PACE Financing: Controversial, Innovative Green Lending

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For many property owners wishing to make energy efficient upgrades to their buildings, the dream proves impossible due to a lack of upfront capital.  Even if they were able to secure a loan to pay for the upgrade, there would be no guarantee they’d be in their home long enough to see full payback and subsequent savings from the improvement.  This is where an emerging financing structure known as Property Assessed Clean Energy (PACE) loans enters the conversation.  These exploratory programs forge public-private partnerships that aim to spur investment in the energy efficiency of our built environment.

How it Works

In areas with PACE legislation in place, municipality governments offer a specific bond to investors and then turn around and loan the money to consumers and businesses to perform energy retrofits. The loans are repaid over an assigned term of 15 to 20 years though an annual assessment on their property tax bill, known as a lien.  PACE bonds can be issued by municipal financing districts 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 owner.  If an owner invests in energy upgrades and then they sell their property some period of time later, the lien (as well as the lowered utility bills) passes to the new owner.  California passed the first legislation for PACE financing and started the BerkeleyFIRST climate program in 2008. Currently there are 28 states plus the District of Columbia that have PACE programs in place.

Concerns and Controversy

Though PACE financing no doubt provides great benefit to homeowners to improve their home's energy efficiency and save on their utility bills, the loans have become controversial for a few reasons.  Foremost amongst these is the issue of involuntary subordination, due to property taxes being superior to all other debt obligations, including mortgages. In the case of default, taxes are paid before other creditors. Since the PACE loan is made after a mortgage is taken out, this in effect acts as a subordination of the lender's security. The Federal Housing Financing Agency (FHFA) issued a statement in July 2010 concerning the senior lien status associated with most PACE programs. Essentially, Fannie Mae and Freddie Mac will not give or refinance a mortgage that has a PACE lien preexisting. In response to the FHFA statement, most local PACE programs have been suspended until further clarification is provided.

The Bottom Line

State municipalities are already doing a lot to help finance energy efficiency projects across the country with PACE financing.  Without question, PACE loans are gaining momentum and with effective implementation, have the potential to achieve dramatic results for our economy and environment.  Once its lien status under default has been resolved, this progressive financing mechanism could open the floodgates for widespread energy efficiency investment.