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Answers to Arguments against PACE

November 18, 2014 By Lacey Miller

Lacey Miller

Search the terms “property assessed clean energy” (PACE), and you will get a laundry list of results from program supporters, PACE organizations, and other energy efficiency groups. They all have roughly the same information about the definition, origin, and benefits of PACE, but what they aren’t discussing are potential concerns.

Don’t misunderstand, I am a proponent of PACE financing and think it is an incredible program but I’m not the building owner and it’s not my financial juggle to decide. The truth is, all of these websites speak to the project developer and those guys get it; of everyone, they have the strongest desire to get the project approved and financed. But they also have to face question after question from the decision maker, from the building owner. And the gap in PACE education is it has left the nitty gritty to the skeptics.

It’s interesting to hear someone “explain” PACE and completely butcher the concept, and I’m not the one buying the project, so imagine how a project pitch will go if there is no one around to answer the hard questions?

I dug up some of my favorite arguments against PACE to elaborate on and debunk them. Here, I’ll discuss five but would love to hear more from project developers who get asked these questions or form building owners who just want answers to some of their harder finance questions.

A Little History

The concept of PACE originated in 2008, with early programs largely focused on the residential market. While these programs received strong encouragement and industry praise, issues relating to the PACE lien seniority over mortgages, at the time of the housing market crash, brought residential PACE programs to a halt in 2010.

This caused waning support for commercial programs, too.

Proponents of PACE were not about to lose traction, instead supporters charged on, recapturing mainstream attention in 2011, and launching several new programs including those in Connecticut and DC in 2013; all focused on unlocking the energy efficiency potential in industrial, office, retail, services, and other types of commercial buildings. But even with strong support, informative awareness campaigns, and smart program design, there are a lot of misconceptions.

#1: These programs have been conceptualized as an alternative to, rather than as a form of, real estate financing.

Yes, PACE is seen as an alternative to traditional finance options but it’s because of the opportunity offered by the opportunity to finance projects with a payback period from five to as long as 20 years. Conventional lenders are often reluctant or unable to make long term loans to finance the upgrades, so PACE provides the chance to expand efficiency projects beyond the usual ‘low hanging fruit’.

The only hang up I see in this conversation is it may be tough to explain PACE if you aren’t well versed in energy efficiency finance. If you have a strong project, don’t let it get stalled by budgetary and financial obstacles. There are several websites that explain the benefits of PACE (such as pacenow.orgnrel.govinstitutebe.com, and more) so get as much information as possible in front of the building owner.

#2: Building owners and their properties are burdened with the PACE loan but the tenants are the ones who reap the benefits of the efficiency project.

It is the owner that must agree to a special property tax, used to pay the upfront cost of energy-efficiency improvements, but the idea is that energy savings will exceed the added tax. And, because it is structured as a tax, the landlord can pass the cost on to tenants, resolving the ‘split-incentive’ problem in commercial retrofits.

PACE is designed to overcome the notorious financial barriers to investment in energy efficiency. The details of the financing models vary, but in all cases, PACE was built to maximize financial benefits for building owners. It’s designed to reduce concern about investment recovery when the property is sold, because the financing is tied to the property itself rather than to the owner, meaning the lien attaches to the building not the business. This in itself should be the top reason for every building owner to consider PACE when discussing efficiency financing.

#3: In most states, commercial PACE has been a regional affair, with different municipalities each adopting slightly different rules.

The commercial PACE market is at a pivotal moment in its development. Twenty-six states and the District of Columbia have PACE enabling legislation in place; some of these already have emerging or active programs.

This has been a barrier to widespread adoption but with the strength of current and new programs, more governments are working together to solidify PACE standards across cities and the state.

(PACE Programs at a glance)

#4: While PACE is designed to help overcome several key finance barriers, PACE alone will not remove all barriers to energy efficient buildings. Complementary policies and programs will be needed to help the building efficiency market reach scale.

It’s true; in order to further promote PACE projects, states will likely need to amend or create enabling legislation, and local communities will need to grant approval for proposed districts within their jurisdictions. But this should not overshadow the stability that is a PACE loan program.

#5: Owners of commercial properties who hold PACE loans may need to put up collateral to back up the loan.

In most cases, this is false. PACE programs are attractive because they eliminate the need for large up-front costs, a common barrier to upgrades for energy-efficiency projects. And it is seen as a very secure investment in the eyes of the lender, so whether or not it’s deemed traditional or alternative, PACE loans are an incredibly attractive finance method.

In few circumstances, project lenders may impose additional minimum and maximum project funding requirements based on their own criteria and risk standards, but this goes for any type of financing scenario.

Lacey Miller is a content marketing specialist for Noesis EnergyAt Noesis, we spend a great deal of time working with our partners to ensure they have the right tools, information, and sales techniques to present the best energy efficiency project proposals possible to the CFO, building owner, or other decision makers. We push education. That being said, these are just a few objections I came across when learning about PACE, but I would love more input. We’ve got a team of finance experts working with our partners daily to clarify misconception about PACE financing so send me your questions; let me know if you have anything to add to this list.

 

2 comments on “Answers to Arguments against PACE

  1. Great review of PACE. Lack of understanding and education about PACE is a challenge. But an even bigger challenge is the disconnect in the appraisal/finance community on how to “value” any level of energy upgrades that result in reduced operating expenses. Until we plug that “black hole” in the market, adoption of PACE and any other energy related improvement projects will be difficult for owners/investors to justify.

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