Best Practice Guidelines for Residential Property Assessed Clean Energy Financing
The U.S. Department of Energy’s (DOE) Best Practice Guidelines for Residential PACE Financing Programs (published Nov. 18, 2016) outline best practices that can help state and local governments, PACE program administrators, contractors, and other partners develop and implement programs and improvements that effectively deliver home energy and related upgrades through residential PACE. The guidelines are an update to a 2010 version, “Guidelines for Pilot PACE Financing Programs,” and supersede its recommendation.
The guidelines focus on best practices for program design, including consumer and lender protections; compatibility of residential PACE with other energy efficiency programs and services; minimum contractor requirements and performance standards; and evaluation of program outcomes, including cost effectiveness, energy savings, and non-energy benefits such as improved health and comfort.
DOE encourages existing and prospective residential PACE financing programs to use these guidelines to design programs that meet the specific needs of their states and communities.
Property Assessed Clean Energy
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 both residential properties (commonly referred to as residential PACE or R-PACE) and commercial properties (commonly referred to as commercial PACE or C-PACE). There are some key differences between commercial PACE and residential PACE, which has resulted in different rates of adoption and implementation across the U.S.
Commercial and residential PACE programs share a common foundation. PACE programs allow local governments, state governments, or other inter-jurisdictional authorities, when authorized by state law, to fund the up-front cost of energy improvements on commercial and residential properties, which are paid back over time by the property owners.
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 typical 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 (EE) and renewable energy (RE) allows a property owner to implement improvements without a large up-front cash payment. Property owners 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), so 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.
Commercial Property Assessed Clean Energy Programs
Commercial property assessed clean energy (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. As of early 2017, more than 30 states plus the District of Columbia have commercial PACE enabling legislation and approximately $400 million in projects have been financed with commercial PACE.
Residential Property Assessed Clean Energy Programs
Residential PACE programs have recently received considerable attention and regulatory scrutiny. Recent Federal Housing Finance Agency guidance letters have caused many residential PACE programs to suspend operations, but they do not directly affect commercial PACE programs.
- Allows for secure financing of comprehensive projects over a longer term, making more projects cash flow positive.
- Spreads repayment over many years 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, such as the municipal bond markets.
- Available only to property owners.
- Cannot finance portable items (screw-in light bulbs, standard refrigerators, etc.).
- Can require dedicated local government staff time.
- High legal and administrative setup.
- 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.