Author’s Bio – Wilder Clerk is a commercial pace financial specialist, here he discusses why you should find a PACE lender.
The property assessed clean energy (PACE) model is a novel funding mechanism for improving energy efficiency and renewable energy on private land. PACE programs are available for:
- Commercial real estate (commonly referred to as Commercial PACE or C-PACE).
- Residential real estate (commonly referred to as Residential PACE or R-PACE).
Commercial and residential PACE programs are built on the same base. PACE programs allow a property owner to finance the initial cost of energy or other qualified upgrades to a property and then repay the expenses over time through a voluntary assessment. The evaluation is tied to the property rather than an individual, which makes PACE assessments unique.
PACE financing for clean energy projects is typically built on an existing structure known as a land-secure financing district, which is sometimes known as an assessment district, a local improvement district, or another similar term. The local government sells bonds in a traditional assessment district to support public-purpose projects such as streetlights, sewer systems, or underground utility lines.
The recent expansion of this financing model to energy efficiency and renewable energy allows a property owner to execute upgrades without requiring a substantial cash outlay upfront. Property owners who voluntarily opt to participate in a PACE program recover their renovation expenditures over a defined length of time—typically 10 to 20 years—via property assessments secured by the property and paid as an addition to the owners’ property tax bills. Nonpayment typically has the same set of consequences as failing to pay any other element of a property tax bill.
A PACE assessment is a property debt, which means that the obligation is attached to the property rather than the property owner. In turn, if the buyer agrees to take the PACE obligation and the new first mortgage holder permits the PACE obligation to stay on the property, the payback obligation may transfer with property ownership. This can remove a significant barrier to investing in energy upgrades since many property owners are unwilling to undertake changes if they believe they will not stay in the property long enough for the ensuing savings to offset the upfront expenditures.
Property owners embrace PACE financing because it saves them money and increases the value of their buildings. PACE financing, which is filed as a lien on the property and returned annually through an assessment on the property’s tax bill, distributes the expense of energy improvements over the life of the project. PACE has the following advantages:
- PACE assists building owners in financing energy initiatives that they need and require.
- PACE pays all hard and soft expenditures for a project, so the building owner incurs no out-of-pocket expenses.
- PACE, in comparison to other forms of debt and equity, offers low-cost, low-interest financing for maturities of up to 20 years.
- The PACE assessment remains with the property and is immediately transferred to a new owner.
- Because the yearly energy savings exceed the annual payback, the PACE financing’s 20-year amortization generates positive cash flow. As a result, the increased debt payment coverage ratio increases the ability to pay off existing debt.
- PACE loans do not accelerate in the event of a default. As with property taxes, only arrears payments are senior to the current mortgage.
PACE financing is an excellent substitute for mezzanine or equity loans. PACE will lower your project’s capital costs and provide longer-term solutions for construction debt in a variety of sectors.