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PACE Financing for Commercial Real Estate Companies Money is often misunderstood…

PACE Financing for Commercial Real Estate Companies Money is often misunderstood… George Caraghiaur Senior Fellow, PACE Now April 2015. A Typical CFO Objection to PACE Financing.

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PACE Financing for Commercial Real Estate Companies Money is often misunderstood…

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

  2. A Typical CFO Objection to PACE Financing • “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...”

  3. Let’s Not Confuse Apples with Oranges • The Objection:the CFO objection is based on his company’s cost of “corporate” debt. • PACE:  PACE funds represent project financing.

  4. The True Cost of Corporate Capital • 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%

  5. The True Cost of Capital Allocated to Projects • 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.

  6. Money is Often Misunderstood Corporate Debt 4% Corporate Capital 8% Project Capital 21%

  7. PACE vs Rationed Internal Capital PACE Project Financing

  8. An Example to Understand thePower of PACE Financing 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%

  9. The Answer to the CFO Objection • “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.”

  10. For more information • For more information, or if you have any questions, please email: • info@pacenow.org

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