PACE loans can cover up to 100% of the cost of a project, depending on the specific program and the particular project. Similar to other assessments, a PACE assessment runs with the property and can be transferred to a purchaser upon sale. Terms range from 5 to 25 years with rates starting at approximately 6.75% for a 5-year loan and 7.5% for a 10-year loan plus administrative fees. The amount of financing is capped relative to the property’s total debt-to-equity ratio. Among the thousands of projects eligible for PACE financing, some of the most popular include the installation of rooftop solar systems, energy efficient roofing and windows, and water efficiency improvements (such as gray water reclamation systems). In certain circumstances, rooftop solar providers have utilized PACE in conjunction with the power purchase agreement model to increase security for investors, reduce financing costs and make solar available to a larger consumer population.
After the City of Berkeley pioneered the first PACE financing program for rooftop solar systems in 2008, other states and municipalities followed suit and enacted legislation and programs based on the Berkeley model. In 2010, however, residential PACE programs hit a significant roadblock. Specifically, the Federal Housing Finance Agency (FHFA), acting as conservator of Fannie Mae and Freddie Mac, which own or guarantee approximately half of the residential mortgages in the United States, directed the mortgage lenders to stop underwriting, purchasing or refinancing mortgages for properties with PACE assessments. The argument proffered by FHFA was a concern that, in the event of default or foreclosure, the mortgage lender’s secured interest in the property would be subordinate to a PACE lien. In 2013, the Ninth Circuit dismissed a legal challenge to the FHFA determination brought by the California Attorney General along with interested municipalities, including Sonoma County, Placer County and Palm Desert.1 Fortunately, in 2014, in order to promote lender confidence and address FHFA’s concerns, California established a $10 million loan loss reserve.
Although the FHFA continues to maintain reservations over the priorities of PACE liens and the impact upon mortgage lenders, proponents of the PACE model argue that FHFA’s concerns are misplaced. Unlike other forms of property assessments, PACE-financed retrofits improve cash flow: loans are used to finance energy and water efficiency measures that result in permanent reductions in the property owner’s utility expenditures. The additional cash can be used for repayment of both the PACE loan and the mortgage. A 2013 study concluded that property owners that had implemented energy efficiency improvements were 32% less likely to default than property owners that had not.2
Despite the “impediments” raised by FHFA, the PACE model has rapidly been gaining momentum in California. In 2014, CaliforniaFIRST extended $300 million in financing to property owners in 17 counties and more than 140 cities. According to Renovate America, its residential HERO Financing Program’s loan portfolio has grown exponentially as the program has expanded into new communities over the past two years: from $21 million in 2012 to $109 million in 2013 to $302 million in 2014. The commercial market, meanwhile, has grown from $17 million in 2012 to $88 million in 2014.
Where the PACE model goes from here and what roadblocks FHFA will develop against larger implementation remain to be seen; however, with the explosion of capital flowing into energy efficiency and solar distributive generation, creative finance companies utilizing the PACE model are well positioned to jump-start the marketplace.