PACE Financing for Commercial Real Estate with Mansoor Ghori – CREPN #249

Posted by on May 27, 2020 |


Mansoor Ghori  0:00

What PACE does it allows them to look longer than one year allows them to look through, you know, 2, 3, 4 years down the road down the road, and pull all those ECM that they’re going to do over that time period into one holistic project that they can do day one, because of the fact that there’s long term financing. It should be net positive from day one.

Unknown Speaker  0:22

Welcome to C R E P N Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant We are here to learn from the experts.

J Darrin Gross  0:42

Welcome to Commercial Real Estate Pro Networks CREPN Radio, Episode Number 249. Thanks for joining us. My name is J Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Where we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio. Let’s get into the show. today. My guest is Mansoor Ghori.  Mansoor is the co-founder and CEO at Petros PACE Finance. And in just a minute we’re going to speak with him about PACE financing, what it is, and how it can help commercial real estate investors. But first, a quick reminder, if you like this show, CREPN radio, please let us know. You can like, share, or subscribe. And, as always, please leave a comment. We’d love to hear from our listeners. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. And that’s Commercial Real Estate Pro Network on YouTube. With that, I want to welcome my guest Mansoor. Welcome to CREPN Radio.

Mansoor Ghori  1:57

Thanks, Darrin. Appreciate it.

J Darrin Gross  1:59

Alright. Well, I’m really looking forward to our chance to talk today. And, before we get started, if you could take just a minute and share with listeners a little bit about your background.

Mansoor Ghori  2:10

Sure. So, I’ve been in the in the commercial lending venture capital and structured finance world for over 30 years now. We founded our firm Petros PACE Finance in 2011, actually. And really what it is is Petros is a structured finance shop and really what we do is we create fixed income instruments that we then get rated, securitized and sold to large institutional investors. PACE is one of those products that we create and we started the PACE part of it, probably in 2013 or 2014 to really kind of get into the industry and are now the largest commercial PACE provider out there.

J Darrin Gross  3:02

Great on the PACE. I think that’s kind of the main, you know, interest as far as what led me to reach out to you. And it sounds like you’re clearly – if you’re the largest – you’re the right guy to talk to about this. For the uninitiated, can you explain what it is, just as an overview, what PACE stands for?

Mansoor Ghori  3:25

PACE stands for Property Assessed Clean Energy. And what it does is allows people like us to enable commercial property owners to either retrofit or build new properties with more energy efficient upgrades. And it allows us to do that over a period of time, which is much longer than they would get if they got a bank loan. So, we can actually do the PACE assessment financings over a period of up to 30 years or the weighted average life of whatever’s being put in. So, when you think about that from a commercial real estate owner’s perspective, historically, there has not been a lot of energy upgrades to properties because the cost benefit just never made any sense. Right? So, you know, the payback periods on a lot of these upgrades are anywhere from, you know, 10 to 20 years or maybe even longer. But the financing that they would get for it from a bank would be anywhere from three to five years. So, the project was always underwater. Now with PACE, it allows us to do this, where the project is net positive from day one, because we’re doing it over the extended period of time. And it’s much cheaper than using your own capital and a lot of these commercial property owners want to use their own capital for higher return items and commercial PACE improvements are not a higher return items, so they’d rather go out and buy new properties or, or do something else with their money. So, this is a great mechanism for them to be able to retrofit those properties and actually be net positive from day one.

J Darrin Gross  5:18

Or cash flow positive from day one for a capital improvement project. That’s, that’s unique. I mean, that’s not exactly the way the conversation usually goes. Right. So, talking about energy, is there an audit? Or how do we determine, you know, what our baseline is? Is there a need for a measurable improvement?

Mansoor Ghori  5:45

Yeah, so first of all, every deal that we do, there’s an energy audit that’s completed, whether it be a retrofit project, or whether it be a new construction gut rehab project, so that energy audit will go out there and for retrofit project we’ll look at what’s currently in there. And they will then look at what is going to be put in there. And they’ll do the analysis to figure out what the difference in savings is going to be with the new ECMs on a new construction gut rehab project that’s hard to do. People use as a baseline typically code and then they’ll look at code and look at ECM that are either above code or add code to figure out what you know the potential energy usage is going to be on those new properties. Okay, but every project does have an energy audit that’s completed.

