PACE Financing: A Detailed Guide to Property Assessed Clean Energy

The upfront cost of installing a solar panel can be high, which can pose a financial burden on many homeowners. Before adding the tax credits, the solar panel cost ranges from $13,000 to $17,000. Additional start-up expenses such as inverters could cost up to $1,000 and batteries up to $10,000 or more.

PACE financing is a unique program for funding upgrades in energy efficiency and renewable energy at commercial or residential properties. It is one of the solar financing options. It doesn’t require any upfront payment and unlike the other loans, it has a long-term repayment period of 30 years. Typically, the PACE programs are funded through state legislation and authorized at local government levels.

You might have several doubts such as if non-profit organizations can utilize PACE financing, what if you sell your property before the PACE assessment is fully repaid. Let’s find out how PACE financing works, its types, advantages, and disadvantages. Also, it is important to gain important insights about PACE securitization.

How PACE Financing Works?

PACE (Property Assessed Clean Energy) financing is established through a partnership between local government and property owners. The program is funded through public-private partnerships and utilizes private capital to finance every project related to home improvement. A voluntary assessment is conducted on the property tax bill, through which you can collect the invested amount. Until the amount is repaid, a lien is placed on your property. However, you don’t require any minimum score for qualification.

These are the types of home improvement projects that are eligible for PACE financing:

• Solar panel installations
• Energy efficiency roofing
• Solar water heaters
• Heating, Ventilation, and Air Conditioning (HVAC)
• Water Softener
• Windows and Doors
• Replacing Ducts
• And many more…

Here is the sequential process of obtaining PACE financing:

1. Check out the project eligibility to find out if it is qualified for PACE financing, which includes the criteria of upgrading energy efficiency, installing renewable energy, and improvements in water conservation.
2. Identify the project scope by listing out the relevant modifications that you plan to make and verify that they satisfy the PACE project demands.
3. Choose a PACE lender and service provider from the list of capital providers and find out the contractors registered with the program.
4. Complete the application process by providing details about the property and planned improvements.
5. Receiving Mortgagee Consent from your mortgage lender.
6. Involving with an Independent Third-Party Reviewer (ITPR) helps smoother project verification.
7. Finalize the PACE financing agreement and start your project.

The eligibility factors for PACE financing include home equity, mortgage payment history, ability to repay property assessment, and property information.

Select a contractor who is licensed and registered with the PACE program, certified by industry leaders, has strong professional standing, and is geographically accessible.

PACE financing repayment is structured based on property assessments, term length, no upfront costs, and transferable debt.

Types of PACE Financing

The two main types of PACE financing include Commercial PACE (C-PACE) and Residential PACE (R-PACE):

Commercial PACE (C-PACE)

The commercial property assessed clean energy (C-PACE) toolkit supports the development and implementation by providing a variety of resources and the most effective practices. Also, they aim to promote energy efficiency, renewable energy, economic development, job creation, and safety advancements in business-related buildings.

The C-PACE Toolkit is based on the four main factors that any state or local government can utilize to overcome challenges and make the most of C-PACE financing which include:

1. C-PACE 101: Build a Foundation: Start with understanding the basics of C-PACE financing.

2. Establish, Join, or Design a Program: A guide on joining the C-PACE program to comprehend the advantages, risks, and techniques to successfully offer a program and make use of the data to assess energy savings opportunities at the state or local level.

3. Implement a Program and Generate Project Uptake: It includes focusing on achieving quick and successful projects, and early success can contribute to long-term results.

4. Apply C-PACE to Support Underserved Market Segments or Advance Resilience Objectives: Focuses on using C-PACE for wider public purpose.

C-PACE toolkit assists state and local government in the following ways:

• Making responsible decisions and ensuring that the program achieves the public demands.
• Accomplish the public purpose objectives with minimum to zero public funds investment, while being actively involved and validating program outcomes.
• Creating Jobs, promoting economic growth, and dealing with climatic changes.

Residential PACE (R-PACE)

Residential property assessed clean energy (R-PACE) permits homeowners to fund using private sources of capital to carry out energy efficiency, renewable energy, and other eligible upgrades on their homes. The unique concept of R-PACE is that the program allows homeowners to invest in budget-saving clean energy modifications to their homes through loans that are paid back through an assessment of property tax bills.

The types of projects financed by R-PACE include:

1. Renewable energy installations such as solar photovoltaic systems and solar water heaters.

2. Energy Efficiency Improvements such as air sealing and insulation, energy-efficient doors and windows.

3. Water conservation measures that include water-efficient fixtures and irrigation systems.

4. Resilience Improvements that include fire and wind hazard protections.

R-Pace programs have numerous positive impacts on homeowners and communities:

• Enhanced Property Value: Homes with PACE financing witnessed an estimated value increase of $81,000 approximately, which is three times the funding amount used for financing. It represents a 27% increase in value compared to homes without PACE financing.
• Additional Tax Benefits: States with PACE programs gain $664 tax benefits per borrower on an annual basis.
• Extending Credit Access: PACE programs are valued for their capacity to alter the accessibility to credits by eliminating the standard credit score criteria and allowing for more credit opportunities. This approach is operated through the public-private collaboration and doesn’t involve taxpayer’s money.
• Environmental Impact: Funding the required upgrades for energy efficiency through property taxes, the PACE financing programs in Florida reduce overall energy usage thereby supporting a more sustainable and environmentally friendly future.
• Job opportunities: R-PACE programs have created jobs in the clean energy sector that contribute to the economic activities in that region.

Advantages of PACE Financing

These are the benefits of PACE financing:

1. Secure Financing: There is secure financing of a wide range of projects over a long time, which makes the cash flow of the project much more positive. Also, PACE covers 100% upfront costs of the hard and soft costs, which means that owners need not pay any initial costs from their pocket.

