

“It’s a better way to construct multifamily housing, a way to use clean and efficient energy in a beneficial way,” said A.J. Gilbert, the Little Rock managing partner in the development team, New Cap Investment Partners LLC. “It’s the new wave now, and we’re pleased tenants will be the beneficiaries as they save on energy bills.”

Pulaski County’s commercial PACE program — Property Assessed Clean Energy financing — and PACE Equity are providing $646,443 for efficient heating and air systems, water and electricity-conserving fixtures and a “green” roof that’s actually white. The apartments, which Gilbert is developing with Oklahoma urologist Dr. Bolaji Sofola and other partners, will also give the county something to show off.

Officials hope the three-story, 56,000-SF complex at 1310 Aldersgate Road, designed by Heiple & Wiedower architects of Little Rock, will be a model home for PACE. The goal is for businesses to eventually consider long-term PACE financing for virtually every project.

The selling point? It’s a way to afford clean-energy features that would be impractical under more conventional financing methods.

Environmental benefits aside, PACE won legislative approval in Arkansas with arguments that focused on job creation, higher property values and greater cash flow for business owners.

“PACE allows projects seeking capital to happen,” said Ethan Elser, vice president of PACE Equity, the financing originator. “Whether that’s solar, HVAC replacement, a change of use for a building or new construction, it’s a great solution. And the Aldersgate project itself represents milestones for PACE in Pulaski County, the state of Arkansas and the nation. We’re proud to be involved in it.”

PACE cuts upfront costs to borrowers, said Jordan Haas, a third-party administrator with PACE Arkansas. “In general under traditional financing you would spend 20 percent out of pocket with the bank paying 80 percent,” said Haas, who coordinated the Aldersgate deal. “I’ve seen dozens of projects that are energy efficient, but the owners had a problem with upfront costs. Those problems are eliminated with the PACE program. By paying 100 percent of those efficiency improvements, it cuts down barriers. It can also be done alongside a bank loan.”

(Also see: PACE Expands Improvement District Model)

The Aldersgate complex, mainly composed of one- and two-bedroom apartments, will get the bulk of its financing through a $4.75 million conventional mortgage from BOK Financial of Tulsa. The project is the biggest ever in Arkansas, dwarfing a $27,000 effort in Fayetteville, according to Will Gruber, a staff attorney for Pulaski County.

Hope for High-tech Jobs

Pioneered in California early this century, PACE was enacted in Arkansas in 2013 — with support from the Arkansas Advanced Energy Association and state Sens. David Johnson, D-Little Rock, and Greg Leding, D-Fayetteville — but it developed slowly here.

“With a first project like this, there’s a sigh of relief to finally break the ice,” said Pulaski County Judge Barry Hyde, who sees PACE as an engine for growing high-tech jobs. “We’re excited to get this project, and to get PACE off and running in the county. We expect growth to take off under this program in the next two years because it’s a great opportunity for so many different projects.”

Pace Equity is a specialist lender, but Gruber said state law allows money to come from almost any source, including banks or even individuals, meeting the qualifications of the county PACE board.

Pulaski County PACE is restricted for now to commercial, industrial, agricultural and multifamily projects (fourplex or larger). It requires developers to show that PACE-financed features will save more over the payoff term — up to 20 years — than they cost to install.

“The planned improvements are compared with efficiency projected from a baseline expected from work that is up to code, and the improvements have to perform above and beyond,” Haas said. “All this has to be quantified by an energy engineer, and the savings afforded by the improvements must outweigh the costs.”

The energy upgrades at Aldersgate should save $71,124, or $1.27 per square foot, in its first year, estimates suggest. The project’s annual property tax assessment will be $61,747.

Hyde described the overall program’s measuring stick. “Savings from the improvements must exceed the amount of debt service, or payment,” the county judge said. “You can’t just come in and qualify. You have to do the engineering to demonstrate what the savings are going to be, then a financial analysis to make sure the savings will cover things.”

But the payoff in advantageous financing is undeniable, he said. “We’re expecting growth to take off in the next two years, because this is a great opportunity for so many different projects.” Farmers could even use the program for water efficiency improvements on irrigation systems, he said.

Pace Equity is financing some 10 to 20 projects a year at today’s pace, but hopes to more than double that rate next year, Elser said. Haas has set a goal of $10 million in Pulaski County projects, and says he has $4.5 million of that total now in the pipeline, though it is too early to offer details. “Aldersgate is new construction, but these others are renovations of existing buildings, including work for a nonprofit organization and a hotel,” he said.

‘An Emerging Market’

In the Aldersgate complex, the PACE money went for efficient water heaters, insulation, double-paned windows, an advanced heating and air system, and a special thermoplastic polyolefin roof, Haas said. “It’s a TPO roof, a reflective white rubber-looking substance. It doesn’t retain heat, and it’s an insulation component in itself.”

Sofola, the Oklahoma physician, said the Aldersgate project is his first in Arkansas and his first collaboration with Gilbert, although he has partnered in other development projects in Oklahoma. “Little Rock is an emerging market, and we think there’s a lot of opportunity there,” he said.

Sofola leads Metis Legacy Partners, which includes the Aldersgate project in its online portfolio. Gilbert, who has bounced back from a 2011 bankruptcy filing, is a principal in CCI of Arkansas, the general contractor for the project.

CCI, a certified minority business enterprise, has a reputation for electrical contracting and environmentally friendly work. The electrical resume on its website lists renovations at the Clinton National Airport, a jail expansion in Conway County and additions at Crestwood Elementary School in North Little Rock and Davis Elementary in Bryant. The Aldersgate complex will be managed by Ledic Management Group of Memphis.

“We’re getting geared up now,” said Gilbert, who was a bond salesman and Church’s Chicken franchise owner before going into real estate in the 1990s. “The holiday season is upon us, and a lot of people are in hunting mode, but we’re hopeful to break ground in the next two or three weeks.” He said he expects to finish construction in the fourth quarter of 2017 or the first quarter of 2018.

Hyde emphasized that because PACE financing arrangements aren’t loans, but rather tax assessments, they attach to the properties, not the businesses associated with them. “The funding doesn’t go on a business’s balance sheet.”

Hyde said Gruber has been “working hard to get the word out to lenders,” and that the county has lined up several contractors with green expertise.

“We have several administrators on board, and we have interest from one in California that specializes in large industrial projects,” Hyde said. “We have a couple of industrial prospects, and when we get one closer to a commitment, we expect to push forward that relationship with the California administrator.”

Elser said a lot of work goes into a PACE project, and that his company’s job is to pull the pieces and stakeholders together. “PACE Equity pioneered the use of this financing with new construction,” he said. “Up until this year, it had only been used with existing buildings.”

The county would eventually like to expand the financing option to individual homeowners, but that might take some time. “We’re not doing individual-family residential right now because we have to make sure that PACE is off the ground and working smoothly,” Gruber said. The fact that there are “just so many more residential customers” could overwhelm the process in its infancy, he added.

But developers, commercial enterprises and industries should take note now, he said. “This could be part of a cost-benefit analysis we want businesses to consider every time they have a building or renovation project. The time is right, and it’s just a matter of making people aware.”

Hyde said now that PACE has a foothold, time is on its side. “If we can get a little momentum, this is really going to hit a home run. It’s just going to make a lot of sense for a lot of people.”

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