Property assessed clean energy (PACE) is a means of financing energy efficiency upgrades or renewable energy installations for buildings. Depending on state legislation, PACE can be used to finance water efficiency products, seismic retrofits, and hurricane preparedness measures. Examples of energy efficiency and renewable energy upgrades range from adding more attic insulation to installing rooftop solar panels for residential projects and chillers, boilers, LED lighting and roofing for commercial projects. In areas with PACE legislation in place, governments offer a specific bond to investors or in the case of the open-market model, private lenders provide financing to the building owners to put towards an energy retrofit. The loans are repaid over the selected term (over the course of somewhere between 5 and 25 years) via an annual assessment on their property tax bill. PACE bonds can be municipal financing districts, state agencies or finance companies and the proceeds can be used to retrofit both commercial and residential properties. One of the most notable characteristics of PACE programs is that the loan is attached to the property rather than an individual.
PACE can also be used to finance leases and power purchase agreements (PPAs). In this structure, the PACE property tax assessment is used to collect a lease payment of services fee. The primary benefit of this approach is that project costs may be lower due to the provider retaining the tax incentives and passing the benefit on to the property owner as a lower lease or services payment.
PACE programs help home and business owners pay for the upfront costs of green initiatives, such as solar panels, which the property owner then pays back by increasing property taxes by a set rate for an agree upon term ranging from 5–25 years. This allows property owners to begin saving on energy costs while they are paying for their solar panels. This usually means that property owners have net gains even with increased property tax.
Voluntary assessments for repaying municipal bonds have been attached to property taxes since the early 1800s to fund projects for public good such as sidewalks, fire stations, and street lighting. PACE uses the same concept, but for projects that benefit the private sector, or individual building owners. PACE was originally known as a "Special Energy Financing District" or "on-tax bill solar and efficiency financing." The concept was first conceived and proposed in the Monterey Bay Regional Energy Plan in 2005 but followed voter approval of a similar solar bonds program approved by San Francisco voters in 2001. The concept was designed to overcome one of the most significant barriers to solar and costly energy efficiency retrofits: up-front costs. A homeowner could spend tens of thousands of dollars on a solar photovoltaic system, upgrading windows to be more energy efficient or adding insulation throughout the home, yet all of these investments would not likely be recovered when the home was sold. PACE enables the homeowner to "mortgage" these improvements and pay only for the benefits they derive while they own the home.
The first PACE program was implemented by Berkeley, California, led by Cisco DeVries, the chief of staff to Berkeley's mayor. Berkeley's PACE program was recommended as an alternative to the [solar bonds] authority approved by neighboring San Francisco voters in 2001 in conjunction with the City's Community Choice Aggregation program, which is being implemented in both San Francisco and Sonoma counties. DeVries saw PACE as a way to provide a viable means to help achieve the Bay Area's climate goals. California passed the first legislation for PACE financing and started the BerkeleyFIRST climate program in 2008. Since then, PACE-enabling legislation has been passed in 31 states and the District of Columbia, allowing localities to establish PACE financing programs.
However, PACE financing for residential properties was dealt a serious blow in 2010 when Fannie Mae and Freddie Mac refused to back mortgages with PACE liens on them. In August 2015, the Department of Housing and Urban Development announced that it intends to require liens created by energy retrofit programs to remain subordinate to loans guaranteed by the Federal Housing Administration and that it would be issuing guidance on how to handle the transfer and sale of homes with a PACE assessment.
For a city, PACE can play an important role in reducing local greenhouse gas emissions, promoting energy efficiency improvements in its buildings, making the shift to renewable sources of energy more affordable, and reducing energy costs for residents and businesses. Because PACE is funded through private lending or municipal bonds it creates no liability to the city's funds. Additionally, most PACE programs made possible through public-private partnerships rely on private capital to source financing. PACE also enables states and local governments to design and implement such programs in their communities. PACE programs also help to create jobs and thus spur local economic development when local solar installers and renewable energy companies partner with the program. It is also an opt-in program, so only those property owners who choose to participate are responsible for the costs of PACE financing.