2. Long-Term Repayment: PACE loans consist of long-term repayment periods, that range from 10 to 30 years. This results in the repayment spreading over several years and removes the requirement that the debt is paid at the purchase or refinancing level.

3. Low Interest Rates: The interest rates are competitive in PACE financing due to the high security and less risk involved in the tax collection processes.

4. Tax Deductions: PACE loans are tax-deductible and allow property owners to lower their taxed income, which provides extra advantages financially by paying the loan amount. In simpler terms, the property owners can cut off their payments from their taxable income.

5. Municipal Benefits: The municipalities have an option to promote energy efficiency and renewable energy without risking or affecting the public funds.

Disadvantages of PACE Financing

Here are the main drawbacks of PACE financing you should consider:

1. Property Ownership Limitations: PACE financing is available only to property owners, which means that renters cannot take advantage of this financing option since they don’t own the property.

2. Cannot Finance Portable Items: Portable items such as screw-in light bulbs, traditional refrigerators, etc. are not possible in PACE financing.

3. Administrative Challenges: PACE financing might require high legal and administrative setup costs, which can be time-consuming and challenging.

4. High Setup Costs: The initial setup costs for PACE financing can be higher, which includes fees for property valuations, legal documentation, and other additional expenses.

5. Investment Threshold: PACE financing has a minimum threshold, which means that they are not suitable for investments of less than $2,500.

6. Lender Resistance: The lenders or mortgage holders are unfriendly to PACE financing. Particularly, when a property owner doesn’t pay their assessments such as property taxes, their debts become a concern if the property undergoes a foreclosure stage. As a result, a tax lien is imposed on the property, which makes the selling or refinancing process complicated.

PACE Securitization

PACE securitization is a financial mechanism that involves combining PACE loans into securities that can be sold to investors. It allows government entities to increase funds for energy projects that convert future payment sources into existing cash.

PACE bonds are issued and backed by property assessments such as municipalities or local governments through a master bond agreement. The bonds given by the municipalities are backed up by a lien over the property on which the improvements are to be implemented. A lien is given the main priority in the majority of states to claim the property rather than other types of property taxes

Usually, the municipalities borrow and provide loans to residents and business companies to install solar power systems and make necessary improvements in energy efficiency. The borrowed amounts are repaid by homeowners and businesses through additional property tax payments over a certain period. These assessments are not linked to the owner and are related to the property, which means that the debt continues to exist with the property even if there is a transition in ownership.

PACE bonds are attractive to investors due to the following reasons:

• Environmentally conscious investors find PACE projects attractive as they provide an estimation of annual energy and water savings as well as the methods to reduce greenhouse gas emissions.
• The bonds offer a similar return compared to mortgages while possessing a high-interest lien on the company-owned properties, which makes them appealing to investors aiming for good returns with low risks involved.
• A promising option for investors searching for stable and long-term investments.

How are PACE repayments different from other loan repayments?

The differences in repayment methods of PACE financing vs. other loans are tabulated below in detail:

S.No	PACE Financing	Other Loans
1.	Long Term Financing from 20 years to 30 years.	Shorter terms from 5 years to 15 years
2.	Covers 100% of the project costs and doesn’t require any investment in upfront costs	Borrowers might be required to pay upfront costs.
3.	Repayments are made through property taxes and are transferable to new property owners upon selling.	Repayments are made on a monthly installment basis, which is different from property tax bills.
4.	PACE financing is approved based on property value,	Approval and interest rate depend upon the borrower or debtor’s credit score. Additionally, they might be required to provide collateral as their property to be eligible for secured loans.

What happens if you sell your property before the PACE assessment is completely repaid?

If you sell your property before the PACE assessment is 100% repaid, the repayment fee will be passed on to the new property owner. This is because the PACE assessment is attached to your property and not the homeowner. In such scenarios, the repayment agreement would get handed over along with the property ownership only if the buyer is willing to handle the PACE fees and the first mortgage lender allows the PACE loan to remain on the property.

At times, selling the property can be challenging since the potential buyers might be unwilling to take additional financial commitments to make improvements to the property. This is because the new buyers might think that they might not remain in the property for long periods for the expected reduction in expenses to make up for the upfront costs.

Can non-profit organizations utilize PACE financing?

Yes, Non-profit organizations can make use of PACE financing to overcome their upfront costs and easily take advantage of the debt that is paid over a certain time by maximizing the savings on utility bills. Especially, for mission-driven or non-profit organizations, PACE financing offers reasonable interest rates and long term to reduce the payments and financial burden.

Most importantly, nonprofits are undervalued communities in the debt market. They have differing forms of credit or cash flows, which makes PACE an appealing program to pay for upgrading infrastructures, as it is connected to the property and not to the credit score of the borrower.

How do I find out if my local government offers PACE financing?

There are several websites to find out if your government provides PACE financing, out of which a few are listed below:

1. Local Government Websites: Several local governments have website pages set up for PACE financing. For instance, you can check out the official website of Florida PACE programs to get detailed information on eligibility and application process, if you’re residing in Florida.
2. PACENation: The official website of PACENation provides valuable information on the PACE program map section, where you can get details about the state-by-state breakdown. This helps you find if the PACE program in your region is active, enabled, or currently in development.
3. Assets America: Visit the official website of Assets America to know clear information about what is PACE financing, its pros and cons, and the PACE loans offered by states in the U.S.
4. Reach out to Local Government Authorities: You can contact the local government offices to get information from the authorities on whether PACE financing is available in your area, which is one of the best offline methods to gather in-depth information.