Property Assessed Clean Energy (PACE) Loans Definition
A Property Assessed Clean Energy (PACE) loan is a financing tool. It allows homeowners and/or business owners to borrow funds for expenses related to energy improvements. The loan is repayable over a set period through an assessment of the property. It is similar to a mortgage or home equity loan.
PACE programs exist for both commercial and residential private properties. PACE programs for commercial properties are called Commercial PACE or C-PACE. PACE loans for residential properties are called Residential PACE or R-PACE.
The U.S. Department of Energy oversees the guidelines, programs, and standards for PACE loans.
How a PACE Loan Works
PACE loan financing aims to help homeowners and business owners finance energy-efficient improvements to their property.
Unlike banks, the PACE loan does not prioritize earning interests from loans. It offers an opportunity for homeowners and business owners to afford efficient, environmentally friendly, and sustainable property improvements.
Below are some of the features of PACE Loans:
- Interest rates are generally low and do not fluctuate
- PACE loans do not require the property owner to pay the up-front cost of the improvement
- The property will serve as the collateral to the loan, which means that debt is directly tied to the property. Thus, if ownership of the property changes, the balance of the PACE loan remains unchanged
- Payment of the loan balance is spread over 10 to 20 years
- The property assessment is added to the homeowner's property tax bill, which ensures repayment of the loan
The PACE Loan Process
Below are the factors to be considered in going through the PACE loan process:
Availability
Although a PACE loan is a viable financing option, it is important to note that not all states offer PACE financing.
At the time of writing, PACE-enabling legislation is active in 38 states plus D.C. PACE programs are also active in 30 states plus D.C.
Residential PACE is currently offered in the states of California, Florida, and Missouri. A most updated list is found in PACENation.
Eligibility
PACE financing is tied to the property rather than the homeowner. This means that if property ownership changes, payments made to the PACE loan are sold along with the property.
This is an advantage because a homeowner does not need to commit to living in a PACE-financed property until the loan is fully repaid.
Hence, for a person to be eligible for a PACE loan, municipalities will look into an applicant's ability to pay the loan. They do this by scrutinizing the applicant's record of past property tax payments. Any delinquent taxes or tax liens may disqualify an applicant from PACE loan eligibility.
Credit scores are typically not considered when applying for PACE loans.
Contractors
One unique attribute of PACE loans compared with traditional mortgage loans is that PACE loan providers offer oversight and training for participating contractors.
Homeowners and business owners who qualify for the PACE loan are assured connections with specialists authorized to handle the property improvement projects.
These contractors go through a strict screening where their licenses are verified, previous project commitments are reviewed, and insurance is checked.
The contractor's work is also regularly inspected to ensure quality and adherence to the guidelines set by the PACE program.
Size of Improvement
PACE projects cannot be too small or too large so that it benefits both the homeowner or business owner and the local government offering the loan.
The project is set to have a minimum value of $2,500 and a maximum value that does not exceed 15% of the property's overall value.
PACE Loan Securitization
Ygrene Energy Fund is a well-known financial institution that handles PACE loan securitization. Securitization is the process of pooling loans, repackaging them into securities, and then selling them to investors.
Ygrene announced in 2022 that it had completed $344 million in securitizations for PACE.
In its statement, Ygrene claimed to have completed 12 securitization transactions totaling $2.5 billion. It remains the only PACE originator with a successful and continuous track record of securitizing both C-PACE and R-PACE assets.
The company looks forward to helping communities stand up through PACE-enabled economic stimulus and job creation.
PACE loans have been a proven solution in reducing climate change-impacting emissions and utilizing a market-based approach to achieve the United Nations' Sustainable Development Goals.
PACE loan securitization represents an innovative transaction that provides PACE-backed investment capital for energy improvements in public buildings, such as schools, libraries, hospitals, and other public works projects.
Securitizing these PACE loans creates an opportunity for investors to invest in municipal bonds, which will finance energy-efficient upgrades on public land.
Guaranteed by the repayment of PACE property assessments, this process reduces financial risk and allows investors to gain exposure to income-producing assets.
Benefits of a PACE Loan
One of the major benefits of a PACE loan is that it helps finance energy-saving improvements that may not otherwise be an option.
PACE loan financing can reduce greenhouse gas emissions and meet renewable energy requirements mandated by cities or other governing bodies.
It also allows homeowners and business owners to avoid hefty up-front costs for energy-saving enhancements or emergency repairs. These issues may include insulation damage from leaking pipes, damaged roofs from storms, or broken windows resulting in heating problems.
The repayments are added to the property bill, which ensures immediate repayment without accumulating additional interest fees.
It also allows municipalities to encourage the use of renewable energy without exposing general funds to risk.
Drawbacks of a PACE Loan
One drawback is that applicants have to meet eligibility requirements, which might exclude those who are not property owners.
It will also depend on the borrower's income level and ability to repay within a specific timeframe.
The PACE loan is also not available for improvements below $2,500.
Additionally, there can be potential resistance from mortgage holders whose claims to the property may be subordinated under the terms of a PACE loan.
The Bottom Line
The PACE loan is an innovative new solution that provides access to funding while transforming communities.
With improved energy efficiency, lower utility bills, and fiscal benefits for municipalities, this financing tool has unlocked millions in renewable-energy investments for communities.
PACE loans provide unique opportunities for property owners to improve their buildings' efficiency with lower interest rates than other types of loans without increasing savings or credit scores.
However, it is important to take note of the disadvantages associated with PACE loans. These drawbacks include the strict eligibility requirements and other possible barriers.
FAQs
1. Are there any limitations on using PACE loans?
PACE loans are limited to energy efficiency and renewable energy projects.
2. What is the difference between C-PACE and R-PACE?
C-PACE (Commercial Property Assessed Clean Energy) loans allow businesses to finance upgrades, including solar panels, insulation, window replacements, air sealing, boilers, lighting upgrades, HVAC replacement, or repowering with geothermal heat pumps.
R-PACE (Residential Property Assessed Clean Energy) loans fund improvements in residential homes, including lighting, heating, cooling, insulation, solar panels, water heaters, and many other energy improvements.
3. What would disqualify me from PACE financing?
No applicants with foreclosure filings in the previous year can qualify for PACE financing. Delinquent mortgage payments, previous bankruptcy, involuntary liens or judgments on the property, and any past-due municipal liens also disqualify applicants from this program.
4. How will I know what I can afford?
Call your lender to discuss your financial situation and ask about the eligibility requirements necessary for PACE financing. Your lender can help you determine how much money you can borrow and the term length of the loan based on your credit score, down payment amount, and monthly income.
5. How long do I have to pay back my PACE loan?
The payment periods usually range from 10 to 20 years based on terms agreed upon between borrowers and lenders.
