“PACE” stands for “Property Assessed Clean Energy.” It is a financing tool through which cities sell bonds and then loan the proceeds to property owners to improve building energy efficiency. The loans are repaid via a dedicated taxing mechanism. A Milken Institute event on PACE financing described it in more detail:
In the PACE framework, cities and counties form financing districts that could issue bonds to provide financing for residential and commercial property owners to voluntarily retrofit buildings and make improvements such as installing solar, wind or geothermal energy systems.
Property owners would repay the loans over 20 years through a special property assessment, with the paper secured by a super-senior position, much like any property tax. Up-front costs for owners are dramatically reduced, which improves return on investment and the internal rate of return and doesn’t discourage them from opting in.
One bit of legal uncertainty surrounding PACE proposals is in that super-senior position. Since the loan would become attached to a property that frequently is already mortgaged, in the case of default lenders become very concerned with who gets paid first from any proceeds from liquidation. If PACE loans can achieve the super-senior position, then the bonds are safer investments, it lowers the city’s borrowing cost, and enhances the attractiveness of the program to property owners. The legal question concerns whether, for already mortgaged properties, the law will allow PACE loans to jump ahead of the mortgage lender in priority.
On the finance side of things, the main issue comes in packaging bundles of small-scale, non-standardized city loan programs into something that can be sold in the municipal bond market. But there are a lot of creative financial types that are under-employed these days, so I trust “the market” will solve this particular problem.
Mitchell Schnurman’s column in the Fort Worth Star-Telegram discusses the PACE program’s California origins and growing interest among cities in Texas, he calls it a “game changer for a green economy.”
PACE financing has a couple of key principles. Most important, the improvements have to generate enough savings to cover the costs. That helps ensure that homeowners are making high-value investments.
Most programs exclude homeowners who are underwater on their mortgage. Leaders try to make sure that contractors are qualified, that the work is done correctly and that nobody is shortchanged.
There’s one more reason Texas leaders should get moving soon. To make the numbers work on energy efficiency, residents tap a slew of federal, state and local incentives.
With deficits rising, that money won’t be around forever.
I wouldn’t oppose the PACE idea on principle, though municipal management of lending programs make me a little nervous. Lots of critics of Wall Street these days are calling for salaries and bonuses to be tied to long term performance in order to prevent short term manipulation of results. How will municipal workers be motivated to be good loan officers? Program management overhead should be recovered through the loan repayments, otherwise these costs become an indirect subsidy to participants.
On principle I worry about the after-the-fact revision of lender priorities. And it seems like a misuse of the taxing authority of government to use it to support home and commercial property improvements, even though the “taxing” is limited to the properties involved in the PACE program. Yet I’m not a specialist in these finance issues, so I am not particularly confident that my worrisome feelings properly identify substantive areas of concern.
I do object to the idea that government subsidies can “make the numbers work on energy efficiency.” Seems to me that a proposed energy efficiency project is either a net value enhancer or a net value destroyer. Subsidies can’t change energy efficiency facts, they only change who ends up paying for property owners to improve their property. If it takes a subsidy to “make the numbers work,” the numbers don’t work. But government subsidy is not inherent in the program, so this is not an “in principle” objection to PACE financing.
Much more information on PACE financing is available at PACE Now.