What Is a Property Assessed Clean Energy (PACE) Loan?
A Property Assessed Clean Energy (PACE) loan is a type of financing 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, and more than $3.4 billion in energy efficiency projects on commercial properties have been financed in over 38 states plus the District of Columbia.
However, the residential component has been slower to gain traction, with financing programs for residential property available in just California, Florida, and Missouri. As of December 2021, more than 323,000 homeowners have availed themselves of loans to make energy efficiency and other improvements.
- PACE programs can be used for residential or commercial properties.
- A PACE loan is attached to the property versus a building or home.
- PACE loans are paid during tax assessments and are considered a tax lien.
- It can be difficult to sell a home with a PACE loan attached because it stays with the property and transfers over to the next owner.
- Some mortgage lenders will not give a mortgage to someone who wants to buy a home with a PACE loan attached.
How a Property Assessed Clean Energy (PACE) Loan Works
PACE loan financing can be used for several 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 does not 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 can 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 $7.7 billion—that is, a cumulative $7.3 billion worth of loans have been issued for 323,000 home upgrades from 2010 to December 2021. 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 $3.4 billion for 2,760 projects.
Freddie Mac, Fannie Mae, and Federal Home Loan banks do not give mortgages on homes with a PACE loan attached to them so if you take out one, it is important to recognize that it may be difficult to sell your home.
Advantages and Disadvantages of a Property Assessed Clean Energy (PACE) Loan
Property assessed clean energy loans can improve cash flow for owners, spreading repayment over many years versus one large, upfront payment. These loans tap into sources of private capital, and these loans can help property owners deduct payments from their income tax liability at tax time. In addition, PACE loans allow cities and towns to create energy efficiency and renewable energy options on properties.
However, disadvantages exist. These types of loans are only available to those who own property. You may require large sums of cash to pay for legal and administrative setups. You cannot finance portable items like kitchen appliances, and there may be complications if you want to sell your property with a PACE lien attached.
Can improve cash flow
No down payment necessary
Creates energy efficient properties
Interest payments could be tax deductible
Depending on the project, you can save money on your energy bills
Upfront fees for setup may be costly
Only available to property owners
Can make things complicated when you go to sell your home
Interest rates can be higher than average
Property Assessed Clean Energy (PACE) Loan Process
Similar to a mortgage or refinance, a PACE loan and your eligibility for one is based on a range of factors, including the equity you have in your home, your payment history on your mortgage, and your ability to repay the property assessment.
Once you are approved for a PACE loan, you must find a contractor who will agree to work with one. Contractors are frequently paid for their work in installments, but with a PACE loan, the contractor is paid once the project is complete. When the project is done, you will be responsible for paying back the loan when you pay your property taxes.
Like any loan, it is usually good to shop around for loan alternatives to PACE. If you decide to take out a PACE loan, make sure to review the terms and find out if you qualify for tax credits and have money on hand to pay any fees. A PACE loan is usually 100% financed, but because property assessments are paid annually (or twice a year), the cost of the loan may be higher than a monthly payment.
State-based residential Property Assessed Clean Energy (PACE) bond programs are growing in popularity among investors. An illustration is Ygrene Energy Fund, an issuer of securities backed by PACE bonds and assessments, which announced in 2020 that it closed on its GoodGreen 2020-1 securitization with the issuance of $318 million of investment-grade debt securities.
According to a statement from the company, "building on the more than $525 million the Company securitized in 2019, as of December 2021, the company completed 10 securitization transactions totaling $2 billion and remains the only PACE originator with a successful and continuous track record of securitizing both residential PACE and commercial (C-PACE) assets."
Issued by local government entities, PACE bonds are taxable munis. They finance energy improvement upgrades to residential homeowners or commercial property owners and are often unrated and structured as limited obligation, special assessment bonds. The reason is that they are paid back by property assessment payments, and they do add a tax lien to any property with a PACE loan.
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 used 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. As of 2021, parts of the development are finished, and construction continues in other parts of the neighborhood.
This relatively easy access to financing has been compared to the residential housing market's lending atmosphere 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.
Where Does PACE Funding Come From?
Pace loans are typically funded through municipal bonds.
Can You Pay Off a PACE Loan Early?
Yes, you can pay off a PACE loan early by paying the assessment in full versus the terms of the loan. This is called a payoff, and it means you remove the tax assessment from your property.
Can You Sell a House With a PACE Loan?
Yes. You can sell a house with a PACE loan because this type of loan is attached to the property rather than the home itself, even if the money was used for something that is part of the home. The loan is tied to the property assessment so buyers will inherit the loan from the sellers.
How Do I Refinance With a PACE Loan?
It can be tricky to refinance with a PACE loan because these loans are tax liens, and must be paid first, This means you may have to pay the lien off in full before you refinance your mortgage. Conventional mortgage loans may not allow you to refinance with a PACE loan in place unless you pay it off, first. Some lenders may let you refinance with the condition that you pay off your PACE loan with the proceeds.