PACE financing

PACE financing (property assessed clean energy financing) is a means of financing energy efficiency upgrades, disaster resiliency improvements, water conservation measures, or renewable energy installations of residential, commercial, and industrial property owners. Depending on state legislation, PACE financing can be used to finance building envelope energy efficiency improvements such as insulation and air sealing, cool roofs, water efficiency products, seismic retrofits, and hurricane preparedness measures. In some states, commercial PACE financing can also fund a portion of new construction projects, as long as the building owner agrees to build the new structure to exceed the local energy code.

Examples of energy efficiency and renewable energy upgrades range from adding more attic insulation to installing rooftop solar panels for residential projects and chillers, boilers, LED lighting and roofing for commercial projects. In areas with PACE legislation in place, governments offer a specific bond to investors or in the case of the open-market model, private lenders provide financing to the building owners to put towards an energy retrofit. The loans are repaid over the selected term (over the course of somewhere between 5 and 25 years) via an annual assessment on their property tax bill. PACE bonds can be issued by municipal financing districts, state agencies or finance companies and the proceeds can be used to retrofit both commercial and residential properties. One of the most notable characteristics of PACE programs is that the loan is attached to the property rather than an individual.[1][2][3][4] A PACE loan is therefore said to be nonrecourse to the borrower.[5]

PACE can also be used to finance leases and power purchase agreements (PPAs). In this structure, the PACE property tax assessment is used to collect a lease payment of services fee. The primary benefit of this approach is that project costs may be lower due to the provider retaining the tax incentives and passing the benefit on to the property owner as a lower lease or services payment.

PACE programs help home and business owners pay for the upfront costs of green initiatives, such as solar panels, which the property owner then pays back by increasing property taxes by a set rate for an agreed-upon term ranging from 5–25 years. This allows property owners to begin saving on energy costs while they are paying for their solar panels. This usually means that property owners have net gains even with increased property tax.

History

Voluntary assessments for repaying municipal bonds have been attached to property taxes since the early 1800s to fund projects for public good, such as sidewalks, fire stations, and street lighting. PACE uses the same concept, but for projects that benefit the private sector, or individual building owners. PACE was originally known as a "Special Energy Financing District" or "on-tax bill solar and efficiency financing." The concept was first conceived and proposed in the Monterey Bay Regional Energy Plan in 2005[6] but followed voter approval of a similar solar bonds program approved by San Francisco voters in 2001.[7] The concept was designed to overcome one of the most significant barriers to solar and costly energy efficiency retrofits: up-front costs. A homeowner could spend tens of thousands of dollars on a solar photovoltaic system, upgrading windows to be more energy efficient or adding insulation throughout the home, yet all of these investments would not likely be recovered when the home was sold. PACE enables the homeowner to "mortgage" these improvements and pay only for the benefits they derive while they own the home.

The first PACE program was implemented by Berkeley, California, led by Cisco DeVries, the chief of staff to Berkeley's mayor and then-CEO of RenewableFunding and Matthew Brown. University of California, Berkeley led the development of the program via the "Guide to Energy Efficiency & Renewable Energy Financing Districts for Local Governments" contributed by Cisco DeVries, Ann Livingston and Lestis Private Capital Group's Matthew Brown. The guide was funded through grants to the City of Berkeley from the U.S. Environmental Protection Agency.[8] Berkeley's PACE program was recommended as an alternative to the solar bonds authority approved by neighboring San Francisco voters in 2001 in conjunction with the City's Community Choice Aggregation program, which is being implemented in both San Francisco and Sonoma counties.[9] DeVries saw PACE as a way to provide a viable means to help achieve the Bay Area's climate goals. California passed the first legislation for PACE financing and started the BerkeleyFIRST climate program in 2008.[3][10] Since then, PACE-enabling legislation has been passed in 31 states and the District of Columbia, allowing localities to establish PACE financing programs.[11]

However, PACE financing for residential properties was dealt a serious blow in 2010 when Fannie Mae and Freddie Mac refused to back mortgages with PACE liens on them.[12][13] In August 2015, the Department of Housing and Urban Development (HUD) announced that it intends to require liens created by energy retrofit programs to remain subordinate to loans guaranteed by the Federal Housing Administration (FHA) and that it would be issuing guidance on how to handle the transfer and sale of homes with a PACE assessment.[14] HUD clarified its policy in 2017 by stating properties with PACE obligations were ineligible for FHA financing.[15]

Benefits

For a city, PACE can play an important role in reducing local greenhouse gas[16] emissions, promoting energy efficiency improvements in its buildings, making the shift to renewable sources of energy more affordable, and reducing energy costs for residents and businesses. Because PACE is funded through private lending or municipal bonds, it creates no liability to the city's funds. Additionally, most PACE programs made possible through public-private partnerships rely on private capital to source financing. PACE also enables states and local governments to design and implement such programs in their communities.[17] PACE programs also help to create jobs and thus spur local economic development when local solar installers and renewable energy companies partner with the program. It is also an opt-in program, so only those property owners who choose to participate are responsible for the costs of PACE financing.[1][10][18]