J Darrin Gross  6:39

Got it. On the retrofits, if we start with a baseline and the projected improvement is, you know, whatever it is, is there a time period for monitoring to confirm that we’ve met that or is it just a one time we did the calcs and we’re good to go?

Mansoor Ghori  7:00

Yeah, that’s a good question. And it depends per state and per program. So, there are some programs that require that you continue to do the monitoring to make sure that savings are there. And there’s one program in particular, I think it’s the Michigan program for a, smaller transaction, so that’s typically less than $250,000. Actually, I’m sorry, if it’s greater than $250,000 dollars, and there’s an energy guarantee that the contractor has to actually give the borrower or the property owner. And what that does is it guarantees that the savings that the energy auditor actually projected are going to be there and if not, then he’s coming out of pocket to make that difference up. So, there are specific programs that make you actually monitor your results and others that don’t necessarily monitor that from a year to year basis, but you know, the borrowers are actually watching to make sure that those savings are there.

J Darrin Gross  8:07

And so, in the spectrum of energy savings, and I guess my first thought would be like heating and cooling are, you know, windows or your water? Is there a defined list of projects that are eligible?

Mansoor Ghori  8:29

So, it’s not a defined list of projects. But there are a defined list of ECMs. And once again, that changes by program and by state, for instance. In California, there’s seismic upgrades that are allowed under the PACE program. And since California is really kind of the only state that has the issues with earthquakes, that same allowance is not used in other states like Texas or Florida or whatever. But in Florida there’s hurricane resistance measures that are included in the program which are not included in other states. So, it is more program specific, but in general a lot of the similarities are things like water, things like renewable energy, whether it be solar panels wind or some other renewable energy. There’s also lighting, lighting controls, chillers, boilers, windows, windows tinting, and other energy saving upgrades. So, there’s a big list that that is similar and then for specific states, there are some differences, some nuances

J Darrin Gross  9:51

Got it. So, if I have a project that we’re gonna, you know, or that’s got elements that qualify that we can do through PACE, you mentioned kind of the weighted average as far as the length of the payback. So, if I’ve got something that’s 20 years and I’ve got something that’s maybe seven years and, and on and on, do they basically just take all those up and come up with an average and that becomes my length of the payback?

Mansoor Ghori  10:26

Exactly, so not the payback, but the length of the assessment. So, you know, we’ll figure out exactly what that length, you know, the average life is of everything being put in, and then that will be the length of the actual assessment. So, if it’s 17 years, our assessment will be on our property for 17 years. So, what that does, is it enables the net positive from day one feature of PACE. You know, the reality is if you had, you know, a 20 year, weighted average life of ECM is being put in yet you’re 10 or were 10 years, then once again, it’s the same concept of getting a three year loan for a 10 year payback type issue when you’re underwater. So now this kind of stretches it out so that whatever is being put in, you should be able to be net positive from day one because the length of the assessment is the same as what the weighted average useful life is.

J Darrin Gross  11:34

Are there like some sweet spot kind of items that you typically see? I mean, you mentioned kind of California and Florida being unique with their environmental, you know, issues that they have there but is there kind of a sweet spot of things that you typically see as a kind of lighting and water?

Mansoor Ghori  11:56

I think the majority of what we see is lighting, lighting controls, we see chillers, we see boilers, and we see kind of like window envelope type deals. We have not seen as much solar as we thought we’d see. And that’s primarily I think, because solar so far is a really nice to have, but it’s not a have to have. And these guys are looking at their ECM, they’re looking at their capital budgets over the next three to five years and saying, Okay, well, what do we actually have to change out? Right? They have to change out the HVAC because they’re going to go bad. And if it’s in a warm state, guess what happens in the summertime. You know, same thing with the boilers up in a cold region, they have to get those changed out so that they’re not freezing during, you know, the winter in Minnesota. So, look at the things that they absolutely have to change up first, and then eventually they’ll start going and looking at things that will be nice to have, as we see more mandates, like what’s happening in California right now, for solar. So recently, there was a law that was passed where all new construction of commercial buildings have to have solar on them. And those I think start taking effect, maybe 2021 and 2022. But as we see more of those mandates that are spread across the country, then I think we’ll probably start seeing more solar projects. That make sense.

