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Manufacturers struggle amid the COVID-19 pandemic: C-PACE can assist in recovering lost profits | Maryland Commercial PACE

Manufacturing is an important component of the United States’ infrastructure and economy, playing a critical role in ensuring that key industries maintain productivity and provide necessary products such as chemical cleaners, paper products, food, and appliances to consumers. Through advances in technology, total industrial production is larger today than ever before, despite a smaller percentage of the workforce being employed in manufacturing. However, the national manufacturing sector is not impervious to regression; the most significant downturn in modern American history occurred during the Great Recession of 2008. The national manufacturing sector is currently reeling at the present economic disaster caused by the COVID-19 pandemic, impacting total industrial production in severity comparable to that of the 2008 crisis. Thankfully, the sector appears to be recovering from its low point in FQ2 of 2020, and many believe that this points to a brighter future. Nevertheless, the industry suffered a major blow. With experts still unsure when full recovery will occur or what consumer demand may look like in the future, questions persist for manufacturers across the country.

The total index of national industrial production was hit hard by COVID-19, with its lowest point in Q2 of 2020. Though recovering, the disruption to supply chains, personnel, and consumer demand indicate that total industrial production may take years to fully repair, posing the question where new profits may be found.

In the face of a historically severe recession, manufacturers everywhere are auditing their operations for waste and looking for creative avenues for savings. Increasing the efficiency of water and electricity used on the premises may be one solution to the uncertain economic times and sudden loss of income. The U.S. Department of Energy and the energy efficiency authority ENERGY STAR agree that even minimal investments in energy efficiency can reliably produce significant savings. On its website, ENERGY STAR reveals the business case for energy efficiency in manufacturing with several telling examples. For one manufacturer in search of the improvements that represented the “lowest hanging fruits”, investing $70,000 into HVAC and water-cooling improvements resulted in a return of $426,000 in the first year. These savings illustrate the potential advantage that investment in energy efficiency improvements can produce, particularly for manufacturing companies which tend to be high energy users.

Manufacturers can be difficult to lend to, owing in part to the industry standard for capital expenditure projects to pay for themselves in three years or less[1]. Lenders may be reluctant to provide capital on the grounds that there is insufficient collateral available to secure the loan, and the scarcity of cash that is typical in manufacturing reduces the chances of personal financing. Such capital as may be available may come at the expense of the lender requiring a shorter loan term, providing less than the necessary amount to complete the project, or mandating unwieldy guarantors of repayment. Commercial property assessed clean energy (C-PACE), circumvents these obstacles through its innovative property-backed lending structure. Using C-PACE, manufacturers can access immediate financing for improvements that increase efficiency while saving money, cover the costs of appliances or building parts crucial to the functioning of the operation, or invest in renewable energy. These improvements are usually out of reach of cash-strapped businesses, where there is simply not enough capital available to expend on non-essential business needs. Many businesses try to get by with the option that bears the lowest initial price tag, sacrificing durability or energy savings for an up-front discount. Through C-PACE, the manufacturer can purchase and install the improvement at no cost and start repaying the financing months later in installments over as long as twenty-five years. Additionally, if the manufacturer decides to relocate before the C-PACE term is over, the outstanding balance transfers to the next property owner.

Experts in C-PACE say that members of the manufacturing sector are ideal users of this lending product, being that they frequently have extra-long hours of operation and consume large amounts of energy and water[2]. Case studies from around the country show that there are clear advantages to accessing energy efficiency improvements using C-PACE. For example, in 2016 Heller Machine Tools became the first manufacturer in Michigan to utilize C-PACE for a deep energy retrofit. Using C-PACE, the company was able to immediately access $978,607 to replace outdated and inefficient technology and will return $1.7 million in total savings over the 15-year loan period, netting Heller Machine Tools over $170,000. For companies like Heller Machine Tools, the money normally spent without return on utilities became a new fund for more revenue accretive business needs.

Many manufacturers with aging buildings or outdated equipment could benefit from improvements that increase energy or water efficiency, and using C-PACE, could see these projects financed easily and with clear additional advantages. As C-PACE projects grow in prominence around the country, those in the manufacturing sector may increasingly turn to C-PACE to finance projects and increase resilience to economic downturns. If you are interested in using C-PACE for a commercial property, please consider reaching out to the MD-PACE Program to learn more.

 

About the MD-PACE Program

The MD-PACE program is sponsored by the Maryland Clean Energy Center (MCEC), a corporate instrumentality of the state of Maryland which advances the adoption of clean energy, energy efficiency products, services and technologies. MCEC leverages private capital to help homeowners, businesses, and government entities reduce energy costs. The MD-PACE program offers C-PACE financing to commercial property owners statewide.

 

[1] PACENation Monthly call 11/10/2020

[2] PACENation Monthly call 11/10/2020