Introducing Property Assessed Clean Energy Financing (PACE)
PACE finance programs allow property owners to pay for energy efficiency, renewable energy, and/or water efficiency projects through an additional assessment on their property tax bill over 5-20 years, depending on the lifespan of the equipment. There is no up-front cost to the building owner and the investment is immediately cash flow positive. If the property is sold, the benefit of the improvement and the burden of the tax lien pass to the new owner. In addition, owners using PACE financing have the ability to pass payments through to tenants
Energy efficiency retrofits in existing commercial buildings help the environment, communities, and building owners and occupants. A robust market for such retrofits would create $12 billion in business annually over the next decade, while producing energy savings of 22 percent, creating 240,000 new jobs, and avoiding 128 million metric tons of CO2 emissions – roughly the annual emissions from 28 coal-fired power plants. For building owners, the benefits include increased net cash flow and a property with greater appeal to tenants seeking green space. PACE has the potential to help unlock this market.
A Guide for Policymakers
The issue brief “Unlocking the Building Retrofit Market: PACE Financing” highlights the experience of leading commercial Pace programs and recommends some best practices in program design. The issue brief also highlights how policymakers can launch a PACE program.
A local government or taxing authority creates a clean energy financing district, which all property owners can elect to join. Property owners who join can subsequently apply for financing to pay for pre-qualified energy efficiency, renewable energy, and/or water efficiency measures permanently affixed to their property. Local governments can issue bonds or allow direct owner-arranged financing to fund the projects. The owner pays for the upgrades through an additional special assessment payment on their property tax bill for a specified term. An energy savings guarantee from the services provider ensures that the owner remains in a cash flow positive position (i.e.- the energy saved because of the improvement will result in monetary savings that will cover the cost of the additional payment). The tax assessment stays with the property, not the borrower, upon sale of the property.
Key features recommended for PACE programs include:
Enabling the owner-arranged PACE financing model
Requiring performance guarantees and contractor certification
Establishing stringent qualifications criteria to ensure early success
Putting forth requirements to protect existing mortgage holders
Ensuring a proper integrative design sequence
Targeting portfolios of properties initially
Creating a loan loss reserve fund
Requiring ongoing measurement and verification for program-wide validation
The steps from authorization of a PACE program through completion of a PACE project are as follows:
Where is PACE Available?
The commercial PACE market is at a pivotal moment in its development. Twenty six states and the District of Columbia have PACE enabling legislation in place; some of these already have emerging or active PACE programs (Figure 2). Active PACE programs are those that can accept applications for property improvements. Twenty such programs in seven states were active or launched as of May 2013. Many of the active programs have multiple municipalities participating. Emerging programs are those finalizing program documents and administration arrangements, securing financing, and expected to launch within six months.
According to Jeffrey Tannenbaum, the founder of PACENOW.org, “Pace bonds can provide enormous amounts of much needed low cost capital to retrofit America’s towns and cities, all while creating local jobs. PACE financing has strong bipartisan support as it provides large benefits to property owners, existing mortgage lenders, municipalities, and our nation without burdening our nation’s taxpayers.”2
For more on how PACE tax lien financing can open up opportunities, see:
Private Sector Barriers… PACE Solutions
Or view this video to learn why PACE is gaining momentum:
Originally published April 2010, updated August 2013
1 San Francisco Launches Nation's Largest PACE Program [http://www.greenerbuildings.com/news/2010/02/10/san-francisco-launches-nations-largest-pace-program].
2 President Clinton and PACNOW Coalition Announce National Pace Bond Program at Clinton Global Initiative [http://www.johnsoncontrols.com/content/dam/WWW/jci/be/smart_environments/october_2009/PACE_Press_Release9_21_09.pdf].