PACE enables individuals and businesses to defer the upfront costs that are the most common barrier to energy efficiency or renewables installations. The PACE loans are paid with property taxes over an agreed upon term while energy costs are simultaneously lower, providing the PACE consumer with net gains. Also, because the solar panels and the PACE loan is attached to the property, the consumer can sell the property leaving the debt to be paid through the property tax assessed on the subsequent owners.
The protections put in place by many PACE programs to protect borrowers and existing mortgage holders may result in origination fees between 2-3%. For example, a 1% fee is often charged to cover a third-party engineering review.
Several problems have been raised regarding residential PACE, but commercial PACE is far less controversial. In July 2010, the Federal Housing Finance Agency (FHFA) along with Fannie Mae and Freddie Mac objected to the senior lien status that residential PACE financing shares with other property taxes and assessments and took steps to stop residential PACE. The Agency issued a statement advising Fannie Mae and Freddie Mac to avoid buying mortgages with PACE assessments and hinted at more drastic actions, such as finding PACE homeowners in default under their mortgages. These actions stalled the development of residential PACE programs. Despite these concerns, residential programs continued to develop and began to gain traction in 2012-2013.  In August 2015, President Obama and the FHA announced support for the PACE concept.
Part of the problem with PACE in residential is that priority lienholders are not notified nor given an opportunity to object to this financing. Unlike residential properties, in Commercial properties priority lien holders are notified and given an opportunity to object, therefore Commercial PACE has been less affected. There are 25+ active commercial PACE Programs in 10 states and the District of Columbia. Sixteen programs have funded commercial PACE projects. Commercial PACE market is growing and evolving.
Other problems regarding PACE type programs are that these are financing programs secured with Real Estate where lenders do not follow the same type of regulations than traditional lenders securing real estate must follow, therefore there is a concern that borrowers are not properly informed of the implications of obtaining this financing, despite publicly available financing documents.
It has been reported that many PACE loans have been sold to borrowers under the false statement that such financing will be paid with the existing tax assessment. In reality, once the financing has been obtained the assessment on the property taxes will increase according to the terms and size of the financing obtained.
Another reported problem is that property owners obtain this financing and then sell the house without disclosing this increase in the property tax liability and in fact, if the buyer is to do a search of the recorders office and the tax assessor, there is a possibility that if the financing was obtained recently it will not appear with the recorder nor the assessor, this is because the PACE financing is added to the property tax bill and such bill is not updated on a regular basis, it is only updated a couple of months before the property tax bill is prepared. There have even been cases where the lender has foreclosed on the property, without knowing about the PACE financing, and a third party buyer buys the property at the foreclosure auction only to find out later when the buyer receives the next property tax bill that PACE financing had been obtained.
Bonds associated with PACE assessments can be packaged and securitized. Securitization, which was developed in the mortgage industry, works by pooling a series of assets, such as mortgages, and selling notes backed by these assets to investors. Because these bonds are for property improvements which achieve a positive environmental impact, some PACE providers have had their bonds green certified. PACE bonds are unique amongst the green bond market because products rated as efficient are reducing carbon emissions as soon as they are installed.
Locations with PACE legislation
PACE is enabled in 31 states and the District of Columbia, covering more than 80% of the U.S. population.
|Arkansas||Available in some locations|
|California||Available in some locations|
|District of Columbia||Available|
|Maryland||Available, but no current programs|
|Nevada||Available, but no current programs|
|New Hampshire||C-Pace under development|
|New Jersey||Under development|
|New Mexico||Under development|
|North Carolina||Available,but no current programs|
|Oklahoma||Available, but no current programs|
|Wyoming||Available, but no current programs|
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- "Renovate America gets green bond certification for all of its PACE securitizations - Stratton Report". Stratton Report. Retrieved 2016-05-25.
- "PACE Roundup: $150M Securitization by Ygrene, Clean Fund Closes $60M". www.greentechmedia.com. Retrieved 2016-05-25.