June 25, 2019

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Does Your Lease Keep Pace? Retail Lease Considerations Associated with Property Assessed Clean Energy

Simon Property Group, Inc. recently needed a new roof on its mall in Sonoma, California. Simon elected to install a new roof to reflect sunlight and heat away from the building that would improve energy efficiency. Rather than making payments directly to its lender to finance the project, a special assessment will appear on the mall's property tax bills for the ten year term of the loan. This unique payment structure results from Simon participating in one of the growing number of Property Assessed Clean Energy ("PACE") programs across the country.

This article considers areas of retail leases where the use of PACE financing by a property owner could trigger unintended consequences for the landlord or tenant.

What is a PACE program?
A PACE program offers property owners a financing arrangement for energy efficiency and renewable energy projects. PACE loans are unique because of the following characteristics:

  • Payments Through Property Tax Charge or Assessment—Rather than the owner paying the lender directly, the government sponsor of the PACE program places the payment obligations on the property owner's property tax bill as a special charge or assessment.

  • Charges Continue after the Sale of the Property with a PACE Project—Obligations related to a PACE loan run with the property. Any subsequent owner of a property that includes a PACE loan will continue to have the applicable special assessment on its tax bill for the term of the loan.

  • Term Linked to Useful Life of the Improvements—The term of a PACE loan tends to be longer because it is based on the expected useful life of the improvements. Such an approach makes the project cash flow positive more quickly.

These unique features address financial barriers to the adaptation of energy efficient improvements for many property owners, such as providing a 100% financing solution and a longer than normal payback schedule that may make projects immediately cash flow positive. To date, 13 states have active PACE programs. (In 2010, only California and Colorado had active PACE Programs).1

How does a PACE loan impact your retail lease?
Participation in a PACE program may require some lease upgrades to maintain balance between the landlord's and tenant's rights and obligations. Here are a few considerations when PACE financing is involved:

  • Responsibility for the Special Charge—It is anticipated that the special charge will flow through to tenants on a pro rata basis. A lease that provides that each tenant will pay its portion of the property tax bill, but excludes any special assessments or fees, may prevent a landlord from passing the special charge to its tenants as planned. Assuming the tenant is responsible for utilities, a lease amendment may be desirable to balance the benefit of the energy efficiency with payment obligations.

  • Obligation to Maintain Targeted Systems—Improvements financed using a PACE loan, such as energy efficient heating and air conditioning systems, can be dealt with a variety of ways in a lease. However, only property owners are generally eligible for participation in PACE programs, and not tenants. Accommodations may need to be made to existing lease terms if they provide that the tenant has the obligation to install and maintain the systems that could be upgraded to generate energy efficiency.

  • Adequacy of Roof Access and Space—Depending on the nature of the project, lease terms may provide existing tenants too much space on the roof to permit certain projects. As part of evaluating the project, a landlord would need to ensure it has the ability to adequately control rooftop access and space with existing (or amended) lease terms.

  • Sufficiency of Power Representations—A lease may include representations associated with the supply of electricity. Updates related to such representations may be needed to address issues that may arise with new technology.

Jurisdictions across the country continue to establish PACE programs. Building owners across the country continue to seek to make energy efficiency and renewable energy improvements. As more projects utilize this new financing option, the need for leases that accommodate the unique features of PACE financing will become more imperative.

©2019 von Briesen & Roper, s.c

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Chris A. Jenny, von Briesen Roper Law Firm, Madison, Corporate, Real Estate and Family Estate Law Attorney

Chris A. Jenny is a Shareholder in the Madison office of von Briesen & Roper, s.c. He focuses his practice on representing business owners in a wide variety of niche markets to become more profitable while minimizing their risk and expenses. Chris’s practice has a heavy concentration in the real estate, construction, and information technology industries. This practical experience is a tremendous benefit to the contractors, suppliers, landlords, tenants and real estate developers he represents. Chris’s construction...

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Andrew Guzikowski, von Briesen Roper Law Firm, Milwaukee, Finance Law Attorney

Andy Guzikowski is a Shareholder and Chair of the Firm’s Public Finance Section.

Andy has had more than 25 years of experience in public finance. He has served as bond counsel and issued the approving bond/tax opinions in over $500 million of tax-exempt bond issues that financed municipal equipment purchases, sewers, new schools and school improvements as well as manufacturing facilities, nursing homes and senior living facilities and has a broad range of experience representing bond issuers, borrowers, underwriters, bond purchasers, remarketing agents and banks/credit enhancement providers in tax-exempt and taxable bond financing transactions.  He frequently serves as issuer’s counsel to the Public Finance Authority in bond issues and has represented PFA in over $750 million of tax-exempt and taxable bond issues financing a wide variety of projects throughout the United States.

Andy is also a senior member of the firm’s Banking and Commercial Transactions practice group.  He represents financial industry clients in a variety of matters, including corporate and holding company reorganizations, mergers and acquisitions, branch purchases and sales, loan and servicing portfolio sales, loan participations and in structuring and restructuring complex commercial lending transactions.  He also handles compliance matters before regulatory agencies including the Wisconsin DFI, the FDIC the Federal Reserve, the SEC and FINRA. His experience includes structuring, negotiating and documenting interest rate swaps, letters of credit, securities lending and repo transactions.  He has also advised banks, credit unions, savings institutions, broker-dealers and registered investment advisers in matters involving the on-premise sale of non-deposit investment products, on FDIC and NCUA deposit insurance rules, regulatory capital requirements and other regulatory and compliance matters.

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William West, von Briesen Roper Law Firm, Milwaukee, Corporate and Real Estate Law Attorney

Bill West is a Shareholder. He Chairs the Firm’s Business Section and the Firm’s Mergers & Acquisitions Section.

Bill is a trusted advisor to his clients and they rely on his ability to achieve desired outcomes in a practical, timely and cost-effective manner – in other words, he gets things done. He has over 30 years of experience in corporate and business related transactions including:

  • Mergers and acquisitions

  • Complex corporate and commercial transactions

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James Wawrzyn, von Briesen Roper Law Firm, Milwaukee and Waukesha, Corporate and Healhcare Law Attorney

James Wawrzyn counsels clients on commercial contract negotiation, mergers and acquisitions, supply-chain alternatives, and general corporate matters. James collaborates with clients to identify and implement their priorities. For each project, James has a results-oriented approach. He continuously engages the stakeholders to recognize and actively address obstacles to finalizing priority items.

James is skilled in the preparation and negotiation of technology-based agreements such as master services, development and licensing...

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