Property assessed clean energy (PACE) financing programs allow state and local governments, where permitted by law, to incentivize homeowners to undertake energy efficiency improvements at no upfront cost to the homeowners. The government funds the initial cost as a loan and in turn a special assessment is added to the property to provide for repayment.
On July 19, 2016, the US Department of Housing and Urban Development, in conjunction with the Obama administration’s new cross government partnership the Clean Energy Savings for All Initiative, released guidance (“HUD Guidance”) with respect to PACE financing to encourage homeowners to make energy efficiency improvements on their property.
Prior to the HUD Guidance, the Federal Housing Administration would only insure properties at which a PACE assessment was subordinated to the related mortgage; however, under the HUD Guidance, residential properties subject to a senior PACE assessment may now be eligible for FHA-insured mortgage financing, if the following are satisfied:
- The PACE assessment is collected and secured in the same manner as other special property assessments under applicable law;
- Only past due, regularly scheduled PACE assessments may be realized ahead of the mortgage on the property;
- The PACE lien does not restrict transferability of the property;
- The terms and existence of the PACE assessment are fully disclosed and transparent in applicable public records; and,
- In the event of a sale, including a foreclosure sale, the outstanding amount of the PACE assessment runs with the property, causing the new property owner to be responsible for the outstanding amount.
In addition to the above-outlined HUD Guidance, the US Department of Veterans Affairs released similar guidance (“VA Guidance”) with respect to the use of PACE financing for VA-issued mortgages. Specifically, the VA Guidance outlines the circumstances under which veterans are able to take advantage of PACE programs in conjunction with their VA Home Loan Guaranty benefit.
The Department of Energy recently updated Best Practices Guidelines for Residential PACE Financing (“DOE Guidelines”) for public comment. The DOE Guidelines, which are revisions to the original Guidelines for Pilot PACE Financing Programs, issued on May 7, 2010, focus exclusively on the design and successful implementation of residential PACE programs. For instance, the DOE Guidelines encourage PACE programs to, among other things:
- Define which improvements are eligible and prioritize cost-effective measures to protect both homeowners and mortgage holders;
- Establish criteria for eligible improvements that are consistent with the public purpose of such PACE program; and
- Establish standardized procedures to determine the financial eligibility of the property.
In response to the HUD Guidance, VA Guidance and DOE Guidelines, we anticipate an upsurge in the development and implementation of PACE financing nationwide and thus an increase in residential solar financing opportunities available to homeowners, investors and lenders.