PACE enables individuals and businesses to defer the upfront costs that are the most common barrier to energy efficiency or renewables installations. The PACE loans are paid by additional assessments on the property owner's property taxes over an agreed upon term while energy costs are simultaneously lower, providing the PACE consumer with net gains. Also, because the solar panels and the PACE loan is attached to the property, the consumer can sell the property leaving the debt to be paid through the property tax assessed on the subsequent owners.[1][2][10][18]

Concerns for residential PACE financing

For consumers, PACE type programs have several problems. Because the financing is designed to stay with the property, eligibility is based primarily on property information rather than income and FICO scores. A homeowner’s ability to pay is currently based primarily on their mortgage and property tax payment history as well as the requirement that there are no recent bankruptcies. Most significantly, homeowners are financed for the home improvements without any assessment of whether the financing is affordable for the homeowner, though Senate Bill 242, currently being considered in California, would require PACE providers to conduct an income review.[19][20][21] Because the PACE financing is structured as a tax assessment instead of a loan, the PACE programs historically have not had to provide to homeowners the same disclosures about the financing costs that traditional lenders must provide.[20] In September 2016, California Governor Jerry Brown signed AB2693 into law, which required PACE programs to provide mortgage-level disclosures and some providers to conduct live recorded calls with the homeowner to confirm financing terms and obligation.[22] In some cases, without either an assessment of affordability or these disclosures about the costs of the financing, homeowners depend on what the PACE program providers tell them when trying to figure out whether the financing is affordable. Homeowners have complained that PACE contractors are lying about the costs of financing as part of selling the program.[23] These problems create a situation in which homeowners can suddenly owe far more in property taxes than they can afford to repay; this is especially true for retired and disabled homeowners on fixed incomes. PACE architects Cisco DeVries and Matthew Brown deny these claims as "isolated incidents."

Interest rates for PACE programs are usually 3-4% higher than for traditional mortgage loans, with additional administrative fees close to 5%,[19][20] which can often total more than $4000,[24] but compare well to many lending options such as credit cards and HELOCs, without tying up credit lines.

Many buyers and sellers have had difficulty with sales of homes with PACE tax assessments. Though the PACE assessment typically appears on the title report, some buyers find out about the assessments after the sale, which may force them to pay money out-of-pocket unexpectedly.[25] In some cases, sellers have agreed to pay off the PACE assessment or lower the sale price to compensate for the PACE tax assessment.[26][27][28] When the remaining payments are unable to be assumed by the new buyer, this renders the PACE financing to a position more similar to that of a traditional lending product.

Some homeowners have reported that there were massive differences in the lump sum payment required at the first assessment as well as far from the reported monthly costs to increase in escrow.[29]

A problem with PACE for both residential lenders and consumers is that the tax liens for PACE financing take priority over other lien-holders, and those lien-holders may not be notified or given an opportunity to object.[30][31] Commercial PACE is less problematic because priority lien-holders for those properties are notified beforehand. Fannie Mae and Freddie Mac have refused to purchase or underwrite loans for properties with existing PACE-based tax assessments,[32][33] but in mid-2016 the Veterans Benefits Administration (VA) announced guidance for how to manage the financing of properties with PACE obligations.[34] Properties encumbered with PACE obligations are not eligible for Federal Housing Administration (FHA) insured financing.[15]

Securitization

Bonds associated with PACE assessments can be packaged and securitized. Securitization, which was developed in the mortgage industry, works by pooling a series of assets, such as mortgages, and selling notes backed by these assets to investors. Because these bonds are for property improvements which achieve a positive environmental impact, some PACE providers have had their bonds green certified. PACE bonds are unique amongst the green bond market because products rated as efficient are reducing carbon emissions as soon as they are installed.[35][36][37]

Locations with PACE legislation

PACE is enabled in 37 states and the District of Columbia, covering more than 80% of the U.S. population.

Original Map with updated PACE Financing Location Information

State	Status
Alaska	C-PACE available - no current programs
Arkansas	Available in some locations
California	Available in some locations
Colorado	Available
Connecticut	Available
District of Columbia	Available
Florida	Available
Georgia	Under development
Hawaii	On hold
Illinois	Under development
Kentucky	Under development
Louisiana	Under development
Maryland	Available
Massachusetts	Under development
Michigan	Available
Minnesota	Available
Missouri	Available
Nebraska	Available in Omaha and Lincoln
Nevada	Under development in Las Vegas and Reno
New Hampshire	C-Pace under development
New Jersey	Under development
New Mexico	Under development
New York	Available
North Carolina	Available,but no current programs
Ohio	Available
Oklahoma	Available, but no current programs
Oregon	Under development
Pennsylvania	Available in some areas
Rhode Island	Available
Texas	Available
Utah	Under development
Virginia	Available
Washington	Available
Wisconsin	Available
Wyoming	Available, but no current programs

