Scott Richardson and Andrew Ganahl were close, but not quite there, to rounding up financing to convert a former Kansas City Star warehouse to apartments in the Crossroads Arts District.
Somebody in St. Louis read about their project and approached them with a novel funding idea. The original pitch didn’t work out, but it pointed the two men to a little known financing package available in Missouri for projects that promise energy improvements.
The redevelopers eventually won $623,000 in Property Assessed Clean Energy funding. It became the first Kansas City project to complete a PACE financing deal managed by Rahill Capital, a company established this year to shepherd such financing packages.
PACE allows building improvements that produce utility, energy or water savings to be funded by private investors who are repaid through long-term tax assessments on the improved property.
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Richardson and Ganahl, working as Linden Street Partners, said PACE funds provided 8 percent of their nearly $8 million cost to create the Walnut Terrace apartments at 1721 Walnut St.
“Owners are always looking for sources of funds to make their project happen or make their returns more attractive,” said Anne Murphy Hill, founder and president of Rahill Capital. “PACE fits a niche.”
Hill was able to identify part of the Walnut Terrace renovation — retrofits of the building’s windows, wall insulation and roof — that qualified for PACE funding, which allows building owners “to pay off energy improvements on their property assessments over a 20-year period.”
PACE financing can piggyback on other financing arrangements such as Low-Income Housing Tax Credits, mortgage debt and other development incentives.
The Walnut warehouse conversion already had earned property tax abatement through Kansas City’s Planned Industrial Expansion Authority, winning a 95 percent abatement for 10 years followed by a 50 percent abatement for the next 13 years. But Richardson said a funding gap remained until they learned about PACE.
Missouri legislators enabled PACE funding in 2010 and set up “districts” to administer the program, which provides a new kind of public/private financing. The state legislation allows municipalities to opt in to participate, and Kansas City did. (Kansas doesn’t have PACE authorization.)
Linden Street chose to work with Rahill Capital and the Show-Me PACE district, one of two PACE districts operating in Kansas City.
“PACE closed the gap between a traditional construction loan and the equity we have in the project,” Richardson said.
Hill, at Rahill Capital, found an investor group, Clean Fund, based in Marin County, Calif., that wanted to participate in the Walnut Terrace deal.
“Our loan payments go to” Clean Fund, Richardson said. “They essentially serve as a lending bank, and we pay through an additional property tax assessment for 20 years. … It spreads our costs out over a much longer period than if we had to raise the dollars up front.”
Hill said Rahill Capital charges a flat fee to assemble PACE deals.
“We think this (PACE) is an economic development tool that will grow,” Hill said. “It doesn’t just apply to solar or sophisticated energy technology. It’s much broader. It can be used for renovations for roofing, windows, anything that has an energy savings component” such as tuckpointing, insulation or more efficient utilities.
Rahill has closed on $16 million worth of PACE financing across Missouri so far and has about $30 million more in the pipeline.