What Is It?
Property Assessed Clean Energy (PACE) is a voluntary local government tool to finance energy efficiency and renewable energy upgrades to buildings. To help overcome the barrier of high up front costs, PACE allows businesses and homeowners to borrow the funds needed using their home or building as collateral against the loan. The local government then places a voluntary assessment against the property and collects payments for the loan as part of the property tax bill. To provide security for the loan, a lien is placed against the property so that if the loan is not repaid, the lender can recover the funds when the building is sold. If the loan is in good standing, the PACE lien remains attached to the property when it is sold, and the new owner takes on the responsibility for the debt.
The combination of the property tax bill as a collection method and the collateral in the form of the lien against the property are meant to reduce the risk to lenders, allowing them to offer lower interest rates. Interest rates for home improvement loans are typically above 10%, and PACE programs aim to reduce that to something closer to mortgage interest rates, currently below 4%.
The combination of low or no upfront costs and affordable loan terms can eliminate significant financial hurdles to implementing projects that can pay for themselves in the long run. Ideally, the savings realized on energy bills are less than the increased property tax payments so that owners experience overall reduced costs from the outset.
Importantly, the Federal Housing Finance Authority (FHFA) objects to liens being placed on homes with mortgages securitized by FannieMae, which it oversees. FannieMae currently guarantees about 25% of residential mortgages, and being covered by FannieMae allows homeowners access to lower mortgage rates. FHFA's reservations are based on concerns that a competing lien on a home increases the risk that a loan will be recovered in the case of default. In 2010, it directed FannieMae adjust its lending requirements for homes with PACE liens, reducing loan to value ratios and increasing interest rates. This action effectively halted PACE programs in many jurisdictions, and the FHFA’s actions are now the subject of a lawsuit. In some instances, PACE programs use subordinate liens, ones that get paid only after the primary mortgage is paid, to which the FHFA has little objection.
Sonoma County, CA
The Sonoma County Energy Independence Program (SCEIP) was the first countywide programs launched in California to help implement a PACE program. In the first three years SCEIP financed over $55 million in projects, including 1600 residential properties and 2600 individual improvements. Homeowners can borrow up to 10% of the value of their homes for improvement projects, and the program also includes incentives for home energy assessments and specific energy saving measures. The program provides services to both residential and nonresidential consumers. (more information)
State of Maine
Signed into legislation April of 2010, Efficiency Maine Trust has developed rules for Maine’s PACE programs. The legislation specifies that the PACE assessments be considered subordinate liens, secondary to mortgages, which avoids conflicting with recent FHFA decisions. Homeowners can borrow up to $25,000 at an interest rate of 5% with no up front costs. Municipalities are able to use federal grants to establish the programs, and over 100 municipalities are currently participating in the program. Maine received $30 million through the U.S. Department of Energy’s Better Buildings Program to support the PACE program. As of July 2012 there are 134 towns that have adopted a PACE ordinance. (more information)
State of Vermont
The Vermont PACE program is administered by Efficiency Vermont, and offers loans of up to $30,000 or 15% of home value. Upfront costs to borrowers are 2% of the loan value. The loans are backed by a secondary lien, which is subordinate to the mortgage, allowing the program to move forward without conflicting with recent FHFA decisions. (more information)