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Keeping PACE with Revolving Loan Programs in Green Building

By: Luke Bujarski

Local governments continue to put public dollars to work saving both the environment and money on ’ energy bills.  Through creative financing methods known as Property Assessed Clean Energy or PACE programs, communities are opening access to capital for energy audits and property retrofitting of existing buildings.  Twenty-three states have adopted legislation allowing public funds to be used by private owners looking to retrofit their properties.  While resistance from the mortgage industry has stalled progress in the residential sector, a renewed focus on commercial  properties has charted a new path of least resistance for PACE programs in communities around the country.

 Historically, the biggest obstacle to energy efficiency improvement projects has been access to financing.  PACE programs work on the simple notion that borrowed money can be paid back over time, with the savings achieved through lower energy costs.  In addition to lower energy bills, these new energy saving technologies such as ultra efficient insulation and new boilers raise the overall value of property.  And, since the tax hike stays with the property instead of the owner, participants opting to use available funding leave the debt obligation with them when they decide to sell.  As an added incentive, monthly payments are typically set lower than the actual savings being achieved.  This delivers immediate cost savings to the owner, as well as instant revenue used to replenish the PACE fund.

This tax-lien model has been implemented in communities around the country under different names and stipulations.  Programs like Long Island Green Homes and Milwaukee Energy Efficiency (Me2) have worked with residents to cover the cost of new insulation and home heating appliances.  The Cambridge Energy Alliance of Massachusetts hopes to leverage over $100 million dollars to retrofit over half of the city’s buildings over the next six years.   The City of Berkley, California launched a pilot program in 2008 which allowed property owners to borrow money for solar photovoltaic (PV) systems, repaying the loan as an assessment on their property tax over a period of 20 years.

Despite early successes, an over-leveraged economy and fears of further instability in the mortgage industry have led officials to bring PACE programs under scrutiny.  Since loans through PACE programs are property-based, mortgage lenders ultimately get stuck with the bill in the event of a default.  This has led the Federal Housing Finance Authority (FHFA) to order Fannie May and Freddie Mac to postpone underwriting mortgages on home properties with PACE assessments.  In response, mortgage lenders have redlined communities with PACE programs, throwing spikes under the wheels of initiatives like Berkley First and Long Island Green Homes.

With obstacles in the residential space, PACE programs are now turning an eye toward commercial properties.  Since Fannie and Freddie only underwrite home mortgages, communities like Gulfport, Florida are removing the residential component within their PACE initiatives.  By focusing exclusively on commercial properties, program officials are eliminating the risk of lend-wary bankers blocking droves of hopeful homeowners from securing mortgages.

A renewed focus on commercial properties demonstrates how the rules of the game around PACE programs continue to evolve.  The reason why PACE programs have gained momentum is because they overcome one of the greatest hurtles to building efficiency improvement measures – up-front costs.  Many are hopeful that it may be too late to close the flood gates on swelling demand for energy efficient green real estate.  At the very least, PACE programs will continue to reshape relationships between commercial lenders, municipalities, and property owners as the U.S. real estate market bounces back from the 2008 crisis.

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