J Darrin Gross  13:29

Yeah. Where did you say that was mandated for? California? Yeah. That would certainly drive the demand for, you know, more installation of solar, which, sometimes, that’s what it takes is some sort of a governmental rule like that, right. So, so let’s talk a little bit about the money. We’ve talked about the length of the payback. You introduced in your introduction there about how you raise capital and I didn’t add on, but basically the mechanism I guess for the financing for the long-term financing for this, if I have a project and I’m seeking financing for it, is do you go to the originator of the PACE program? Is it available through different mortgage brokers or how’s that?

Mansoor Ghori  14:41

Yeah, actually, you can come directly to us. So, you can come to us directly and there’s, you know, a handful of others that are more national, that we’ll be able to do deals for you but we’re the actual lender, right? So, if you come to us and there is no fee in between, you know, the commercial property owner and us where the property owner has to pay the broker typically a fee. So, if you come to us you kind of skip that routine. And we actually do the structuring the underwriting and the funding of the transaction.

J Darrin Gross  15:19

Okay. And can you also do like if it’s a new purchase, and I’ve got, you know, essentially, just for round numbers, a $1 million building and traditional financing to require that I come up with $250,000 or $20o,000 worth of down payment. Can you do the balance of the financing?

Mansoor Ghori  15:46

So, the way that it works in PACE is we’ve got limitations, so we’re typically not more than 30% or 25% of a of the market. The value of that property if there is a mortgage on the property, and we can go up to 35% if there’s no mortgage on the property, so let’s just say it’s a $10 million building. We can finance and there is a mortgage on the property we can finance up to two and a half million dollars on that property. Okay.

J Darrin Gross  16:19

Okay. And how would you tell me on the capital stack, is that now a lien against the property? Or how does that work in there?

Mansoor Ghori  16:37

Yeah, so that’s, that’s a great question because that’s kind of comes to the essence of what PACE is. So, PACE is actually considered a property tax assessment. So, when we close the transaction, what happens is it gets recorded at the county recorder’s office, and it is a property tax lien against that property. Okay. Now, that does not restrict any senior lender from doing what they need to do on the property. So, if they’re delinquent to the senior lender, the senior lender has all the remedies that are available to it to take the property back, go sell it and get their money out. Our PACE money stays on that property. So, it transfers from one owner to the next automatically, and it stays there as the PACE assessment, so for any one year our payment is looked at as a property tax. So, it’s included with the property tax at the borrower pays normally, right?  So that’s how it works.

J Darrin Gross  17:49

So, I’ve got my normal property taxes. Now I’ve added some PACE financing. Would that payback view essentially just the amortized payment of whatever the length of term of the amount of financing that I collected for the PACE?

Mansoor Ghori  18:12

That’s right. So, if it’s, you know, if it’s a 20-year loan, that assessment is fully amortized over 20 years, okay? And every year the payment stays exactly the same. So that does not change unlike the normal property tax, which may go up or down based on the value of the property. The property tax assessment for PACE stays exactly the same over the life of the assessment.

J Darrin Gross  18:45

Okay, so the PACE is a separate assessment from my normal property taxes.

Mansoor Ghori  18:51

Yeah, there’s two line items. One will be your normal property taxes. Then the second, you know, PACE assessment.

