The property assessed clean energy (PACE) model is an innovative mechanism for financing energy efficiency and renewable energy improvements on private property. PACE programs exist for:

Commercial and residential PACE programs share a common foundation. PACE programs allow a property owner to finance the up-front cost of energy or other eligible improvements on a property and then pay the costs back over time through a voluntary assessment. The unique characteristic of PACE assessments is that the assessment is attached to the property rather than an individual.

PACE financing for clean energy projects is generally based on an existing structure known as a “land- secured financing district,” often referred to as an assessment district, a local improvement district, or other similar phrase. In a conventional assessment district, the local government issues bonds to fund projects with a public purpose such as streetlights, sewer systems, or underground utility lines.

The recent extension of this financing model to energy efficiency and renewable energy allows a property owner to implement improvements without a large up-front cash payment. Property owners that voluntarily choose to participate in a PACE program repay their improvement costs over a set time period—typically 10 to 20 years—through property assessments, which are secured by the property itself and paid as an addition to the owners’ property tax bills. Nonpayment generally results in the same set of repercussions as the failure to pay any other portion of a property tax bill.

A PACE assessment is a debt of property, meaning the debt is tied to the property as opposed to the property owner(s). In turn, the repayment obligation may transfer with property ownership if the buyer agrees to assume the PACE obligation and the new first mortgage holder allows the PACE obligation to remain on the property. This can address a key disincentive to investing in energy improvements because many property owners are hesitant to make property improvements if they think they may not stay in the property long enough for the resulting savings to cover the upfront costs.

Advantages

  • Allows for secure financing of comprehensive projects over a longer term, making more projects cash flow positive.
  • Spreads repayment over many years, seldom requires an upfront payment, and removes the requirement that the debt be paid at sale or refinance.
  • Can lead to low interest rates because of the high security of loan repayments attached to the property tax bill.
  • Helps some property owners deduct payments from their income tax liability.
  • Allows municipalities to encourage energy efficiency and renewable energy without putting general funds at risk.
  • Taps into large sources of private capital.

Disadvantages

  • Available only to property owners.
  • Cannot finance portable items (screw-in light bulbs, standard refrigerators, etc.).
  • Can require dedicated local government staff time.
  • May require high legal and administrative setup obligations.
  • Not appropriate for investments below $2,500.
  • Potential resistance by lenders/mortgage-holders whose claims to the property may be subordinated to the unpaid assessment amount should the property go into foreclosure.

Commercial PACE

C-PACE programs exist in several states, regions, and local governments. Programs vary across several dimensions including the level of organization (statewide vs. local programs), financing structures, and eligible measures. More than 35 states plus the District of Columbia have C-PACE enabling legislation and more than $800 million in projects have been financed.