PACE Financing for Commercial Real Estate Companies Money is often misunderstood… George Caraghiaur Senior Fellow, PACENow April 2015

A T YPICAL CFO O BJECTION TO PACE F INANCING 2 “ You know, I just raised $300 million for 30 years at less than 4% interest rate. You tell me that I should use PACE financing that will cost me 6% for 20 years. You will understand my skepticism of your claim that this would be in my company’s best interest...”

L ET ’ S N OT C ONFUSE A PPLES WITH O RANGES 3 The Objection: the CFO objection is based on his company’s cost of “corporate” debt. PACE: PACE funds represent project financing.

T HE T RUE C OST OF C ORPORATE C APITAL 4 The money a corporation invests typically comprises two components: debt and equity. The true cost of corporate capital is the weighted average cost of the two components. Assuming a capital structure consisting of 50% debt and 50% equity, with a cost of debt of 4% and cost of equity of 12%, the weighted average cost of corporate capital is 8%: Weighted avg. cost of capital = (0.5 X 4%) + (0.5 X 12%) = 8%

T HE T RUE C OST OF C APITAL A LLOCATED TO P ROJECTS 5 Corporate Capital is not infinite. For that reason, it is rationed to a company’s projects using hurdle rates that are based on capital requests, relative importance and perceived risks. Required Simple Payback Effective Hurdle Rate (IRR - 10 yrs) 3 yrs31% 4 yrs21% 5 yrs15%

M ONEY IS O FTEN M ISUNDERSTOOD 6 Corporate Debt 4% Corporate Capital 8% Project Capital 21%

PACE VS R ATIONED I NTERNAL C APITAL 7 PACE Project Financing

A N E XAMPLE TO U NDERSTAND THE P OWER OF PACE F INANCING Project involves a $200,000 energy efficiency retrofit Annual energy and maintenance savings are estimated at $35,000 (5.7 years simple payback) At 10.2% IRR over ten years, the project does not pass the company’s 4-yr simple payback - 21% IRR hurdle rate for investment in energy efficiency PACE funding is available for 20 years at 6% 8

T HE A NSWER TO THE CFO O BJECTION 9 “ PACE can finance projects that would never be funded internally because they do not meet the company’s internal hurdle rate. In the process PACE would generate free cash flow for your company. You really should use as much of it as you can get.”

F OR MORE INFORMATION 10 For more information, or if you have any questions, please