What is PACE financing? Property Assessed Clean Energy
Property Assessed Clean Energy Financing, used in the United States of America to finance among others:
– Energy efficiency improvements
– Disaster resiliency improvements
– Water conservation measures
– Renewable energy installation
The program applies to residential, commercial and industrial property owners.
To finance energy efficiency improvements to a building, owners can use the PACE program; this depends of the state, and can be of different types, such as:
– Insulation and air sealing
– Cool roofs
– Water efficiency products
– Seismic retrofits
– Hurricane protection.
PACE Allows Financing of New Projects
Some states allow financing of portions of new construction projects, provided the owner builds to exceed local energy standards.
For residential projects, energy efficiency and/or renewable improvements range from attic insulation to installation of rooftop solar panels; but for commercial projects, they can install everything, from chillers, boilers, LED lighting, to even rooftops.
That is way governments with active PACE offer bonds to investors; and if the market is open for that energy modernization, they can also obtain private loans; these offer terms of 5 to 25 years, and the loan payment is calculated based on the property tax bill.
Entities issuing PACEs
Municipal finance districts, state agencies or finance companies can issue PACE bonds; to finance the modernization of residential, commercial, and industrial properties; but the PACE program loans are attached to the property, not to an individual; therefore, a PACE loan is not a resource for the person, it is for the property.
These loans can be used to finance leases and power purchase agreements (PPAs); in this case, the PACE property tax assessment, is used to collect lease payments from the utility rates.
Primary benefit to the owner
The primary benefit is that project costs will be lower; this is because the provider retains the tax incentives, and passes the benefit on to the property owner; the lease or utility payment is made at a lower cost.
PACE programs help homeowners and business owners pay for the upfront costs of green improvements; These can be (solar panels, insulation, chillers, boilers, LED lighting, roofs, etc.); the homeowner then pays for them by increasing property taxes; this is done by fixing the rate for an agreed upon period of 5 to 25 years.
This allows homeowners to start saving on energy costs, while paying for their green improvements; meaning that homeowners will have net gains, even with a property tax increase.
Key benefits for the city
For the city, PACE helps reduce greenhouse gas emissions, promotes energy efficiency and building improvements; these makes it more affordable to switch to renewable energy sources; thereby reducing energy costs for residents and businesses.
Because PACE is financed through private loans or municipal bonds, it does not generate liability for city funds; public-private partnership PACE programs, on the other hand, rely on private capital for financing.
By implementing such programs in their communities, state and local governments can create new jobs; thus, stimulating local economic development along with installers and renewable energy companies.
Other benefits for owners
As a voluntary underwriting program, only participating homeowners are responsible for the costs of financing PACE; therefore, the program allows homeowners and businesses to defer upfront costs; which are the most common barrier to deciding to implement renewable energy systems.
In addition to property taxes, loans can also be repaid in installments; the term will be agreed upon, while energy costs will be reduced, giving the consumer a net return.
As the improvements and PACE loan are tied to the property; a consumer can sell the property and pay off the debt through the property tax; this will be billed to the new owner.
Some concerns about residential PACE financing
A consumer can run into problems if PACE programs are not designed and administered correctly; because the financing is designed to remain on the property, and eligibility is based on property information; and not on the person’s income and “FICO” scores; that is the (Fair Isaac Corporation – Score that summarizes your credit risk).
A homeowner’s ability to pay is based on their payment history; both their property taxes and their mortgage; additionally, they are checked for recent bankruptcies; however, for property improvements, no evaluation is required.
Some buyers and sellers have had difficulty with sales of homes with PACE tax assessments; because, although the PACE assessment appears on the title report, some buyers find out about it after the sale; this forced them to pay out-of-pocket unexpectedly; which has led some sellers to agree to pay the PACE; or in some other cases to lower the sales price to offset the tax.
A commitment to environmental security
Bonds issued by PACE, can be securitized and traded; these function as mortgages and promissory notes backed by these assets for investors.
Because these bonds are for property improvements, and achieve a positive environmental impact; some PACE providers have obtained green certification for their bonds.
PACE bonds are unique in the green bond market because the products qualify as efficient; as soon as they are installed, carbon emissions are reduced.
Locations with PACE legislation
In addition to being available in the District of Columbia, the PACE program is available in 37 states; currently covers more than 80% of the U.S. population.
As always, if you have questions or want to learn more about this topic, contact us…
Call us at (305) 930-1160 or visit us at 605 Lincoln Rd Suite 250, Miami Beach FL 33139.