The Property Assessed Clean Energy (PACE) securitization market in the US is growing, TMF Group has already served on over US$2bn of PACE securitizations.
The Property Assessed Clean Energy (PACE) securitization market is rapidly growing in the United States. PACE is open to home owners as well as owners of commercial, industrial, non-profit and agricultural properties who want to finance a green upgrade to their property. This includes energy efficiencies, renewable energy and water conservation upgrades. There are a number of possibilities for using PACE, for example:
- investing in new heating and cooling systems
- lighting improvements
- solar panels
Historically California has been at the forefront of renewable energy ideas, so it’s no surprise that PACE financing originated here and has spread across the US, benefitting property owners in two ways:
1. saving them money by financing green upgrades, and 2. increasing the value of their property.
PACE pays for 100% of the upgrade cost which property owners can choose to pay back over a period of up to 30 years, with an optional bonus for this to be added to the property’s tax bill. Furthermore the financing stays with the building upon sale.
PACE financing is seen as a benefit to state and local government as well as to property owners as it creates jobs, pushes economic development and protects the environment.
PACE loans have a low credit risk
Morningstar Credit Ratings qualified PACE loans as having little risk of driving a property owner into foreclosure. Additionally they recognise the fact that upgrades financed by PACE actually boost property values and save the owner money when efficiency improvements are made. Furthermore securities with a PACE revenue stream are highly rated by Morningstar.
Brian Grow, the Managing Director at Morningstar Credit Ratings who specialise in residential ABS, said in an interview, “we are looking at it through the lens of how much credit risk these assessments are going to have and whether we have enough protection for investors in the notes that are backed by these assessments. From that perspective, there is very little credit risk in our opinion”.
Possibly because of the low credit risk, the market for PACE ABS has seen a steep increase. Three of the largest PACE originators, Renovate America, Ygrene Energy Fund and Renew Financial, all of whom are TMF Group clients, sponsored more than US$1.57bn in PACE securities in 2016.
A unique financing mechanism
PACE loans are relatively new financing mechanisms and have some unique aspects:
- the PACE loan stays with the property, for example after it’s sold, so therefore becomes a tax lien on the property
- the PACE loan is generally paid semi-annually over a 30-year period and this assessment will show up as part of the tax bill
- the tax lien doesn’t get paid off when the property is sold, it simply transfers to the new owner who assumes the lien and takes over the payments until the loan is paid off and rolls off the tax bill.
As with all things new and unique, misconceptions have arisen around PACE securities so Morningstar has published an ABS research paper addressing three misconceptions about PACE securities.