What makes PACE unique is financing is provided by local government—with funds generally coming from private lenders—and repaid on annual property-tax bills.
Named a “world-changing idea” and one of “20 ways to build a cleaner, healthier, smarter world” by Scientific American magazine, PACE (Property Assessed Clean Energy) provides financing for energy-efficiency improvements, water-conservation projects, renewable-energy installations and upgrades, and, in Florida, wind-resistance projects for commercial, institutional, and, in some cases, residential properties.
What makes PACE unique is that financing is provided by local governmental authorities—with the funds generally coming from private lenders—and repaid on annual property-tax bills, which serves as the security and repayment mechanism, as a non-ad valorem special assessment. Truly a public-private partnership, the program can finance 100 percent of qualifying improvements with a repayment term of up to 20 years. Because it essentially is repaid as a property tax, a loan is tied to the building and not the owner. It truly is off-book financing for the owner, with no requirement for personal guarantees or evidence of individual credit-worthiness. Of course, there cannot be delinquent taxes or mortgage payments associated with a property, and the owner should have sufficient equity to cover the project cost. The advantages to the owner are obvious, and the local government generally has no liability or expense in the process. The local government simply is passing funding from, and collecting and disbursing payments to, the lender.
Requirements vary by state (currently, PACE is enabled in 32 states and the District of Columbia) and individual program. For example, in Florida, there are PACE programs that employ both lender-notification and lender-approval models. In the lender-notification model, the mortgage holder (if any) simply is notified a loan is being executed; because the loan is secured by a property tax lien, it automatically is senior to the mortgage lien. In the lender-approval model, the lender must sign an estoppel and consent, agreeing to the levy of the PACE assessment and the creation of the PACE assessment lien and agreeing that accepting the PACE financing will not constitute an event of default or trigger the exercise of any remedies under the owner’s existing mortgage loan.
PACE programs generally require sufficient equity in a property to cover project costs, and the property must be clear of construction, judgment, or tax liens. Although the property owner does not have to provide proof of credit-worthiness or sign a personal guarantee, the property cannot be part of a bankruptcy filing. A test will be conducted to determine if contemplated improvements qualify for PACE financing. Criteria can include such factors as energy-reduction targets, a simple payback period based on avoided energy spending, and assurance the work constitutes a permanent improvement to the property (i.e., devices such as plug-in timers would not qualify). Improvements that do not meet those criteria can be done simultaneously with PACE improvements, but cannot be paid for with PACE loan proceeds.
Some PACE programs allow partial financing for new construction. Underwriting guidelines are in place for projects on which a building is demolished and replaced—on the same site—with a more efficient building. PACE financing theoretically would be used to pay for a portion of the more energy-efficient features of the new building. Our firm is testing the feasibility of financing out-of-the-ground projects on which the original designs met the minimum standards of the Florida Building Code and, more specifically, the Florida Energy Efficiency Code. The original construction documents would be reviewed and recommendations for design enhancements intended to increase the building’s overall energy efficiency made. After incorporation of the changes into the construction documents, an updated energy model would be run to confirm the value of the design revisions, and the PACE application would be submitted for the qualifying improvements.
While one would expect HVAC contractors to be aggressively promoting or lobbying for PACE, at least in Florida, where there are at least five active PACE programs, that is not the case. Earlier this year, a local PACE representative told our office she was working with a lot of roofing and lighting contractors, but had a backlog of air-conditioning projects because of a shortage of registered A/C contractors signed up for the program. A contractor with whom our firm works told us he had heard of PACE, but did not really understand it. If that is the case in the rest of the country, then our industry needs to do its homework and not let opportunities presented by PACE slip away—for its benefit and the environment’s. For more information about PACE, go to www.pacenation.us.