PACE: Boon for Solar Developers or Boondoggle for Lenders?

Hailed by some as a way to reduce the financial burden homeowners face when going solar, Property-Assessed Clean Energy (PACE) financing programs allow property owners to borrow money to pay for renewable energy or energy-efficiency improvements. Unlike traditional power purchase agreements or other solar loan programs, the amount borrowed is typically repaid over a period of years via a special assessment on the property.

What is PACE?

PACE financing funds are typically set up by state or local governments in the form of bonds and the amount borrowed is typically repaid via a special assessment on property taxes, or another locally-collected tax or bill. Only property owners within the local jurisdiction that choose to borrow money through the PACE program are subject to this special assessment. PACE financing allows the cost of clean energy home improvements to be linked to the property and if a property owner participating in a PACE program sells the property, then the repayment obligation will legally transfer with the property.

In most states, the legislature must authorize cities or counties to issue special assessments on select customers’ property taxes to finance solar energy systems. Cities or counties can use their bonding authority to finance programs.

To date, twenty-two states have passed measures authorizing local governments to create PACE financing programs, and more than 10 governments have taken steps to create programs. California, where the program originated, has seen fourteen counties and close to 120 cities participate in its program, known as the CaliforniaFIRST program.

Prior to 2009, only two states — California and Colorado — had passed legislation authorizing property tax financing. In 2009, more than a dozen states passed legislation authorizing property tax financing. In 2010, three additional states passed PACE-authorizing legislation and several clarified existing laws.

Berkeley and Palm Desert, municipalities in California, were the first to implement property tax assessment financing, with numerous other cities taking steps to do the same. A Vote Solar Initiative paper on municipal property tax assessment financing chronicles Berkeley’s experience and provides a policy primer on how to replicate the model in other counties and cities.

Should Americans Really Borrow More Money Right Now?

Despite the bad economy slowing down the establishment of bonds for PACE programs, progress in getting funds allocated and distributed was being made around the US. That progress was stopped a few months ago when Fannie Mae and Freddie Mac, the mortgage-finance giants that have been partly blamed for the housing bubble that wreaked havoc on the U.S. economy in 2007 and 2008, sent a letter to lenders on May 5 effectively pushing them away from PACE programs.

The issue that the mortgage companies have with PACE revolves around defaults. The companies are concerned that tax assessments have senior lien status to mortgages, meaning they must be paid off first. Fannie and Freddie guarantee more than $5 trillion in mortgages and said in the letter that they don’t believe solar and other energy efficiency improvements to property should be a higher priority than the mortgages they back.

In response to Frannie and Freddie’s letter, DOE, a number of governors, New York City Mayor Michael Bloomberg, San Francisco Mayor Gavin Newsom, and more than 40 members of Congress asked for clarification from the lenders, which are basically owned by the federal government. In addition eleven members of the US Senate wrote to Banking Committee Chairman Chris Dodd (D-CT) urging him to get an expidited clarification from Fannie Mae and Freddie Mac.

Despite all of the pressure from politicians and industry groups, the mortgage firms have stuck to their guns. In fact, earlier this month, a letter from the Federal Housing Finance Agency (FHFA), spokes-agency for Fannie and Freddie, said PACE programs “present significant safety and soundness concerns that must be addressed by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.”

“First liens established by PACE loans are unlike routine tax assessments and pose unusual and difficult risk management challenges for lenders, servicers, and mortgage securities investors. The size and duration of PACE loans exceed typical local tax programs and do not have the traditional community benefits associated with taxing initiatives,” the FHFA letter continued.

Industry reaction has been largely one of confusion. The two letters have effectively shut off a stream of funding that many homeowners were planning to take advantage of in the coming months.

“Despite strong Administration support, to date FHFA has declined to constructively resolve the situation. Congressional lawmakers have indicated that they are working to pursue a legislative fix. In the interim, PACE programs for commercial properties will move forward. Meanwhile, global warming continues unabated, green collar workers sit on their hands, utility bills rise, and the economy is still in the tank. It doesn’t have to be this way,” said Adam Browning director of Vote Solar.

The Benefits Outweight the Risks

As solar developers and PACE adovcates try to navigate through the regulatory morass created by Fannie, Freddie and FHFA, numbers recently released by Pike Research confirm that if the programs are implemented they will spur enormous economic and job growth. The new report said that if PACE programs continue to grow by 2015, investment in PACE financing for commercial buildings will total $2.5 billion annually, under a baseline forecast scenario. This level of investment would result in the creation of 50,000 new jobs.

In an aggressive forecast scenario that takes into account a stronger legislative push for PACE at the federal and state levels, the benefits that result from PACE financing — lower utility bills for homeowners and more jobs created for the industry — would be more than triple the baseline amounts borrowed.

“PACE programs are gaining momentum around the country, and they represent a very promising mechanism for overcoming many of the barriers to energy efficiency retrofits for commercial buildings,” says managing director Clint Wheelock.  “The majority of buildings would benefit from energy retrofits, with neutral to positive cash flow in addition to the other environmental and social benefits.”

Pike’s study recognized Fannie and Freddie’s issues with PACE and even pointed out a few additional obstacles standing in the program’s way. For example, when a property changes hands, the mechanisms for transferring the PACE lien are still relatively untested and it remains unclear as to whether a voluntary PACE lien would be treated as a loan or as an assessment lien for purposes of evaluating a business’s debt position.

Pike Research’s study, “PACE Financing for Commercial Buildings”, explores the potential for PACE programs to address many of the critical barriers in the market for renewable energy and energy efficiency retrofits in privately owned commercial buildings.

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Former Editor at, now Assistant Counsel at the New York State Department of Public Service, regulating New York's electricity, gas, and telecommunications industries.

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