J Darrin Gross  19:00

Okay, so the PACE assessment is frozen for the life of that payback, correct? Correct. And is that independent then of the balance of my property tax that’s still subject to whatever? Okay. Yeah. Gotcha. You talked about the return this does using the PACE and you talked also about how the lenders view it in that, that it’s kind of separate. Does that lessen my need to bring capital to the deal then if I’m utilizing PACE financing for, like we’re just illustrating like on a typical deal, if you had, say, a million or $10 million, and you needed to bring 20% down payment, to get into the property and the bank lends, you know, 70% or 80% of the balance. Can you mention you could go up to 25%? Is that it? Is it possible that could be my down payment or equate to my down payment?

Mansoor Ghori  20:13

That’s a good question. So, PACE is generally used to replace either equity or mezzanine debt or some other types of financing. So, in a situation like you just mentioned, it wouldn’t replace all the equity. I mean, I think everyone wants to make sure that there’s at least some skin in the game by the property owner, whether that number is 10%, or a little bit more, a little bit less, you know, that’s, that’s something that’s has to go through underwriting, but everyone wants to see at least some money in there. But if you’re looking at a situation where you have to come up with 20% or 25% equity on a transaction with a senior lender, PACE can certainly replace some portion of that. So, you would come up with less money and use PACE for that difference.

J Darrin Gross  21:03

Got it, got it, but it certainly sounds a lot more attractive than the traditional whether it be a bridge loan or you know, some sort of construction financing.

Mansoor Ghori  21:14

And the other aspect of PACE is that it does not accelerate, and it is non-recourse to the property owner.

J Darrin Gross  21:23

Alright. You know, we talked about these, these different kind of line item projects and stuff. And my hunch is, is that or I guess my thought is that there’s likely some of these projects that could be partly PACE, partly non-PACE. You know, if you’re doing a rehab of a property, and you were upgrading you know, certain elements or there’s still a balance of things that were outside of the PACE is that typically the case?

Mansoor Ghori  21:59

Yeah, we’ll see. On almost every project we do, there’s a portion that’s PACE and a portion that’s not PACE. So, in a situation where there is a senior lender that’s doing the non-PACE and the PACE lender doing the PACE portion, there’s draw schedules that are agreed to upfront on the items that are PACE eligible, and the items that are that are non-PACE eligible. The senior lender then does the draws based on the on the items that are non-PACE, and we do our draws based on the ECM, or PACE eligible.

J Darrin Gross  22:37

Got it. Is there a minimum amount or a maximum? You mentioned a percentage of the market value, but is there a minimum amount that PACE works for?

Mansoor Ghori  22:54

So, there’s a minimum amount for us. We typically will not do a transaction below a half million dollars. But there are other PACE providers that will go below the half million dollars. On the upside, we don’t necessarily have any limits. So, we’ve got transactions that are out there with term sheets that are, you know, couple hundred million dollars to $500 million, so that the upside is unlimited, as long as it fits the ratios that we talked about.

J Darrin Gross  23:36

We talked a little bit about the transferability of the PACE financing. If I have PACE financing in place, and I’ve got say 10 years left on my PACE financing and let’s just say for round numbers that the balance owed is a million dollars. How is that reflected in a in a sale and subsequent sale to a new buyer?

Mansoor Ghori  24:08

That is a question that really has to be negotiated between the buyer and the seller. So, what I’ll tell you is that the million dollars will have a cost to it, which is the typical, which is your PACE assessment cost every year. But putting those retrofit ECM in there should give you also a reduction in utilities. So, theoretically, the savings from the utilities should offset the additional cost on the assessment. And, so you know, it shouldn’t really affect your NOI. So, your property value should theoretically be the same or maybe even higher. But there’s also deals I’ve seen where they take the assessment into consideration as part of reducing some portion of it in the purchase price. So, it’s all a negotiation based on what’s kind of put in and what it does today and why and cap rates and those kinds of things.

J Darrin Gross  25:17

Well, it still seems like though the, from a performance thing, if the improvements are done right away, and I’m getting the benefit of those right away without going negative for multiple years waiting for the payback, that the project owner, the seller and I would assume that the buyer would recognize that, unless they’re at the tail end of these things, and they’re nearing the need for replacement again, kind of thing, but I would think that there would be some sort of recognized benefit there.

