What Is a Property Assessed Clean Energy (PACE) Loan?

A Property Assessed Clean Energy (PACE) loan is a type of financing that is available to make energy efficiency upgrades and renewable energy improvements at a commercial or residential property.

PACE programs are overseen by the U.S. Department of Energy. More than $2 billion in energy efficiency projects on commercial properties have been financed in 36 states plus the District of Columbia. However, the residential component has been slow to gain traction, with financing programs for residential property available in just California, Florida, and Missouri. As of 2020, more than 306,000 homeowners have availed themselves of loans to make energy efficiency and other improvements.

How a Property Assessed Clean Energy (PACE) Loan Works

PACE loan financing can be used for a number of energy-efficient improvements, including seismic retrofitting for homes, commercial buildings, or industrial properties located in earthquake-prone areas; hurricane preparedness measures; installation of solar panels or boilers; energy-efficient roofing; and LED lighting upgrades. With this type of financing, the property serves as collateral and the debt is tied directly to the property, rather than its owner. Any remaining balance on a PACE loan remains intact when ownership of the property changes hands. 

Unlike a traditional mortgage loan, PACE financing doesn’t require an upfront down payment. PACE loans also lack a regular monthly payment. Instead, these loans are repaid through property assessments, as an addition to the owner’s regular property taxes. These assessments are spread out over a specific time frame, typically 10 to 20 years, based on the amount of financing involved. Property owners who fail to pay the assessments regularly are generally subject to the same penalties as they would be for non-payment of any other property tax bill. 

PACE financing typically does not involve the same underwriting process as a traditional mortgage. Property owners have the ability to finance 100% of the cost of energy-related improvements and creditworthiness is not a significant component of the approval process. Individual PACE programs are administered by state and local government agencies, which have a certain amount of discretion in setting approval guidelines.

In terms of size, the residential PACE loan market (R-PACE) is estimated at $7.3 billion—that is, a cumulative $7.3 billion worth of loans have been issued for 306,000 home upgrades from 2010 to December 2020. It has established itself as the fastest-growing segment of the U.S. lending industry. The size of the commercial market for PACE financing (C-PACE) is a little over $2 billion for 2,560 projects.

Special Considerations for a Property Assessed Clean Energy (PACE) Loan 

This relatively easy access to financing has been compared to the lending atmosphere surrounding the residential housing market during the subprime crisis. 

In July 2016, the Federal Housing Administration announced that it would begin insuring mortgages that carry liens connected to the PACE loan program. PACE loan payments will be escrowed with regular property taxes. Those who purchase a home through the FHA program that has a PACE loan in place will be responsible for any unpaid balance remaining on the loan. 

Real Life Example of a Property Assessed Clean Energy (PACE) Loan 

December 2018 saw the issuance of a $24.9 million commercial property PACE loan, the largest single C-PACE financing of the year. Awarded to Shamrock Development, Inc., a Nebraska-based developer, the loan is slated to help finance an urban renewal project for two blocks of downtown Omaha.

The developer will use the funds to upgrade and implement energy-efficient measures for a Marriott hotel, an apartment building, and 90,000 square feet worth of retail space. The City of Omaha administered the C-PACE financing for the Eastern Nebraska Clean Energy Assessment District.