Green Roofs - Living Architecture Monitor - Winter 2017 - 13

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- ERIC J. ALINI

SPLIT INCENTIVE

PACE is the long-awaited solution to the commercial building
sector's greatest barrier to environmental best practices: the
split incentive. Split incentive relates to commercial real estate
lease language obligating a tenant to pay for utility costs and a
landlord to pay for building upgrades. Building owners, carrying
all the costs of the upgrade and passing all the energy savings to
the tenants, may never see a positive return on the investment.
So it's not surprising that Lawrence Berkley National Lab's 2013
"Remaining Market Potential of the U.S. Energy Services Company Industry" found commercial buildings lag behind all other
building segments with a pitiful 10% adoption rate of energy
efficiency technologies. PACE solves the great split-incentive
dilemma by converting project financing to property tax assessment financing. This triggers an accounting transformation with
considerable benefits. Under most commercial leases, tenants
pay the utility bills and the property tax, placing them with de
facto responsibility for repaying the cost of projects while benefitting from lower utility bills- closing the split-incentive gap.
Now commercial building owners can access low-cost, private
sector capital to pay for 100% of eligible projects, finance the
cost of the project over time to ensure that the annual payments
are less than the annual utility savings, and avoid split-incentive.
On top of that, debt liability may not be impacted if the financing receives off-balance sheet treatment. The building is improved without any capital expenditure and operating expenses
are reduced.

THE PPA MOMENT FOR GREEN ROOFS

Could PACE be the special ingredient that makes green roofs
commonplace? There is precedent. Before Power Purchase
Agreements (PPA) were introduced to the solar industry,
rooftop solar was a luxury consumer product. The advent of
the PPA made solar energy an economically attractive option
for building owners. PACE financing may have the same
transformative power on the green roof industry.
As markets learn to use PACE at a meaningful scale, its
impact will be felt across industries. Already, the earliest
signs of disruption can be seen. Contractors who quickly
learned the basics of PACE are starting to grab market share
by offering a solution that sets them apart.
PACE is still in its infancy, having only developed the
public sector infrastructure necessary to handle the cash
streams over the last 3 to 5 years. Its potential is clear with
early signs of exponential growth. Rocky Mountain Institute
promotes it - Lawrence Berkeley National Labs validates
it - and Scientific American magazine calls it a top 20 "world
changing" idea. Red and blues states across the country are
passing legislation to enable it, making PACE financing
the fastest growing financial tool in the U.S. As PACE goes
mainstream, vendors who align with this tool will emerge
as new industry leaders and products once thought to be
luxuries will become the new standard. Green roofs should
be one of those standards emerging as the new norm for
America's buildings.

Eric J. Alini, Chief Executive Officer, Counterpointe Sustainable Real Estate Mr. Alini is the founder and Managing Partner of Counterpointe Energy Partners, LLC. Mr. Alini is also the founder of Counterpointe Capital Management LLC (CCM), a tax lien asset manager
and servicer. CCM has managed over $240mm in tax lien assets over the past 3.5 years.
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Table of Contents for the Digital Edition of Green Roofs - Living Architecture Monitor - Winter 2017