Mansoor Ghori  25:57

Yeah, and I’ve seen transactions with that concept for sure. And that makes a lot of sense because that’s the way that we look at PACE.  Look, because you’re actually saving more than you’re paying that should not negatively affect NOI, and why it should be positive to your NOI. And so, your NOI should go up. And if you attach a cap rate to your increase, NOI, your valuation on your property should go up. Right? So that’s, that’s certainly one of the arguments there. And, but like you said, if you’re down, you know, 10 to 15 years into this thing, and you’re kind of at the very tail end, you know, maybe more of the savings were at the, the front end versus the tail end and it may not be the case at the very end.

J Darrin Gross  26:44

Got it. What have you seen any resistance to PACE financing, or?

Mansoor Ghori  26:57

So that’s a good question. So, in the early years of PACE, there was a lot of resistance from senior mortgage holders primarily because they’d never seen PACE before. This was a, you know, kind of a new concept. They didn’t really know how it works. And they didn’t really understand, you know, what the remedies were in a situation, whether it was, you know, issues from their perspective with the property owner. And over time, over the last three or four years, what we’ve seen is there is a lot more now understanding of what PACE is and how it fits and how it works with a senior mortgage, and we’ve seen less and less and less resistance. So other than that, we’re seeing, you know, a lot of eyes opening from a commercial property owner perspective, because they’d never heard of PACE. And they’re now looking at this saying, wow, that would be great in our cap stack. Especially the guys that are doing the new construction gut rehab projects, because as you know, banks are getting tighter where they can kind of at the end of a cycle now. So, loan to cost ratios from banks are tightened. We’ve got the EB five program that’s not as robust as it used to be due to political issues. So, there’s more, there’s more gap in the cap stacks for those new projects that need to be filled and PACE is a perfect kind of, you know, step to put in there to kind of fill that gap.

J Darrin Gross  28:39

You know, I’m an insurance broker. And, I mean, the capital improvements are just ongoing as far as what insurance companies are looking at. They’re recognizing a lot of the claims that they’re paying or are related to these older systems. And as such a lot of the carriers are kind of narrowing their view of what a desirable risk is. And they’re usually saying something that’s, you know, 30 years or newer. And, and this is, to me, this is like just the opportunity for somebody that has a property that not only are they I mean, if they don’t take care of it through something like PACE, we’ve already talked about the ongoing costs, and the negative return or the you know, how many years it takes to pay it back. This could have multiple benefits, as opposed to just the, you know, you’re getting your system replaced, you’ve got long-term financing, which makes you cash positive, and now you can make your insurance company happy.

Mansoor Ghori  29:44

That’s right. So, I mean, I think you hit on some key points here. So, you know, one of the things that property owners do is they’re looking at either their deferred maintenance that they’ve got to do, or and they’re looking at the capital expenditures for each year going forward, and they typically don’t like to go beyond one year at a time, because it’s just a lot more capital that they have to kind of invest. What PACE does it allows them to look longer than one year allows them to look through, you know, 2, 3, 4 years down the road, and pull all those ECM that they’re going to do over that time period, into one holistic project that they can do, because of the fact that there’s long term financing, and it should be net positive from day one. That’s great. All of a sudden, their properties are getting improved much quicker than, you know, three, four years down the road.

J Darrin Gross  30:39

Yeah. Are you trying to try to finance it out of you know, cash flow and you basically are in zero or negative or are waiting for everything to be done, and it’s just ongoing because you can’t get it all done? Oh, yeah. It’s great. Any advice to a real estate investor, that’s looking to get started and are looking for PACE? Or is there something that you should they should look for? Be aware of?

