by Kristina Klimovich, Director, Communications and Market Research, PACENow
Property Assessed Clean Energy (PACE) financing is a simple and effective way to fund energy efficiency, renewable energy, and water conservation upgrades to buildings. PACE can pay for new heating and cooling systems, lighting improvements, solar panels, water pumps, insulation, and more for almost any property—residential, commercial, industrial, nonprofit, and agricultural. PACE financing has been enabled by state legislatures in 32 states, which comprise 80% of the U.S. population. Thirteen states have active programs offering PACE financing as a tool to pay for energy efficiency and renewable energy improvements to buildings. The market continues to grow and, according to PACENow1, by the end of 2014 it had surpassed $500 million in residential and commercial PACE funding extended to property owners for energy efficiency and renewable energy projects across the country.
PACE offers a number of benefits compared with other methods of financing energy-saving projects. Long-term, 100% funding for projects (including development costs), secured by the value of the property and not the owner’s credit, that transfers to a new owner upon resale makes PACE much more attractive than other types of loans. For commercial property with tenants, PACE, as a municipal assessment, may be much easier to share with tenants. Commercial debt financing generally does not extend past 10 years, which makes it challenging to structure cash-flow-positive projects involving long-term payback measures. With PACE, commercial clients can implement energy efficiency, renewable energy, and water conservation projects with payback periods of up to 20 years and achieve positive cash flow, which in turn results in an increase in net operating income of the property.
Although program design and financing arrangements may vary across the United States, at minimum a PACE project should include a local government (acting as a “servicer” for a PACE assessment), a property owner (willing to upgrade a property), an energy services professional (i.e., a contractor in charge of project implementation), and a financing provider (PACE lender).
Many milestones were reached for commercial PACE in 2014. New and additional PACE legislation was passed in New Hampshire and California; efforts are in the works in Arizona, Kentucky, and several other states. Commercial programs are in development in Texas, Utah, Illinois, Colorado, and Florida. A growing number of operational programs throughout the country are building demand and completing projects. Active commercial programs report a steady $400 million pipeline of commercial projects. The first commercial securitization was completed in Connecticut; the state’s Green Bank sold a $30 million portfolio of PACE assets to a private investment company. A secondary market for PACE assets is poised to grow in 2015.
Additionally, 2014 saw a renaissance in residential PACE in California. To date, most residents of California have access to PACE, some through multiple programs operating in the same municipalities. With more than $200 million of residential projects securitized in California, other states are looking into revamping or developing residential programs. To address Federal Housing Finance Agency and mortgage lender objections to PACE, the California State Treasurer’s office launched the PACE Loss Reserve Program to make mortgage lenders whole for any losses in a foreclosure or a forced sale that are attributable to a PACE lien.
A number of trends have emerged in the marketplace in the past year. First, PACE programs are investing in effective contractor engagement strategies as a way to spur demand among building owners. Recent contractor trainings in Connecticut and Michigan resulted in closed projects. Second, independent project originators and developers can play a role in expanding this market by bringing PACE projects to programs. Such efforts were successful in Los Angeles County, Milwaukee, St. Louis, and Minneapolis. Third, the industry is embracing the “open-market” model, which means that multiple programs can operate within the same municipality. In California, most cities and counties joined more than one PACE program. Fourth, the emergence and increasing adoption of the Environmental Defense Fund’s Investor Confidence Project2 helps address the challenge owners and investors face in projecting savings with confidence, which has been an impediment to energy retrofit financing nationwide.
Both residential and commercial PACE are poised to grow in 2015 and beyond, as many states have active PACE programs and more than 80% of the U.S. population lives in states with PACE-enabling legislation. The market is becoming more complex with many new private PACE service providers entering this space as project developers, third-party administration firms, technical review firms, financing providers, and investors.
The key to sustained growth and expansion is education for building owners and local officials. PACE is inherently a local mechanism, as it hinges on a municipality adopting the necessary legal infrastructure to enable a PACE transaction. Local government officials who understand that PACE programs result in the creation of local jobs, reduction of greenhouse gas emissions, and increased economic activity have been proactive in putting successful programs in place. PACE is still a relatively new financing product, and it requires significant outreach to the building-owner community on the local and national level. PACENow, a national nonprofit advocate for PACE financing, is working with building-owner organizations to promote PACE. In 2015, we look forward to partnering with organizations and policymakers to build awareness of PACE and to affect market growth.
Buildings in the United States use three-quarters of all domestic energy, which presents an investment opportunity that can translate into $1 trillion in energy savings, more than 3 million new jobs, and an annual reduction in carbon emissions of 600 million metric tons. PACE is an effective financing options that can make a difference on a local and national level by making buildings more energy and water efficient, creating jobs, and improving the environment.
Posted on: February 12th, 2015