It’s well known that facilities and energy managers are extremely interested in reducing their overall energy costs. And according to the U.S. Dept of Energy, residential and commercial retrofits have the potential to cut energy bills by $40 billion annually. With this in mind, why aren’t all building owners investing in energy efficiency (retrofitting windows, lighting, and HVAC) measures?
Because most managers are looking for ways to cut costs that either has a short payback, or a demonstrable improvement in their top line – in other words, they’re conservative and reluctant to invest capital. The challenge is to overcome reluctance to finance the project and also see the immediate benefits of lower energy bills.
Game-changing legislation known as PACE Bonds are being adopted throughout the U.S. and could help building owners finance energy retrofits with no upfront costs. With Property Assessed Clean Energy (PACE) Bonds, building owners can gain access to low-cost loans and see the immediate benefits of retrofitting.
What are PACE Bonds?
A PACE bond is a municipal bond where the proceeds are lent to commercial or residential property owners to finance energy efficiency measures and small renewable energy systems. The owners then repay their loans over a 20 year term via an annual assessment on their property tax bill.
How does it work?
The loan is attached to the property, not the owner, and transfers if the owner sells the property. The future owners or tenants then take on the payments, and can enjoy lower energy bills from the energy efficient projects enabled by the loan.
PACE bonds avoid the traditional roadblocks to energy efficiency, particularly among commercial or industrial customers, because:
- There’s no up-front cost – a local tax entity loans the cash to the property owner, who pays back the loan through a special assessment on their property tax.
- There’s overall net-savings – depending on the efficiency measures installed, the overall energy savings to the property owner will more than off-set the property tax – the point of energy efficiency is to reduce costs, not just provide a face-lift. In practice, PACE financed-projects will provide property owners more capital to apply to their business or mortgage payments.
- There’s less risk for everyone – the cost of the project is tied to the property itself, so if the property owner moves or changes ownership, the new owner assumes the tax responsibility. In fact, the PACE loans’ seniority is above that of the mortgage on the property, meaning even less risk for the lender. Furthermore, PACE projects increase the property value. This benefits both owners and lenders.
- There’s a lower cost of capital – tying the loan to property means lower default risk and thus better lending rates.
Where is it available?
Twenty states currently have PACE legislation in place, with others working towards a full program for building owners. To find out if PACE bonds are available in your state, visit the DSIRE website.
hello troy – it’s good to see articles/blogs like yours to help inform and educate the public about the advantages of pace initiatives.
here in florida, our governor just signed pace legislation, and we expect to have one of the first programs launch in st. petersburg later this summer.
keep me posted on activities in your area.
btw – do you have documentation on ‘tying the loan to property means lower default risk’? i believe this to be true, but i would like to have some quantitative data to share with decision-makers and lenders.
regards
paul messerschmidt/pace consultant
paulmess@gmail.com
813-334-8682 (mobile)
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Thank you for your comment and your question. It is good to hear from you. To provide you with documentation that you can share with decision-makers and lenders, to start you can note that PACE bonds improve the value of the property itself as “greened” homes improve their value by 5 to 10%. The PACE bond project itself lowers energy bills and improves the borrower’s ability to pay other bills as funds are freed up by installing energy conserving projects, so the borrower can spend money on non-energy bills like their mortgage.
You should also note that foreclosure risk does not impair PACE re-assessment. As described on the PACE NOW website (http://pacenow.org/documents/PACE%20Lien%20Seniority%20in%20Foreclosure%20is%20Immaterial.pdf), in most states property tax liens are senior to mortgage debt, so if homes with PACE bonds are foreclosed, the mortgage holders typically have to repay only the back tax lien payment. This is because most state laws provide that the assessment lien is not ‘accelerated’ at foreclosure (or transfer). Only delinquent assessments are due, not the entire lien. The next property owner will inherit the remainder of the PACE assessment, so the default risk on the bond is lowered, especially compared to, say, a traditional home improvement loan.
Some great online sources that I recommend you check out include: http://eetd.lbl.gov/ea/EMS/reports/ee-policybrief_050410.pdf, http://pacenow.org/documents/PACE%20Benefits,%20Concerns%20&%20Solutions%20Webinar%20Presentation.pdf, http://pacenow.org/documents/Basic_Slide_Intro_to_PACE.pdf, http://www.whitehouse.gov/assets/documents/PACE_Principles.pdf, http://online.wsj.com/article/BT-CO-20100618-709090.html?mod=WSJ_latestheadlines.