Mansoor Ghori  31:10

You know, I think I think the way they should do it is, you know, they should get a hold of people like us and walk through what they’re trying to do. We have folks here that can kind of help them through what a project would look like and what they have to do to pull together to at least get an indication of whether that’s a deal that can get done through PACE or not. And if it’s not, then what are the things that are missing? But that would seem to be the easiest way to do it

J Darrin Gross  31:39

Got it.  Mansoor, if we could, I’d like to shift gears here for a second. As I mentioned to you, by day, I’m an insurance broker. And we work with our clients to assess risk and try and manage the risk. And there’s a couple different strategies we typically consider. The first is we ask can we avoid the risk. The second we, if we can’t avoid it, we look to see if we can minimize the risk. And if that’s not a possibility, then we look to see if we can transfer it. And that’s what an insurance policy is. It’s a risk transfer mechanism. And so, I like to ask my guests, if they can take a look at, you know, their environment and how they are working with investors and what they see and if they can, to identify what they see is the biggest risk. And so, if you’re willing, and just be clear, I’m not necessarily looking for an insurance related answer. Kind of a blank slate. You can define it however you choose. But again, if you’re willing, I’d like to ask you Mansoor Ghori, what is the biggest risk?

Mansoor Ghori  32:55

So, I’ll kind of address this from a PACE perspective because I think from more of a higher-level perspective in terms of the economy, etc. I don’t necessarily see a downturn in the economy as a risk to the PACE in which you actually think that is an opportunity. Because all the rest of the money in the capital is going to get tighter. And PACE will provide an opportunity for them to help them get projects done even in a downturn. I think from a PACE perspective, the thing that I worry about most is that we have to make sure that the way that PACE deals are being done with diligence underwriting. They’re being done in a way where these things can get rated, securitized and sold to investors. If there are people that come in and don’t do it correctly, I worry that there could become issues in the PACE industry or it could be deals up blow up, you know, if you think about PACE in general historically, there has hasn’t been any major blocks for PACE in the commercial space. And since the history of PACE, right, that’s on the commercial side. I’m not saying that’s so on the residential side, but on the commercial side, they’re being underwritten, like normal commercial loans. And so, they’re a lot safer from that perspective. Our worry is that people are going to come into the space as it becomes more active and starts growing, and they’ll do it incorrectly. So, we’ve tried to find ways to mitigate that. So, we created something called a C-PACE Alliance, which is an industry group of pretty much every major commercial PACE lender, the service providers that are working on that are part of the PACE, the commercial PACE area. And what we’re doing is we’re creating templates on how to underwrite, templates on how to administer, templates on what the statute for these programs should look like in each new state, so that there is a box that everyone can play inside and not go outside the box. That make sense?

J Darrin Gross  35:16

That’s absolutely genius. Because, you know, just like what you were describing, it hasn’t blown up. It only takes one rogue operator to see the opportunity and exploit something that wasn’t intended and run roughshod over it. And before you know it, it’s blown up and it’s not available for anybody. So that’s right.

Mansoor Ghori  35:39

That’s right.

J Darrin Gross  35:40

That’s really great and I applaud you and your efforts, and I think that also, you know, definitely keeps you at the forefront as far as the thought leadership goes as far as the PACE financing and would continue to make you guys a noteworthy resource, so that’s great.

Mansoor Ghori  36:05

Yeah, absolutely.

J Darrin Gross  36:06

So, yep. Mansoor, where can listeners go if they would like to learn more or connect?

Mansoor Ghori  36:13

Sure. So, our website is

J Darrin Gross  36:22

Got it.

Mansoor Ghori  36:22

And go there. There’s a lot of information about PACE, how it works for different types of projects, different types of properties. We’ve got case studies there, we’ve got phone number, you can get a hold of us, we can kind of walk you through what it looks like. You can see what our background is. It’ll give you a good perspective on what PACE is and how it works.

J Darrin Gross  36:44

Awesome. Mansoor, I can’t say thanks enough for taking the time today. I’ve enjoyed it. Learned a lot. And I hope we can do it again soon.

Mansoor Ghori  36:53

Sounds great. Thanks, Darrin. Appreciate your time.

J Darrin Gross  36:55

Alright. For our listeners, if you liked this episode, don’t forget to like, share, subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. C R E P N Radio.

Outro  37:13

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Originally published at Commercial Real Estate Pro Network