low-cost financing: overview » introduction » special assessment programs » pace financing
PACE programs use the proceeds from municipal bond issues or other public sources to provide up-front capital for energy-efficiency improvements in privately-owned buildings. This process resembles the commonly-used practice of establishing a "special assessment district" to fund streetlights or other municipal projects; however, PACE programs target homeowners and cover the initial costs of the private contractors who complete the work. [1]

Those who choose to participate re-pay the advance over time (typically 15 to 20 years), generally through an annual assessment on their property tax bill. As a result of the extended term, minimal or nonexistent up-front costs, relatively low interest rates, and anticipated savings on utility bills, PACE programs allow property owners to avoid increased bills, even while repaying the cost of improvements. [2] The use of an established, reliable payback mechanism such as a property tax assessment streamlines the process for the owner and the municipality alike. [3]

As of July 2010, some 22 states had adopted enabling legislation to allow local PACE programs and at least four communities had issued their first PACE bond (Berkeley, CA; Palm Desert, CA; Boulder County, CO; and Babylon NY). [4] According to a White House memo, "if only 15 percent of residential property owners nationwide took advantage of clean energy community financing, the resulting emissions reductions would contribute 4 percent of the savings needed for the US to reach 1990 emissions levels by 2020."
Solutions in Action
In March 2010, Racine, Wisconsin launched the Midwest's first active PACE program, developed in partnership with the Center on Wisconsin Strategy (COWS) and the Delta Institute. The Racine Energy Efficiency Program (REEP) was capitalized with $500,000 from the City of Racine's Energy Efficiency and Conservation Block Grant allocation, and will cover the upfront cost of energy-efficiency improvements to single-family homes and duplexes built between 1946 and 1975 that have total energy- and water-consumption costs of at least $1,700/year.

Participating homeowners may have payments directly debited from a bank account, or may remit monthly payments using coupon books from the city. REEP targeted an initial group of 10 homes at launch, with plans to support up to 100 projects. Click here to leave this site and learn more.

Legal and other issues associated with PACE

Consistent with most states' policy of granting senior tax liens when used to further a valid public purpose, PACE loans confer upon the funding agency a senior position -- not just on the energy-efficient improvements, but on the entire building undergoing upgrades. [5] As a result, pre-existing lenders lose their priority position -- a feature that may cause concern among first mortgage lenders. (See blue box on Federal challenges to PACE programs)

A memo available on PACENOW, a website created to advocate for PACE programs, addresses this and other issues. Among other points raised in the memo, the authors note that in the event of a foreclosure most states require repayment only of back taxes owed, followed by repayment of the mortgage. Limiting liability to any amount in arrears, provides protection to mortgage lenders. In general, then, only a very small percentage of the overall home value would get paid ahead of the mortgage balance. The authors also point out that adoption of PACE programs generally leads to increases in home values, and savings on utility bills help to strengthen borrowers' ability to repay any loans, reducing the likelihood of default.

As some practitioners have noted, municipalities may be reluctant to implement PACE programs using certain federal funding sources, including ARRA, for fear of triggering prevailing wage (Davis Bacon Act) requirements that specify a minimum compensation level for workers carrying out contracts. These requirements do not apply to individual homeowners participating in PACE programs -- click here to view guidance from the Department of Energy on prevailing wage requirements for individual homeowners [PDF].
Federal challenges to PACE programs

Statements issued by the Federal Housing Finance Agency and Fannie Mae and Freddie Mac may pose significant challenges to local communities wishing to adopt PACE programs.

Click here for updates and to view a Forum discussion on this topic.

Click here to access a webinar hosted by the Department of Energy on December 15, 2009, that provides additional guidance on legal and other issues related to implementation of PACE programs, including precedents for defining energy-efficiency improvements as a valid "public purpose," impact on local governments' general funds, and methods for establishing the seniority of PACE loans. (Scroll down to "Past Webcast Presentations" and look for a webcast titled Legal Issues Regarding PACE Financing Programs to access presentation slides, audio, and a full transcript.)

Recommendations for PACE Financing Programs
Adapted from Policy Framework for PACE Financing Programs [PDF]
  • Strive for improvements that result in a positive net present value, so that utility bill savings exceed total expected costs
  • Limit the repayment period to the life expectancy of the improvements, and keep assessment levels below a pre-determined percentage of the home's appraised value (i.e., 10 percent)
  • Adopt clear standards and a system for post-improvement assessment to protect against substandard work
  • Establish a reserve fund to ensure that investors receive timely payments in the event of late property tax payments
  • Limit repayment in the event of foreclosure to back taxes owed, rather than the full outstanding balance
Click here to download a comprehensive "How To" guide to establishing a PACE program, prepared by the Renewable and Appropriate Energy Laboratory at the University of California, Berkeley.

In 2010, the National Housing Conference hosted the Partners in Innovation preservation forums, a series of three regional forums focused on strengthening and supporting affordable rental housing preservation efforts through innovative partnerships, policy development, and legislative reform. The regional forums took place in Boston, MA; Portland, OR; and Denver, CO in 2010.

View the following presentations from the Partners in Innovation: Preserving Affordable Rental Housing Through Energy Conservation in Boston on April 14, 2010.

Click on the links below to learn more about special assessment programs:

Offer Property Assessed Clean Energy (PACE) financing programs that tie payment for energy-efficient improvements to the property

Harold Washington Unity Coop
Work with utilities to offer on-bill financing, allowing customers to pay for energy improvements and realize energy savings on one statement

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Offer special assessment programs that allow the costs of energy upgrades to be repaid through existing utility and municipal bills and largely offset through lower energy usage

Other pages in this section:

Make available energy efficient mortgages, which fold the cost of energy-saving upgrades into a new mortgage or refinance

Provide interest rate buy-down programs

and other low cost loans to lower borrowing costs for energy-efficient improvements

[1] Although PACE financing could conceivably be used in multifamily properties, to date we are not aware of any communities where this has been implemented. Please click on the "Contact Us" link at the bottom of this page to submit examples.
[2] PACE Bond Financing for Energy Projects Gaining Favor, Adopted in New York. 2010. By David Abromowitz and Yuanshu Deng. Boston, MA: Goulston & Storrs.
[3] Policy Framework for PACE Financing Programs. [PDF] 2009. Washington, DC: White House.
[4] Financing Program Support for ARRA Recipients: PACE Legal Issues. [PDF] 2009. Webinar presentation prepared for the U.S. Department of Energy.
[5] PACE Bond Financing for Energy Projects Gaining Favor, Adopted in New York. 2010. By David Abromowitz and Yuanshu Deng. Boston, MA: Goulston & Storrs.