Commercial PACE Financing

(Property Assessed Clean Energy)

By – Jeffrey Howell, Esq.

The private sector retrofit market has been stalled in large part due to lack of capital or access to financing. Because large quantities of the U.S building stock will still exist 25 years from now, there is a significant financial and environmental opportunity to perform retrofits on these properties.

In response, the public and private sectors have presented and debated prospective PACE programs nationwide at the state and federal levels over the past several years. PACE stands for Property Assessed Clean Energy, a program similar to other land secured public financing programs (think Mello-Roos). PACE programs are administered by local government to initiate energy efficiency, renewable energy and water conservation upgrades to existing structures.

Last year, the residential version of PACE was gaining momentum and was put into effect in some counties in California. Unfortunately, the residential program was hindered by lien priority concerns initiated by FHFA (Federal Housing Finance Administration). Eventually, Fannie Mae and Freddie Mac took the position that applying a PACE lien on residential property amounts to a default on the primary loan due to perceived risk to the security. Currently, the issue is in litigation and the future of the program is uncertain at best.

Conversely, some commercial mortgage holders have agreed to PACE style financing because they recognize the opportunity to increase property value. The program works by providing tax lien financing that amortizes the cost of energy efficiency upgrades over long period of time. There are several benefits to this structure, including:

The lien attached to property is senior and transfers with property ownership thereby eliminating personal obligation.
Loan is backed by real property and repaid by owner through voluntary special assessment on tax bill over 5-20 years.
Low interest rates due to low loan risk.
Operating efficiencies benefit tenants and make property a more attractive lease option.

PACE is currently authorized by 23 states to create land secured financing districts which may sell revenue bonds to fund the loan pool. A building owner may also get private bank financing from banks that recognize the benefit provided by the security of a senior position tax lien.

Retrofit benefits include the ability to substantially reduce energy consumption resulting in operating efficiencies as well as reduction in carbon emissions. The savings in these cases are significant enough to provide very favorable return on investment.

Endsley + Associates Law Firm is proud to be a part of the growing cleantech and renewable energy sectors. The firm is uniquely positioned to handle business transactional and litigation needs, as well as real estate transactions with an understanding of cleantech, renewable energy, sustainable building, and carbon emissions issues. Please contact the firm to discuss how PACE financing can fit into your real estate solutions.

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