PACE: Opportunities for Owners Through Tax Lien Financing

Resources:

The PACE Process

PACE Legislation and Activity Map

PACE Benefits and Barrier Busting

EE & RE Financing Districts (RAEL)

Property assessed clean energy (PACE) financing, or tax-lien financing, is a new model that is rapidly gaining popularity. PACE finance programs are attractive because they allow property owners to pay for energy efficiency, renewable energy, and/or water efficiency projects through an additional assessment on their property tax bill over 5-20 years, depending on the lifespan of the equipment. If the property is sold, the benefit of the improvement and the burden of the tax lien pass to the new owner.

Clean energy tax lien financing models in combination with federal loan guarantees could dramatically accelerate the energy efficiency retrofitting of the world’s building stock.

How PACE Works

A local government or taxing authority creates a clean energy financing district, which all property owners can elect to join. Property owners who join can subsequently apply for financing to pay for pre-qualified energy efficiency, renewable energy, and/or water efficiency measures permanently affixed to their property. Local governments can issue bonds or allow direct owner-arranged financing to fund the projects. The owner pays for the upgrades through an additional special assessment payment on their property tax bill for a specified term. An energy savings guarantee from the services provider ensures that the owner remains in a cash flow positive position (i.e.- the energy saved because of the improvement will result in monetary savings that will cover the cost of the additional payment). The tax assessment stays with the property, not the borrower, upon sale of the property.

The Advantages of PACE Finance

This innovation and scalable financing model overcomes several well-documented market barriers to the adoption of cost effective energy efficiency retrofits in buildings, such as:

Initial cost - Reduces the upfront costs to owners for clean energy projects by amortizing the project costs over time and providing immediate positive cash flow.
Scarce capital - Makes more funding available for retrofits at attractive rates and terms by creating markets for privately-financed clean energy securities. There is virtually no risk of loss to lenders because property tax liens are senior to mortgage debt and have very low default rates. (Existing mortgagees consent to a senior lien of this nature because they place the mortgagee in a better position due to the guaranteed positive cash flow, the owner’s enhanced ability to pay its debts, and the improved value of the property.)
Holding period - Supports deep energy savings retrofits with longer paybacks even if the owner isn’t certain how long it will keep the property. If the owner sells the property, both the energy savings benefit and the remaining loan payments are passed on to the future owner.
Split-incentives - Supports projects in tenant-occupied buildings since property taxes qualify as “pass-through” expenses. This allows a triple net lease to become a “green lease” as owners can pass the cost of the retrofits to tenants, who also reap the benefits.

Where is PACE Available?

For a property owner to take advantage of PACE finance opportunities, the property must exist within a local government jurisdiction that has created a PACE program. Local governments cannot create such programs without enabling PACE legislation enacted by the state.

The steps from authorization through completion are as follows:

The PACE finance industry began in 2008 when California passed enabling legislation allowing municipalities to create financing districts that could provide low cost retrofit capital to homeowners and building owners secured by senior tax liens on their properties. As of early 2010, nineteen states allow local jurisdictions to create PACE programs—with some states granting broad authority and others allowing for more limited programs. Recently, acting on the broad authority granted by the State of California, the City of San Francisco established the nation’s largest PACE program, designed to make $150 million in bonding capacity available to the city’s property owners beginning March 1, 2010.¹

PACE Legislation and Activity Across the U.S.

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According to Jeffrey Tannenbaum, the founder of PACENOW.org, “Pace bonds can provide enormous amounts of much needed low cost capital to retrofit America’s towns and cities, all while creating local jobs. PACE financing has strong bipartisan support as it provides large benefits to property owners, existing mortgage lenders, municipalities, and our nation without burdening our nation’s taxpayers.”²

For more on how PACE tax lien financing can open up opportunities, see:
Private Sector Barriers… PACE Solutions

Or view this video to learn why PACE is gaining momentum: