Commercial and Residential PACE Programs: Revolutionizing Property Improvement Financing

Common Foundation of PACE Programs

PACE programs share a fundamental principle that allows property owners to finance the upfront expenses of energy or eligible enhancements and subsequently repay the costs over time via voluntary assessments. A distinguishing feature of PACE assessments is their connection to the property rather than an individual.

A New Paradigm in Financing: PACE’s Structure

PACE financing for clean energy initiatives is typically built upon a pre-existing structure known as a “land-secured financing district.” Often referred to as an assessment district, local improvement district, or similar terms, this framework has traditionally enabled local governments to issue bonds for public-purpose projects such as streetlights, sewer systems, or utility lines.

Extending the Model to Energy Efficiency and Renewable Energy

Recent advancements have expanded this financing model to encompass energy efficiency and renewable energy projects. This extension empowers property owners to implement improvements without a significant upfront payment. Participants in a PACE program voluntarily cover improvement costs over a predetermined period—usually 10 to 20 years—via property assessments. These assessments are tied to the property, paid as an addition to property tax bills. Failure to pay results in consequences akin to neglecting other portions of a property tax bill.

Transferrable and Property-Tied Obligations

A notable characteristic of PACE assessments is that they are tied to the property itself, not the property owner(s). When property ownership changes hands, the repayment responsibility may shift if the buyer agrees to assume the PACE obligation and the new primary mortgage holder permits the obligation to persist. This addresses a significant disincentive for property improvement investments, as owners may hesitate to invest if they plan to sell the property before reaping the benefits of savings on upfront costs.

Advantages

• Facilitates secure, extended-term financing for comprehensive projects, enhancing cash flow positivity.
• Distributes repayment across years, often eliminating the need for upfront payments and the requirement to settle debt during property sale or refinance.
• Potentially leads to lower interest rates due to the secured nature of repayments tied to property tax bills.
• Enables property owners to deduct payments from their income tax liabilities.
• Empowers municipalities to promote energy efficiency and renewables without risking general funds.
• Attracts significant private capital for funding.

Disadvantages

• Limited to property owners’ eligibility.
• Unsuitable for funding portable items like light bulbs or standard refrigerators.
• May necessitate dedicated local government staff time.
• Can involve substantial legal and administrative setup obligations.
• Not suitable for investments below $2,500.
• Potential resistance from lenders/mortgage holders with claims to the property, as their interests may be secondary to unpaid assessment amounts during property foreclosure.