See also

• Feed-in tariff
• RAEL

References

1. "PACENation: Property Assessed Clean Energy". PACENation.
2. PACE (Property Assessed Clean Energy) Financing
3. "Our Financing Solutions - Renew Financial".
4. "Solar Power Energy Systems - Solar Panels - Pure Energies". Pure Energies.
5. "Emerging Issues: Residential PACE Loans and Bankruptcy". natlawreview.com. 2018-02-08. Retrieved 2018-07-31.
6. Kammerer, Kurt (April 6, 2006). Monterey Bay Regional Energy Plan (PDF) (Report).
7. "LOCAL POWER (November 8, 2001): San Francisco Voters Approve Unlimited Solar, Wind, Conservation with Passage of Proposition H".
8. "Guide to Energy Efficiency & Renewable Energy Financing Districts for Local Governments" (PDF).
9. "First Marin, now Sonoma moves on energy program". The North Bay Business Journal.
10. "PACE Program (Property Assessed Clean Energy) Financing". 1BOG.org. Retrieved 2010-08-18.
11. Speer, Bethany; Koenig, Ron. "Property-Assessed Clean Energy (PACE) Financing of Renewables and Efficiency" (PDF). National Renewable Energy Lab. Retrieved 2011-07-09.
12. Hsu, Tiffany (2010-07-07). "Fannie, Freddie freeze PACE energy-efficiency retrofit financing programs". LA Times. Retrieved 2011-07-09.
13. Interview with Cisco Devries on Sea Change Radio, originally aired May 26, 2010
14. "FACT SHEET: President Obama Announces New Actions to Bring Renewable Energy and Energy Efficiency to Households across the Country". whitehouse.gov. 2015-08-24. Retrieved 2016-05-25.
15. "ML 2017-18: Property Assessed Clean Energy (PACE)" (PDF). HUD.gov. 2017-12-07. Retrieved 2018-04-16.
16. Ygrene PACE, How the PACE program helps reduce emissions.,July 2018
17. Brookings Institution, Enact Legislation Supporting Residential Property Assessed Clean Energy Financing (PACE), November 2012
18. "pacefinancing.org".
19. Cox, Prentiss (2011). "Keeping PACE?: The Case Against Property Assessed Clean Energy Financing Programs" (PDF). University of Colorado Law Review. 83: 109–113.
20. "FHA's Property Assessed Clean Energy Guidance: Preliminary MBA Analysis" (PDF). Mortgage Bankers Association. 2016. Retrieved 11 October 2016.
21. "Bill Text - SB-242 Property Assessed Clean Energy program: program administrator". leginfo.legislature.ca.gov. Retrieved 2017-07-11.
22. Register, James Reed | Orange County (2016-10-07). "Consumer Protections for PACE Now Written into State Law". Orange County Register. Retrieved 2017-07-11.
23. grindall61 (2016-05-01), THE CALIFORNIA HERO SOLAR PANEL PROGRAM HAS BEEN EXPOSED AS A MASSIVE SCAM TO SCREW YOU., retrieved 2016-10-11
24. "Ygrene: PACE Impact Window Financing Guide (11/01/2018)" (PDF). www.impactwindow.com. Retrieved 2018-12-11.
25. GRUSZECKI, DEBRA. "MORENO VALLEY: Homebuyer files lawsuit over HERO-financed transaction". Press Enterprise. Retrieved 2016-10-12.
26. "Print Article: INLAND: Realtors offer word of warning about solar financing program". www.pe.com. Retrieved 2016-10-12.
27. "Print Article: Riverside County DA investigating how contractors pitch HERO program". www.pe.com. Retrieved 2016-10-12.
28. "PACE Loans Can Throw a Wrench in Home Sales". Voice of San Diego. 2015-06-22. Retrieved 2016-10-12.
29. www.fairbids.com/pace-loan
30. GRUSZECKI, DEBRA. "MORENO VALLEY: Homebuyer files lawsuit over HERO-financed transaction". Press Enterprise. Retrieved 2016-10-11.
31. GRUSZECKI, DEBRA. "INLAND: Realtors offer word of warning about solar financing program". Press Enterprise. Retrieved 2016-10-11.
32. "Reminder about Mortgages with PACE Obligations - Freddie Mac". www.freddiemac.com. Retrieved 2016-10-11.
33. "B5-3.4-01: Property Assessed Clean Energy Loans (12/01/2010)". www.fanniemae.com. Retrieved 2016-10-11.
34. "Veterans Benefits Administration: Property Assessed Clean Energy (PACE) Loan Processing" (PDF). July 19, 2016.
35. "First energy-efficiency bonds sold to investors". Reuters. 2014-03-07. Retrieved 2016-05-25.
36. "Renovate America gets green bond certification for all of its PACE securitizations - Stratton Report". Stratton Report. Retrieved 2016-05-25.
37. "PACE Roundup: $150M Securitization by Ygrene, Clean Fund Closes $60M". www.greentechmedia.com. Retrieved 2016-05-25.