PACE Financing - Home Improvement Tax Deductions

Property Assessed Clean Energy (PACE) is a means of financing energy efficiency upgrades or renewable energy installations for residential, commercial and industrial property owners. Depending on state legislation, PACE can be used to finance water efficiency products, seismic retrofits, and hurricane preparedness measures. Examples of energy efficiency and renewable energy upgrades range from adding more attic insulation to installing rooftop solar panels for residential projects and chillers, boilers, LED lighting and roofing for commercial projects. In areas with PACE legislation in place, governments offer a specific bond to in vestors or in the case of the open-market model, private lenders provide financing to the building owners to put towards an energy retrofit. The loans are repaid over the selected term (over the course of somewhere between 5 and 25 years) via an annual assessment on their property tax bill. PACE bonds can be municipal financing districts, state agencies or finance companies and the proceeds can be used to retrofit both commercial and residential properties. One of the most notable characteristics of PACE programs is that the loan is attached to the property rather than an individual.

PACE can also be used to finance leases and power purchase agreements (PPAs). In this structure, the PACE property tax assessment is used to collect a lease payment of services fee. The primary benefit of this approach is that project costs may be lower due to the provider retaining the tax incentives and passing the benefit on to the property owner as a lower lease or services payment.

PACE programs help home and business owners pay for the upfront costs of green initiatives, such as solar panels, which the property owner then pays back by increasing property taxes by a set rate for an agree upon term ranging from 5â€"25 years. This allows property owners to begin saving on energy costs while they are paying for their solar panels. This usually means that property owners have net gains even with increased property tax.

History

Voluntary assessments for repaying municipal bonds have been attached to property taxes since the early 1800s to fund projects for public good such as sidewalks, fire stations, and street lighting. PACE uses the same concept, but for projects that benefit the private sector, or individual building owners. PACE was originally known as a "Special Energy Financing District" or "on-tax bill solar and efficiency financing." The concept was first conceived and proposed in the Monterey Bay Regional Energy Plan in 2005 but followed voter approval of a similar solar bonds program approved by San Francisco voters in 2001. The concept was designed to overcome one of the most significant barriers to solar and costly energy efficiency retrofits: up-front costs. A homeowner could spend tens of thousands of dollars on a solar photovoltaic system, upgrading windows to be more energy efficient or adding insulation throughout the home, yet all of these investments would not likely b e recovered when the home was sold. PACE enables the homeowner to "mortgage" these improvements and pay only for the benefits they derive while they own the home.

The first PACE program was implemented by Berkeley, California, led by Cisco DeVries, the chief of staff to Berkeley's mayor and then-CEO of RenewableFunding. University of California, Berkeley led the development of the program via the "Guide to Energy Efficiency & Renewable Energy Financing Districts for Local Governments" contributed by Cisco DeVries, Ann Livingston and Matthew Brown. The guide was funded through grants to the City of Berkeley from the U.S. Environmental Protection Agency. Berkeley's PACE program was recommended as an alternative to the solar bonds authority approved by neighboring San Francisco voters in 2001 in conjunction with the City's Community Choice Aggregation program, which is being implemented in both San Francisco and Sonoma counties. DeVries saw PACE as a way to provide a viable means to help achieve the Bay Area's climate goals. California passed the first legislation for PACE financing and started the BerkeleyFIRST climate program in 2008. Si nce then, PACE-enabling legislation has been passed in 31 states and the District of Columbia, allowing localities to establish PACE financing programs.

However, PACE financing for residential properties was dealt a serious blow in 2010 when Fannie Mae and Freddie Mac refused to back mortgages with PACE liens on them. In August 2015, the Department of Housing and Urban Development announced that it intends to require liens created by energy retrofit programs to remain subordinate to loans guaranteed by the Federal Housing Administration and that it would be issuing guidance on how to handle the transfer and sale of homes with a PACE assessment.

Benefits

For a city, PACE can play an important role in reducing local greenhouse gas emissions, promoting energy efficiency improvements in its buildings, making the shift to renewable sources of energy more affordable, and reducing energy costs for residents and businesses. Because PACE is funded through private lending or municipal bonds it creates no liability to the city's funds. Additionally, most PACE programs made possible through public-private partnerships rely on private capital to source financing. PACE also enables states and local governments to design and implement such programs in their communities. PACE programs also help to create jobs and thus spur local economic development when local solar installers and renewable energy companies partner with the program. It is also an opt-in program, so only those property owners who choose to participate are responsible for the costs of PACE financing.

PACE enables individuals and businesses to defer the upfront costs that are the most common barrier to energy efficiency or renewables installations. The PACE loans are paid by additional assessments on the property owner's property taxes over an agreed upon term while energy costs are simultaneously lower, providing the PACE consumer with net gains. Also, because the solar panels and the PACE loan is attached to the property, the consumer can sell the property leaving the debt to be paid through the property tax assessed on the subsequent owners.

Concerns

For consumers, PACE type programs have several problems. Most significantly, homeowners are financed for the home improvements without any assessment of whether the financing is affordable for the homeowner. Because the PACE financing is structured as a tax assessment instead of a loan, the PACE programs do not have to provide to homeowners the same disclosures about the financing costs that traditional lenders must provide. Without either an assessment of affordability or these disclosures about the costs of the financing, homeowners depend on what the PACE program providers tell them when trying to figure out whether the financing is affordable. Homeowners have complained that PACE contractors are lying about the costs of financing as part of selling the program. These problems create a situation in which homeowners can suddenly owe far more in property taxes than they can afford to repay; this is especially true for retired and disabled homeowners on fixed incomes. PACE archite cts Cisco DeVries and Matthew Brown deny these claims as "isolated incidents".

The costs for consumers with PACE financing is also quite high. Interest rates for PACE programs are usually 3-4% higher than for traditional mortgage loans, with additional administrative fees close to 5%.

Many buyers and sellers have had difficulty with sales of homes burdened with PACE tax assessments. Some buyers find out about the assessments after the sale, forcing them to pay money out-of-pocket unexpectedly. Sellers have sometimes been forced to pay off the PACE assessment or lower the sale price to compensate for the PACE tax assessment.

A problem with PACE for both residential lenders and consumers is that the tax liens for PACE financing take priority over other lien-holders, and those lien-holders are not notified or given an opportunity to object. Commercial PACE is less problematic because priority lien-holders for those properties are notified before hand. Fannie Mae and Freddie Mac have refused to purchase or underwrite loans for properties with existing PACE-based tax assessments. but announced guidance in mid-2016 for limited financing of properties with PACE obligations.

Securitization

Bonds associated with PACE assessments can be packaged and securitized. Securitization, which was developed in the mortgage industry, works by pooling a series of assets, such as mortgages, and selling notes backed by these assets to investors. Because these bonds are for property improvements which achieve a positive environmental impact, some PACE providers have had their bonds green certified. PACE bonds are unique amongst the green bond market because products rated as efficient are reducing carbon emissions as soon as they are installed.

Locations with PACE legislation

PACE is enabled in 31 states and the District of Columbia, covering more than 80% of the U.S. population.