What if somebody told you that they could practically guarantee to reduce both your monthly bills and your impact on the environment at the same time? You might scratch your head since it seems everyone is always telling you that going green is only for the rich folk. Well, it seems you might be able to have your cake and eat it too with the launch of recent financing innovations to help pay for energy efficiency upgrades to your home or business. The most well-known of these recent financial innovations is Property Assessed Clean Energy, or PACE for short.
How PACE Works
PACE is pretty straightforward. First, you have an experienced contractor audit your home for potential energy savings. Second, the auditor will provide you with an estimate of upfront costs and expected future savings. Finally, in order to bridge the difference between these upfront costs and future savings, an institution—typically either a local government or more recently, a private lender—will lend you money to pay for the installation. However, instead of a typical loan, this is backed by a lien on your building, and the loan is paid back through your property tax bill.
Challenges for PACE
Of course, something that sounds as straightforward as PACE has to be too good to be true, and in fact, up until recently it has seen its fair share of difficulties. Berkeley, California piloted a PACE program back in 2008 under a solar financing initiative.1 The city sold bonds to pay for the upfront costs of the solar installations, with the homeowners using the value of their homes to back their loan from the city. The homeowners then agreed to pay a voluntary tax, in which they paid the city a calculated rate that was below their traditional utility bill charge, but included enough interest for the city to pay back the bonds. The basic PACE model creates local green jobs, and has significant potential to reduce a locality’s reliance on fossil fuels.
Now for the bad news… the housing bubble burst in the late 2000s, resulting in the foreclosure of many homes and deep financial crisis felt across the world. Freddie Mac and Fannie Mae are responsible for backing federal mortgages, as enabled through federal policies encouraging home ownership. Following the foreclosure crisis, these two giants let it be known that they no longer would allow for homeowners to put a lien on their homes for PACE financing, because the lien took precedence over a homeowner’s mortgage payments.3 In essence, if a homeowner went bankrupt, the city could take control of their house before Freddie or Fannie Mac could receive the mortgage payments. This put a screeching halt to the PACE financing program.
There is good news too. Despite the hurdles in the residential real estate market, commercial investors are discovering the significant financial gain to be realized through PACE investments. These investors have shifted their focus to commercial buildings, which don’t have to deal with Freddie and Fannie. Private investors are now acting to issue the bonds, which was previously the role of local governments. The most prominent example of this is the recent announcement by Richard Branson’s Carbon War Room of a $550 million investment in the cities of Sacramento, CA and Miami, FL. The New York Times explained the set- up thoroughly, with the following description:
Short-term loans provided by Barclays Capital will be used to pay for the upgrades. Contractors will offer a warranty that the utility savings they have promised will actually materialize, and an insurance underwriter, Energi, of Peabody, Mass., will back up that warranty. Those insurance contracts, in turn, will be backed by Hannover Re, one of the world’s largest reinsurance companies. [] As projects are completed, the upgrade loans, typically carrying interest rates of 7 percent, will be bundled into long-term bonds resembling those routinely issued by governmental taxing districts. Barclays will market the bonds. Retirement funds have expressed interest in buying these bonds, which will be repaid by tax surcharges on each property that undergoes a retrofit.4
The next key hurdle will be to create a certification program for contractors so they can prove that the actual savings resulting from their work match their estimates. Again on the positive side, cities such as San Francisco and Los Angeles have recently announced their own PACE programs.5 The San Francisco project is using a privately funded solar project in Sonoma, California, which may also allow Sonoma homeowners to tap into a PACE program!6
Future of PACE
The future of PACE may need to be more private-sector driven, but hopefully the benefits of PACE programs will be substantial and allow local governments to get back into the game and make these programs more universally accessible. Another part of this discussion is the intersection of community improvement and property taxes. Property tax assessments traditionally do receive seniority in case of default, and there is a 100 year tradition of local governments charging its taxpayers for community improvements via property taxes. These improvements are things such as sidewalk and road infrastructure, and they are put into property tax bills on the premise that these improvements increase property values.7 Perhaps one day green energy investment will be considered an improvement to the community that also increases property values?
